UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 June 30, 2019
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER: 1-36447
ALCENTRA CAPITAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Maryland | 46-2961489 |
(State or other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
200 Park Avenue, 7 th Floor | |
New York, NY | 10166 |
(Address of Principal Executive Offices) | (Zip Code) |
(212) 922-8240
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered |
Common Stock, par value $0.001 per share | ABDC | The NASDAQ Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | x |
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Emerging growth company | x |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
There were 12,875,566 shares of the Registrant’s common stock outstanding as of August 7, 2019.
ALCENTRA CAPITAL CORPORATION
TABLE OF CONTENTS
2 |
Alcentra Capital Corporation and Subsidiary
Consolidated Statements of Assets and Liabilities
As of June 30, 2019 (Unaudited) | As of December 31, 2018 | |||||||
Assets | ||||||||
Portfolio investments, at fair value | ||||||||
Non-controlled, non-affiliated investments, at fair value (cost of $213,022,113 and $212,280,172, respectively) | $ | 204,633,762 | $ | 205,411,779 | ||||
Non-controlled, affiliated investments, at fair value (cost of $26,581,387 and $26,385,612, respectively) | 14,573,438 | 12,980,016 | ||||||
Controlled, affiliated investments, at fair value (cost $0 and $15,212,562, respectively) | — | 16,406,021 | ||||||
Cash | 7,796,536 | 11,049,499 | ||||||
Dividends and interest receivable | 1,404,187 | 454,883 | ||||||
Receivable for investments sold | 2,674,457 | 644,733 | ||||||
Deferred financing costs | 1,066,348 | 1,366,393 | ||||||
Deferred tax asset | 4,263,462 | 5,385,694 | ||||||
Prepaid expenses and other assets | 354,583 | 79,410 | ||||||
Total Assets | $ | 236,766,773 | $ | 253,778,428 | ||||
Liabilities | ||||||||
Credit facility payable | $ | 26,565,008 | $ | 28,536,441 | ||||
Notes payable (net of deferred note offering costs of $642,731 and $855,433, respectively) | 54,357,269 | 54,144,567 | ||||||
Payable for investments purchased | 5,925,000 | 18,550,000 | ||||||
Other accrued expenses and liabilities | 251,183 | 535,096 | ||||||
Directors’ fees payable | 197,154 | 36,125 | ||||||
Professional fees payable | 886,641 | 554,173 | ||||||
Interest and credit facility expense payable | 1,176,846 | 1,069,139 | ||||||
Management fee payable | 701,305 | 765,659 | ||||||
Income-based incentive fees payable | 198,805 | 890,796 | ||||||
Distributions payable | 4,248,937 | 2,433,102 | ||||||
Unearned structuring fee revenue | — | 81,643 | ||||||
Income tax liability | 320,630 | 379,155 | ||||||
Total Liabilities | 94,828,778 | 107,975,896 | ||||||
Commitments and Contingencies (Note 12) | ||||||||
Net Assets | ||||||||
Common stock, par value $0.001 per share (100,000,000 shares authorized, 12,875,566 and 13,105,295 shares issued and outstanding, respectively) | 12,876 | 13,105 | ||||||
Additional paid-in capital | 197,118,476 | 198,594,662 | ||||||
Distributable earnings (accumulated loss) | (55,193,357 | ) | (52,805,235 | ) | ||||
Total Net Assets | 141,937,995 | 145,802,532 | ||||||
Total Liabilities and Net Assets | $ | 236,766,773 | $ | 253,778,428 | ||||
Net Asset Value Per Share | $ | 11.02 | $ | 11.13 |
See notes to unaudited consolidated financial statements
3 |
Alcentra Capital Corporation and Subsidiary
Consolidated Statements of Operations
For the three
months ended June 30, 2019 (Unaudited) | For the three months ended June 30, 2018 (Unaudited) | For the
six months ended June 30, 2019 (Unaudited) | For the six months ended June 30, 2018 (Unaudited) | |||||||||||||
Investment Income: | ||||||||||||||||
From non-controlled, non-affiliated investments: | ||||||||||||||||
Interest income from portfolio investments | $ | 5,753,089 | $ | 5,865,711 | $ | 11,559,398 | $ | 11,608,097 | ||||||||
Paid-in-kind interest income from portfolio investments | 28,797 | 45,481 | 113,301 | 245,131 | ||||||||||||
Other income from portfolio investments | 177,118 | 611,812 | 284,875 | 2,119,116 | ||||||||||||
Dividend income from portfolio investments | — | 30,756 | — | 61,512 | ||||||||||||
From non-controlled, affiliated investments: | ||||||||||||||||
Interest income from portfolio investments | 41,762 | 129,080 | 78,241 | 206,533 | ||||||||||||
Paid in-kind income from portfolio investments | 93,190 | 90,004 | 189,603 | 213,130 | ||||||||||||
Other income from portfolio investments | — | — | — | — | ||||||||||||
From controlled, affiliated investments: | ||||||||||||||||
Interest income from portfolio investments | — | 481,106 | 208,538 | 981,996 | ||||||||||||
Paid in-kind income from portfolio investments | — | — | — | — | ||||||||||||
Other income from portfolio investments | 45,979 | — | 133,095 | — | ||||||||||||
Total investment income | 6,139,935 | 7,253,950 | 12,567,051 | 15,435,515 | ||||||||||||
Expenses: | ||||||||||||||||
Management fees | 841,566 | 1,036,122 | 1,707,184 | 2,270,985 | ||||||||||||
Income-based incentive fees/(reversal of accruals) | (204,867 | ) | — | (691,991 | ) | — | ||||||||||
Professional fees | 774,386 | 379,082 | 1,399,615 | 733,152 | ||||||||||||
Valuation services | 86,250 | (10,038 | ) | 157,500 | 53,933 | |||||||||||
Interest and credit facility expense | 1,322,878 | 1,745,485 | 2,740,328 | 3,440,372 | ||||||||||||
Amortization of deferred financing costs | 206,429 | 103,570 | 412,545 | 207,551 | ||||||||||||
Directors’ fees | 215,000 | 116,826 | 374,676 | 213,028 | ||||||||||||
Insurance expense | 91,492 | 56,519 | 147,327 | 112,507 | ||||||||||||
Amortization of deferred note offering costs | 109,340 | 119,267 | 242,703 | 245,961 | ||||||||||||
Consulting fees | 133,315 | 176,702 | 244,916 | 481,740 | ||||||||||||
Excise tax | (78,019 | ) | 365,308 | 390,413 | 365,308 | |||||||||||
Other expenses | 251,851 | (209,200 | ) | 314,299 | 160,511 | |||||||||||
Total expenses | 3,749,621 | 3,879,643 | 7,439,515 | 8,285,048 | ||||||||||||
Waiver of management fees | (140,261 | ) | (109,281 | ) | (284,531 | ) | (109,281 | ) | ||||||||
Net expenses | 3,609,360 | 3,770,362 | 7,154,984 | 8,175,767 | ||||||||||||
Net investment income and foreign currency transactions | 2,530,575 | 3,483,588 | 5,412,067 | 7,259,748 | ||||||||||||
Realized Gain (Loss) and Net Change in Unrealized Appreciation (Depreciation) From Portfolio Investments | ||||||||||||||||
Net realized gain (loss) on: | ||||||||||||||||
Non-controlled, non-affiliated investments | 1,604,042 | (10,108,277 | ) | (111,717 | ) | (10,123,092 | ) | |||||||||
Non-controlled, affiliated investments | — | (10,167,517 | ) | — | (10,167,517 | ) | ||||||||||
Controlled, affiliated investments | — | — | 1,193,459 | — | ||||||||||||
Foreign currency transactions | 25,078 | — | 65,494 | — | ||||||||||||
Net realized gain (loss) from portfolio investments and foreign currency transactions | 1,629,120 | (20,275,794 | ) | 1,147,236 | (20,290,609 | ) | ||||||||||
Net change in unrealized appreciation (depreciation) on: | ||||||||||||||||
Non-controlled, non-affiliated investments | (1,339,551 | ) | 4,213,571 | (1,519,958 | ) | 3,880,145 | ||||||||||
Non-controlled, affiliated investments | 324,231 | 9,319,907 | 1,397,647 | 9,212,533 | ||||||||||||
Controlled, affiliated investments | — | — | (1,193,459 | ) | 220,904 | |||||||||||
Foreign currency translation | (127,563 | ) | — | (11,628 | ) | — | ||||||||||
Net change in unrealized appreciation (depreciation) from portfolio investments and foreign currency translation | (1,142,883 | ) | 13,533,478 | (1,327,398 | ) | 13,313,582 | ||||||||||
Benefit (Provision) for income taxes on unrealized gain (loss) on investments | (871,877 | ) | 1,019,717 | (1,124,675 | ) | 1,017,228 | ||||||||||
Net realized gain (loss) and net change in unrealized appreciation (depreciation) from portfolio investments | (385,640 | ) | (5,722,599 | ) | (1,304,837 | ) | (5,959,799 | ) | ||||||||
Net Increase (Decrease) in Net Assets Resulting from Operations | $ | 2,144,935 | $ | (2,239,011 | ) | $ | 4,107,230 | $ | 1,299,949 | |||||||
Basic and diluted: | ||||||||||||||||
Net investment income per share | $ | 0.20 | $ | 0.25 | $ | 0.42 | $ | 0.52 | ||||||||
Earnings (loss) per share | $ | 0.17 | $ | (0.16 | ) | $ | 0.32 | $ | 0.09 | |||||||
Weighted Average Shares of Common Stock Outstanding | 12,875,566 | 13,725,423 | 12,890,887 | 13,960,729 |
See notes to unaudited consolidated financial statements
4 |
Alcentra Capital Corporation and Subsidiary
Consolidated Statements of Changes in Net Assets
(Unaudited)
Common Stock | ||||||||||||||||||||
Shares | Par Amount | Paid in Capital in Excess of Par | Distributable Earnings | Total Net Assets | ||||||||||||||||
Balance at March 31, 2018 | 14,010,374 | $ | 14,010 | $ | 205,060,309 | $ | (47,891,919 | ) | $ | 157,182,400 | ||||||||||
Increase (decrease) in net assets resulting from operations | ||||||||||||||||||||
Net investment income | — | — | — | 3,483,588 | 3,483,588 | |||||||||||||||
Net realized gain (loss) on investments and foreign currency transactions | — | — | — | (20,275,794 | ) | (20,275,794 | ) | |||||||||||||
Net change in unrealized appreciation/(depreciation) on investments and foreign currency translation | — | — | — | 13,533,478 | 13,533,478 | |||||||||||||||
Benefit (Provision) for income taxes on unrealized gain (loss) on investments | — | — | — | 1,019,717 | 1,019,717 | |||||||||||||||
Shareholder distributions: | ||||||||||||||||||||
Repurchase of common stock | (427,623 | ) | (427 | ) | (2,898,627 | ) | — | (2,899,054 | ) | |||||||||||
Distributions to shareholders | — | — | — | (2,449,591 | ) | (2,449,591 | ) | |||||||||||||
Total increase (decrease) for the three months ended June 30, 2018 | (427,623 | ) | (427 | ) | (2,898,627 | ) | (4,688,602 | ) | (7,587,656 | ) | ||||||||||
Balance at June 30, 2018 | 13,582,751 | $ | 13,583 | $ | 202,161,682 | $ | (52,580,521 | ) | $ | 149,594,744 | ||||||||||
Dividends declared per common share | — | $ | — | $ | — | $ | 0.18 | $ | 0.18 | |||||||||||
Balance at December 31, 2017 | 14,222,945 | $ | 14,223 | $ | 206,570,701 | $ | (48,870,749 | ) | $ | 157,714,175 | ||||||||||
Increase (decrease) in net assets resulting from operations | ||||||||||||||||||||
Net investment income | — | — | — | 7,259,748 | 7,259,748 | |||||||||||||||
Net realized gain (loss) on investments and foreign currency transactions | — | — | — | (20,290,609 | ) | (20,290,609 | ) | |||||||||||||
Net change in unrealized appreciation/(depreciation) on investments and foreign currency translation | — | — | — | 13,313,582 | 13,313,582 | |||||||||||||||
Benefit (Provision) for income taxes on unrealized gain (loss) on investments | — | — | — | 1,017,228 | 1,017,228 | |||||||||||||||
Shareholder distributions: | ||||||||||||||||||||
Repurchase of common stock | (640,194 | ) | (640 | ) | (4,409,019 | ) | — | (4,409,659 | ) | |||||||||||
Distributions to shareholders | — | — | — | (5,009,721 | ) | (5,009,721 | ) | |||||||||||||
Total increase (decrease) for the six months ended June 30, 2018 | (640,194 | ) | (640 | ) | (4,409,019 | ) | (3,709,772 | ) | (8,119,431 | ) | ||||||||||
Balance at June 30, 2018 | 13,582,751 | $ | 13,583 | $ | 202,161,682 | $ | (52,580,521 | ) | $ | 149,594,744 | ||||||||||
Dividends declared per common share | — | $ | — | $ | — | $ | 0.36 | $ | 0.36 |
See notes to unaudited consolidated financial statements
5 |
Alcentra Capital Corporation and Subsidiary
Consolidated Statements of Changes in Net Assets
(Unaudited)
Common Stock | ||||||||||||||||||||
Shares | Par Amount | Paid in Capital in Excess of Par | Distributable Earnings | Total Net Assets | ||||||||||||||||
Balance at March 31, 2019 | 12,875,566 | $ | 12,876 | $ | 197,118,476 | $ | (53,276,042 | ) | $ | 143,855,310 | ||||||||||
Increase (decrease) in net assets resulting from operations | ||||||||||||||||||||
Net investment income | — | — | — | 2,530,575 | 2,530,575 | |||||||||||||||
Net realized gain (loss) on investments and foreign currency transactions | — | — | — | 1,629,120 | 1,629,120 | |||||||||||||||
Net change in unrealized appreciation/(depreciation) on investments and foreign currency translation | — | — | — | (1,142,883 | ) | (1,142,883 | ) | |||||||||||||
Benefit (Provision) for income taxes on unrealized gain (loss) on investments | — | — | — | (871,877 | ) | (871,877 | ) | |||||||||||||
Shareholder distributions: | ||||||||||||||||||||
Repurchase of common stock | — | — | — | — | — | |||||||||||||||
Distributions to shareholders | — | — | — | (4,062,250 | ) | (4,062,250 | ) | |||||||||||||
Total increase (decrease) for the three months ended June 30, 2019 | — | — | — | (1,917,315 | ) | (1,917,315 | ) | |||||||||||||
Balance at June 30, 2019 | 12,875,566 | $ | 12,876 | $ | 197,118,476 | $ | (55,193,357 | ) | $ | 141,937,995 | ||||||||||
Dividends declared per common share | — | $ | — | $ | — | $ | 0.33 | $ | 0.33 | |||||||||||
Balance at December 31, 2018 | 13,105,295 | $ | 13,105 | $ | 198,594,662 | $ | (52,805,235 | ) | $ | 145,802,532 | ||||||||||
Increase (decrease) in net assets resulting from operations | ||||||||||||||||||||
Net investment income | — | — | — | 5,412,067 | 5,412,067 | |||||||||||||||
Net realized gain (loss) on investments and foreign currency transactions | — | — | — | 1,147,236 | 1,147,236 | |||||||||||||||
Net change in unrealized appreciation/(depreciation) on investments and foreign currency translation | — | — | — | (1,327,398 | ) | (1,327,398 | ) | |||||||||||||
Benefit (Provision) for income taxes on unrealized gain (loss) on investments | — | — | — | (1,124,675 | ) | (1,124,675 | ) | |||||||||||||
Shareholder distributions: | ||||||||||||||||||||
Repurchase of common stock | (229,729 | ) | (229 | ) | (1,476,186 | ) | — | (1,476,415 | ) | |||||||||||
Distributions to shareholders | — | — | — | (6,495,352 | ) | (6,495,352 | ) | |||||||||||||
Total increase (decrease) for the six months ended June 30, 2019 | (229,729 | ) | (229 | ) | (1,476,186 | ) | (2,388,122 | ) | (3,864,537 | ) | ||||||||||
Balance at June 30, 2019 | 12,875,566 | $ | 12,876 | $ | 197,118,476 | $ | (55,193,357 | ) | $ | 141,937,995 | ||||||||||
Dividends declared per common share | — | $ | — | $ | — | $ | 0.51 | $ | 0.51 |
See notes to unaudited consolidated financial statements
6 |
Alcentra Capital Corporation and Subsidiary
Consolidated Statements of Cash Flows
For the six months ended June 30, 2019 (Unaudited) | For the six months ended June 30, 2018 (Unaudited) | |||||||
Cash Flows from Operating Activities | ||||||||
Net increase/(decrease) in net assets resulting from operations | $ | 4,107,230 | $ | 1,299,949 | ||||
Adjustments to reconcile net increase/(decrease) in net assets resulting from operations to net cash provided by (used in) operating activities: | ||||||||
Net realized (gain) loss from portfolio investments | (1,081,742 | ) | 20,290,609 | |||||
Net change in unrealized (appreciation) depreciation of portfolio investments | 1,315,770 | (13,313,582 | ) | |||||
Deferred tax asset | 1,122,232 | (1,020,150 | ) | |||||
Paid in-kind interest income from portfolio investments | (302,904 | ) | (458,261 | ) | ||||
Accretion of discount on debt securities | (998,069 | ) | (342,245 | ) | ||||
Purchases of portfolio investments | (58,735,969 | ) | (44,048,803 | ) | ||||
Net proceeds from sales/return of capital of portfolio investments | 75,393,530 | 79,266,967 | ||||||
Amortization of deferred financing costs | 412,545 | 207,551 | ||||||
Amortization of deferred note offering costs | 242,703 | 245,961 | ||||||
(Increase) decrease in operating assets: | ||||||||
Dividends and interest receivable | (949,304 | ) | (772,871 | ) | ||||
Receivable for investments sold | (2,029,724 | ) | — | |||||
Income tax asset | — | 104,089 | ||||||
Prepaid expenses and other assets | (275,173 | ) | (129,557 | ) | ||||
Increase (decrease) in operating liabilities: | ||||||||
Payable for investments purchased | (12,625,000 | ) | — | |||||
Other accrued expenses and liabilities | (283,913 | ) | 76,131 | |||||
Directors' fees payable | 161,029 | (32,792 | ) | |||||
Professional fees payable | 332,468 | 94,867 | ||||||
Interest and credit facility expense payable | 107,707 | (90,618 | ) | |||||
Management fee payable | (64,354 | ) | (338,331 | ) | ||||
Income-based incentive fees payable | (691,991 | ) | — | |||||
Unearned structuring fee revenue | (81,643 | ) | (393,973 | ) | ||||
Income tax liability | (58,525 | ) | — | |||||
Net cash provided by (used in) operating activities | 5,016,903 | 40,644,941 | ||||||
Cash Flows from Financing Activities | ||||||||
Financing costs paid | (112,500 | ) | (112,501 | ) | ||||
Offering costs paid | (30,001 | ) | (30,001 | ) | ||||
Proceeds from credit facility payable | 51,606,335 | 21,350,000 | ||||||
Repayments of credit facility payable | (53,564,218 | ) | (52,500,000 | ) | ||||
Distributions paid to shareholders | (4,679,517 | ) | (6,121,435 | ) | ||||
Repurchase of common stock | (1,476,415 | ) | (4,409,659 | ) | ||||
Net cash provided by (used in) financing activities | (8,256,316 | ) | (41,823,596 | ) | ||||
Effect of exchange rate changes on cash denominated in foreign currency | (13,550 | ) | — | |||||
Increase (decrease) in cash and cash equivalents | (3,252,963 | ) | (1,178,655 | ) | ||||
Cash at beginning of period | 11,049,499 | 13,882,956 | ||||||
Cash and Cash Equivalents at End of Period | $ | 7,796,536 | $ | 12,704,301 | ||||
Supplemental and non-cash financing activities: | ||||||||
Cash paid during the period for interest | $ | 2,632,621 | $ | 3,530,990 | ||||
Accrued offering costs | $ | 2,485 | $ | 2,485 | ||||
Accrued distributions payable | $ | 4,248,937 | $ | 2,449,591 |
See notes to unaudited consolidated financial statements
7 |
Alcentra Capital Corporation and Subsidiary
Consolidated Schedule of Investments
As of June 30, 2019
(Unaudited)
Company(+) *** | Industry | Spread Above Index | Base Rate Floor | Interest Rate | Maturity Date | No. Shares/ Principal Amount | Cost(1) | Fair Value | % of Net Assets | |||||||||||||||||||||
Investments in Non-Controlled, Non-Affiliated Portfolio Companies — 144.17% | ||||||||||||||||||||||||||||||
Senior Secured - First Lien — 95.48% | ||||||||||||||||||||||||||||||
Aegis Sciences Corporation (2),(3) | Consumer Services | LIBOR + 5.50% | 1.00 | % | 8.24 | % | 5/9/2025 | 7,441,263 | $ | 7,280,818 | $ | 7,162,215 | 5.05 | % | ||||||||||||||||
Black Diamond Oilfield Rentals, LLC (2),(4) | Oil & Gas Services | LIBOR + 6.50% | 1.00 | % | 9.09 | % | 12/17/2020 | 10,955,419 | 10,955,419 | 10,955,419 | 7.72 | % | ||||||||||||||||||
Cambium Learning Group, Inc. (2),(4) | Technology & Telecom | LIBOR + 4.50% | 7.08 | % | 12/18/2025 | 1,985,013 | 1,891,781 | 1,957,718 | 1.38 | % | ||||||||||||||||||||
CGGR Operations Holdings Corporation (2),(4),(11) | Business Services | LIBOR + 7.0% | 1.00 | % | 9.59 | % | 9/30/2022 | 3,136,418 | 3,108,892 | 3,136,418 | 2.21 | % | ||||||||||||||||||
Clanwilliam Group Ltd. (2),(4),(5) | Technology & Telecom | Euribor + 7.00% | 7.00 | % | 11/8/2025 | € | 5,922,000 | 6,570,730 | 6,559,381 | 4.62 | % | |||||||||||||||||||
Digital Room Holdings, Inc. (2),(4) | Business Services | LIBOR + 5.00% | 7.52 | % | 5/21/2026 | 7,000,000 | 6,895,000 | 6,895,950 | 4.86 | % | ||||||||||||||||||||
Envocore Holding, LLC (2),(4),(6) | Industrial Services | LIBOR + 10.25% | 1.00 | % | 12.85 | % | 6/30/2022 | 17,694,444 | 17,656,113 | 16,101,944 | 11.34 | % | ||||||||||||||||||
Epic Healthcare Staffing Intermediate Holdco, LLC (2),(4),(5),(7) | Business Services | LIBOR + 8.25% | 1.00 | % | 10.84 | % | 10/19/2022 | 10,840,396 | 10,807,734 | 10,840,395 | 7.64 | % | ||||||||||||||||||
GGC Aperio Holdings, L.P. (2),(4) | Financial Services | LIBOR + 5.00% | 7.59 | % | 10/26/2024 | 8,662,500 | 8,244,193 | 8,619,188 | 6.07 | % | ||||||||||||||||||||
Healthcare Associates of Texas, LLC (2),(4),(5) | Healthcare Services | LIBOR + 8.25% | 1.00 | % | 10.84 | % | 11/8/2022 | 20,445,329 | 20,445,328 | 20,445,329 | 14.40 | % | ||||||||||||||||||
Impact Group, LLC (2),(4) | Consumer Services | LIBOR + 6.50% | 1.00 | % | 9.10 | % | 6/27/2023 | 13,905,486 | 13,858,297 | 13,523,085 | 9.53 | % | ||||||||||||||||||
Institutional Shareholder Services, Inc. (2),(4) | Business Services | LIBOR + 4.50% | 7.10 | % | 3/5/2026 | 2,992,500 | 2,963,796 | 2,963,809 | 2.09 | % | ||||||||||||||||||||
Manna Pro Products, LLC (2),(4),(5) | Consumer Services | LIBOR + 6.00% | 1.00 | % | 8.44 | % | 12/8/2023 | 7,404,645 | 7,328,732 | 7,330,600 | 5.16 | % | ||||||||||||||||||
Palmetto Moon LLC (4) | Retail | 11.5% Cash, 2.5% PIK | 14.00 | % | 10/31/2021 | 4,397,117 | 4,382,769 | 4,265,203 | 3.00 | % | ||||||||||||||||||||
Perforce Software Inc. (2),(4) | High Tech Industries | LIBOR + 4.50% | 6.82 | % | 7/1/2026 | 5,000,000 | 4,975,000 | 4,975,000 | 3.51 | % | ||||||||||||||||||||
Pinstripe Holdings, LLC (2),(4) | Business Services | LIBOR + 6.00% | 8.44 | % | 1/17/2025 | 9,975,000 | 9,789,167 | 9,792,500 | 6.90 | % | ||||||||||||||||||||
Total Senior Secured - First Lien | 137,153,769 | 135,524,154 | 95.48 | % | ||||||||||||||||||||||||||
Senior Secured - Second Lien — 45.96% | ||||||||||||||||||||||||||||||
BayMark Health Services, Inc. (2),(4),(5) | Healthcare Services | LIBOR + 8.25% | 1.00 | % | 10.77 | % | 3/1/2025 | 8,000,000 | $ | 7,893,042 | $ | 8,000,000 | 5.64 | % |
See notes to unaudited consolidated financial statements
8 |
Alcentra Capital Corporation and Subsidiary
Consolidated Schedule of Investments (continued)
As of June 30, 2019
(Unaudited)
Company(+) *** | Industry | Spread Above Index | Base Rate Floor | Interest Rate | Maturity Date | No. Shares/ Principal Amount | Cost(1) | Fair Value | % of Net Assets | |||||||||||||||||||||
Cambium Learning Group, Inc. (2),(4) | Technology & Telecom | LIBOR + 8.50% | 11.08 | % | 12/18/2026 | 5,000,000 | $ | 4,710,240 | $ | 4,716,118 | 3.32 | % | ||||||||||||||||||
CGGR Operations Holdings Corporation (2),(4),(11) | Business Services | LIBOR + 11.5% | 1.00 | % | 14.09 | % | 9/30/2023 | 11,431,579 | 11,349,077 | 11,431,578 | 8.05 | % | ||||||||||||||||||
Institutional Shareholder Services, Inc. (2),(4) | Business Services | LIBOR + 8.50% | 11.12 | % | 3/5/2027 | 2,000,000 | 1,942,261 | 1,942,302 | 1.37 | % | ||||||||||||||||||||
Medsurant Holdings, LLC (4) | High Tech Industries | 13.00% Cash | 13.00 | % | 6/30/2020 | 8,729,396 | 8,710,483 | 8,729,396 | 6.15 | % | ||||||||||||||||||||
Perforce Software Inc. (2),(4) | High Tech Industries | LIBOR + 8.00% | 10.32 | % | 7/1/2027 | 5,000,000 | 4,850,000 | 4,950,000 | 3.49 | % | ||||||||||||||||||||
Pharmalogic Holdings Corp. (2),(4) | Healthcare Services | LIBOR + 8.0% | 10.44 | % | 12/11/2023 | 16,100,000 | 16,034,637 | 16,100,000 | 11.34 | % | ||||||||||||||||||||
Sandvine Corporation (2),(4) | Telecommunications | LIBOR + 8.00% | 10.44 | % | 11/2/2026 | 4,500,000 | 4,414,967 | 4,417,330 | 3.11 | % | ||||||||||||||||||||
WeddingWire, Inc. (2),(4) | Consumer Services | LIBOR + 8.25% | 10.69 | % | 12/21/2026 | 5,000,000 | 4,952,134 | 4,952,896 | 3.49 | % | ||||||||||||||||||||
Total Senior Secured - Second Lien | 64,856,841 | 65,239,620 | 45.96 | % | ||||||||||||||||||||||||||
CLO/Structured Credit — 1.29% | ||||||||||||||||||||||||||||||
Goldentree Loan Management US CLO 2 Ltd. (2),(3) | USD CLO | LIBOR + 4.70% | 7.06 | % | 11/28/2030 | 2,000,000 | $ | 1,949,886 | $ | 1,828,490 | 1.29 | % | ||||||||||||||||||
Total CLO/Structured Credit | 1,949,886 | 1,828,490 | 1.29 | % | ||||||||||||||||||||||||||
Equity/Other — 1.44% | ||||||||||||||||||||||||||||||
Envocore Holding, LLC, Preferred Shares(4),(6),(8) | Industrial Services | 1,139,725 | $ | 1,160,360 | $ | — | — | |||||||||||||||||||||||
IGT, Preferred Shares(4),(8) | Industrial Services | 11% PIK | 11.00 | % | 12/10/2024 | 1,110,922 | 1,110,922 | — | — | |||||||||||||||||||||
Common Shares(4),(8) | 44,000 | 44,000 | — | — | ||||||||||||||||||||||||||
Preferred AA Shares(4),(8) | 15% PIK | 15.00 | % | 12/10/2024 | 326,789 | 326,790 | 270,734 | 0.19 | % | |||||||||||||||||||||
1,481,712 | 270,734 | 0.19 | % | |||||||||||||||||||||||||||
Metal Powder Products, LLC, Common Shares(4),(8) | Industrial Manufacturing | 500,000 | 500,000 | 665,961 | 0.47 | % | ||||||||||||||||||||||||
My Alarm Center, LLC, Common Shares(4),(8) | Security | 129,582 | 256,793 | — | — | |||||||||||||||||||||||||
Junior Preferred Shares(4),(8) | 2,420 | 2,366,548 | — | — |
See notes to unaudited consolidated financial statements
9 |
Alcentra Capital Corporation and Subsidiary
Consolidated Schedule of Investments (continued)
As of June 30, 2019
(Unaudited)
Company(+) *** | Industry | Spread Above Index | Base Rate Floor | Interest Rate | Maturity Date | No. Shares/ Principal Amount | Cost(1) | Fair Value | % of Net Assets | |||||||||||||||||||||
Senior Preferred Shares(4),(8) | 8% PIK | 8.00 | % | 7/14/2022 | 2,998 | $ | 2,862,059 | $ | 1,023,603 | 0.72 | % | |||||||||||||||||||
5,485,400 | 1,023,603 | 0.72 | % | |||||||||||||||||||||||||||
Palmetto Moon LLC, Common Shares(4),(8) | Retail | 61 | 434,145 | 81,200 | 0.06 | % | ||||||||||||||||||||||||
Total Equity/Other | 9,061,617 | 2,041,498 | 1.44 | % | ||||||||||||||||||||||||||
Total Investments in Non-Controlled, Non-Affiliated Portfolio Companies | 213,022,113 | 204,633,762 | 144.17 | % | ||||||||||||||||||||||||||
Investments in Non-Controlled, Affiliated Portfolio Companies — 10.27%* | ||||||||||||||||||||||||||||||
Senior Subordinated — 0.86% | ||||||||||||||||||||||||||||||
Battery Solutions, Inc. (4) | Environmental/Recycling Services | 12% Cash, 2% PIK | 14.00 | % | 11/6/2021 | 1,225,019 | $ | 1,225,019 | $ | 1,225,020 | 0.86 | % | ||||||||||||||||||
Southern Technical Institute, Inc. (4),(8) | Education | 6% PIK | 6.00 | % | 12/31/2021 | 3,528,988 | 3,528,988 | — | — | |||||||||||||||||||||
Total Senior Subordinated | 4,754,007 | 1,225,020 | 0.86 | % | ||||||||||||||||||||||||||
Equity/Other — 9.41% | ||||||||||||||||||||||||||||||
Battery Solutions, Inc.,
Class A Units(4),(8),(9) | Environmental/Recycling Services | 5,000,000 | $ | 1,058,000 | $ | — | — | |||||||||||||||||||||||
Class E Units(4) | 8% PIK | 8.00 | % | 11/6/2021 | 4,670,546 | 4,670,546 | 3,873,517 | 2.73 | % | |||||||||||||||||||||
Class F Units(4),(8) | 3,333,333 | — | — | — | ||||||||||||||||||||||||||
5,728,546 | 3,873,517 | 2.73 | % | |||||||||||||||||||||||||||
Conisus, LLC, Common Shares(4),(8) | Media: Advertising, Printing & Publishing | 4,914,556 | — | — | — | |||||||||||||||||||||||||
Preferred Equity(4) | 12% PIK | 12.00 | % | 12,677,834 | 12,677,834 | 8,679,689 | 6.12 | % | ||||||||||||||||||||||
12,677,834 | 8,679,689 | 6.12 | % | |||||||||||||||||||||||||||
Southern Technical Institute,
Inc., Class A Units(4),(8) | Education | 3,164,063 | 2,167,000 | — | — | |||||||||||||||||||||||||
Class A1 Units(4),(8),(10) | 6,000,000 | — | — | — | ||||||||||||||||||||||||||
2,167,000 | — | — | ||||||||||||||||||||||||||||
Xpress Global Systems, LLC, Class B Units (4),(8) | Transportation Logistics | 12,544 | 1,254,000 | 795,212 | 0.56 | % | ||||||||||||||||||||||||
Total Equity/Other | 21,827,380 | 13,348,418 | 9.41 | % | ||||||||||||||||||||||||||
Total Investments in Non-Controlled, Affiliated Portfolio Companies | 26,581,387 | 14,573,438 | 10.27 | % | ||||||||||||||||||||||||||
Total Investments | 239,603,500 | 219,207,200 | 154.44 | % | ||||||||||||||||||||||||||
Liabilities In Excess Of Other Assets | (77,269,205 | ) | (54.44 | )% | ||||||||||||||||||||||||||
Net Assets | $ | 141,937,995 | 100.00 | % |
See notes to unaudited consolidated financial statements
10 |
Alcentra Capital Corporation and Subsidiary
Consolidated Schedule of Investments (continued)
As of June 30, 2019
(Unaudited)
(+) | All investments are qualifying assets under Section 55(a) of the 1940 Act, with the exception of the Company’s investments in Goldentree Loan Management US CLO 2 Ltd., Clanwilliam Group Ltd., and CGGR Operations Holdings Corporation. As of June 30, 2019, non-qualifying assets represented 10.5% of the Company’s total assets, at fair value. |
* | Denotes investments in connection with which the Company is deemed to be an “Affiliated Person” under the 1940 Act because it owns 5% or more of the portfolio company’s outstanding voting securities or it has the power to exercise control over the management or policies of such portfolio company (including through a management agreement). Transactions as of and during the six months ended June 30, 2019 in which the issuer was an Affiliated Person (but not a portfolio company that the Company is deemed to Control) are as follows: |
Name of Issuers | Fair
Value at December 31, 2018 | Gross
Additions/ (Gross Reductions) | Transfers In/Out | Change
in Unrealized Appreciation (Depreciation) | Realized
Gain (Loss) | Fair
Value at June 30, 2019 | Interest/ Dividend/ Other Income | |||||||||||||||||||||
Battery Solutions, Inc. | $ | 5,699,791 | $ | 195,775 | $ | - | $ | (797,029 | ) | $ | - | $ | 5,098,537 | $ | 267,844 | |||||||||||||
Conisus, LLC | 6,554,225 | - | - | 2,125,464 | - | 8,679,689 | - | |||||||||||||||||||||
Southern Technical Institute, Inc. | - | - | - | - | - | - | - | |||||||||||||||||||||
Xpress Global Systems, LLC | 726,000 | - | - | 69,212 | - | 795,212 | - | |||||||||||||||||||||
$ | 12,980,016 | $ | 195,775 | $ | - | $ | 1,397,647 | $ | - | $ | 14,573,438 | $ | 267,844 |
** | Denotes investments in connection with which the Company is deemed, under the 1940 Act, to be both an “Affiliated Person” and “Control” this portfolio company because it owns more than 25% of the portfolio company’s outstanding voting securities or it has the power to exercise control over the management or policies of such portfolio company (including through a management agreement). Transactions as of and during the six months ended June 30, 2019 in which the issuer was both an Affiliated Person of, and deemed to be Controlled by, the Company are as follows: |
Name of Issuers | Fair
Value at December 31, 2018 | Gross
Additions/ (Gross Reductions) | Transfers In/Out | Change
in Unrealized Appreciation (Depreciation) | Realized
Gain (Loss) | Fair
Value at June 30, 2019 | Interest/ Dividend/ Other Income | |||||||||||||||||||||
FST Technical Services, LLC(12) | $ | 16,406,021 | $ | (16,406,021 | ) | $ | - | $ | (1,193,459 | ) | $ | 1,193,459 | $ | - | $ | 341,633 | ||||||||||||
$ | 16,406,021 | $ | (16,406,021 | ) | $ | - | $ | (1,193,459 | ) | $ | 1,193,459 | $ | - | $ | 341,633 |
*** | Pledged as collateral under the Credit Facility with ING Capital LLC. |
(1) | The cost of debt securities is adjusted for accretion of discount/amortization of premium and interest paid-in-kind on such securities. |
(2) | The principal balance outstanding for all floating rate loans is indexed to LIBOR, Euribor or an alternate base rate (e.g., prime rate), which typically resets semi-annually, quarterly, or monthly at the borrower's option. The borrower may also elect to have multiple interest reset periods for each loan. For each of these loans, the Company has provided the applicable margin over LIBOR based on each respective credit agreement. |
(3) | Security is classified as Level 2 in the Company’s fair value hierarchy (see Note 3). |
(4) | Security is classified as Level 3 in the Company’s fair value hierarchy (see Note 3). |
(5) | The investment has an unfunded commitment as of June 30, 2019 which is excluded from the presentation (see Note 12). |
(6) | The investment was formerly known as LRI Holding, Inc. and Integrated Efficiency Solutions, Inc. On March 16, 2018, the name was changed to Envocore Holding, LLC. |
(7) | The investment was formerly known as Cirrus Medical Staffing, Inc. On May 25, 2018, the name was changed to Epic Healthcare Staffing Intermediate Holdco, LLC. |
(8) | Non-income producing security. |
(9) | The Company has represented its ownership in Class A units in 919 BSI SPV, LLC (70.7% of that entity), which in turn owns 70,700 Class A Shares of Battery Solutions, LLC (representing 18.16% of ownership of Battery Solutions, LLC). |
(10) | Class A1 units of 1,764,720 are subject to a deferred purchase agreement equal to 95% of future proceeds less $1.00. |
(11) | CGGR Holdings’ Tranche B Loan was reclassified to a second lien investment as a result of a sale of a portion of the Tranche A Loan to an unaffiliated third party. |
(12) | FST Technical Services, LLC was sold on February 8, 2019. |
Abbreviation Legend
LIBOR - | London Inter-bank Offered Rate |
PIK - | Payment-In-Kind |
See notes to unaudited consolidated financial statements
11 |
Alcentra Capital Corporation and Subsidiary
Consolidated Schedule of Investments
As of December 31, 2018
Company(+)*** | Industry | Spread
Above Index | Base
Rate Floor | Interest
Rate | Maturity
Date | No.
Shares/ Principal Amount | Cost(1) | Fair Value | %
of Net Assets | |||||||||||||||||||||
Investments in Non-Controlled, Non-Affiliated Portfolio Companies — 140.89% | ||||||||||||||||||||||||||||||
Senior Secured – First Lien — 106.14% | ||||||||||||||||||||||||||||||
Black Diamond Oilfield Rentals, LLC(2),(3),(15) | Oil & Gas Services | LIBOR + 6.50% | 1.00 | % | 8.90 | % | 12/17/2020 | 11,385,109 | $ | 11,385,109 | $ | 11,382,254 | 7.81 | % | ||||||||||||||||
Cambium Learning Group,
Inc.(3),(10) | Technology & Telecom | LIBOR + 4.50% | 7.31 | % | 12/18/2025 | 4,000,000 | 3,800,000 | 3,800,000 | 2.61 | % | ||||||||||||||||||||
CGGR Operations Holdings Corporation(2),(3),(8) | Business Services | LIBOR + 11.5% | 1.00 | % | 13.90 | % | 9/30/2023 | 13,431,579 | 13,324,053 | 13,431,579 | 9.21 | % | ||||||||||||||||||
LIBOR + 7.0% | 1.00 | % | 9.40 | % | 9/30/2022 | 9,468,421 | 9,397,345 | 9,468,421 | 6.49 | % | ||||||||||||||||||||
22,721,398 | 22,900,000 | 15.70 | % | |||||||||||||||||||||||||||
Champion ONE(2),(3) | Technology & Telecom | LIBOR + 10.5% | 1.00 | % | 12.90 | % | 3/17/2022 | 5,884,230 | 5,842,683 | 5,884,230 | 4.04 | % | ||||||||||||||||||
Clanwilliam Group Ltd.(2),(3),(8) | Technology & Telecom | Euribor + 7.00% | 7.00 | % | 11/8/2025 | € | 5,724,000 | 6,344,310 | 6,347,088 | 4.35 | % | |||||||||||||||||||
Envocore Holding, LLC(2),(3),(7) | Industrial Services | LIBOR + 9.25% | 1.00 | % | 11.65 | % | 6/30/2022 | 18,500,000 | 18,453,344 | 18,500,000 | 12.69 | % | ||||||||||||||||||
Epic Healthcare Staffing Intermediate Holdco, LLC(2),(3),(8),(9) | Business Services | LIBOR + 8.25% | 1.00 | % | 10.65 | % | 10/19/2022 | 13,430,114 | 13,392,406 | 13,430,114 | 9.21 | % | ||||||||||||||||||
Healthcare Associates of Texas, LLC(2),(3),(8) | Healthcare Services | LIBOR + 8.0% | 1.00 | % | 10.40 | % | 11/8/2022 | 20,578,816 | 20,578,816 | 20,578,816 | 14.11 | % | ||||||||||||||||||
Impact Group, LLC(2),(3) | Consumer Services | LIBOR + 6.50% | 1.00 | % | 9.21 | % | 6/27/2023 | 19,965,214 | 19,965,214 | 19,965,214 | 13.69 | % | ||||||||||||||||||
Lugano Diamonds & Jewelry, Inc.(2),(3) | Retail | LIBOR + 10.00% | 0.75 | % | 12.40 | % | 10/24/2021 | 6,750,000 | 6,229,503 | 6,365,358 | 4.37 | % | ||||||||||||||||||
Manna Pro Products,
LLC(2),(3),(8) | Consumer Services | LIBOR + 6.0% | 1.00 | % | 8.31 | % | 12/8/2023 | 1,322,485 | 1,316,153 | 1,322,485 | 0.91 | % | ||||||||||||||||||
Palmetto Moon LLC(2) | Retail | 11.5% Cash, 1.0% PIK | 12.50 | % | 10/31/2021 | 4,737,622 | 4,720,936 | 4,648,350 | 3.19 | % | ||||||||||||||||||||
Pinstripe Holdings, LLC(2),(3) | Business Services | LIBOR + 6.00% | 8.81 | % | 1/17/2025 | 10,000,000 | 9,800,000 | 9,800,000 | 6.72 | % | ||||||||||||||||||||
Superior Controls, Inc.(2),(3),(8) | Wholesale/ Distribution | LIBOR + 7.25% | 1.00 | % | 9.65 | % | 3/22/2021 | 9,825,000 | 9,789,394 | 9,825,000 | 6.74 | % | ||||||||||||||||||
Total Senior Secured – First Lien | 154,339,266 | 154,748,909 | 106.14 | % | ||||||||||||||||||||||||||
Senior Secured – Second Lien — 29.18% | ||||||||||||||||||||||||||||||
BayMark Health Services,
Inc.(2),(3) | Healthcare Services | LIBOR + 8.25% | 1.00 | % | 10.60 | % | 3/1/2025 | 7,000,000 | 6,938,172 | 7,000,000 | 4.80 | % | ||||||||||||||||||
Medsurant Holdings, LLC(2) | High Tech Industries | 13.00% Cash | 13.00 | % | 6/30/2020 | 8,729,396 | 8,701,223 | 8,729,396 | 5.99 | % | ||||||||||||||||||||
Pharmalogic Holdings
Corp.(2),(3),(8) | Healthcare Services | LIBOR + 8.0% | 10.34 | % | 12/11/2023 | 11,340,000 | 11,267,485 | 11,340,000 | 7.77 | % | ||||||||||||||||||||
Sandvine Corporation(2),(3) | Telecommunications | LIBOR + 8.00% | 10.35 | % | 11/2/2026 | 4,500,000 | 4,410,000 | 4,410,000 | 3.02 | % | ||||||||||||||||||||
VVC Holding Corp.(2),(3),(5) | Healthcare Services | LIBOR + 8.13% | 1.00 | % | 10.56 | % | 7/9/2026 | 6,000,000 | 5,943,433 | 6,120,000 | 4.20 | % | ||||||||||||||||||
WeddingWire, Inc.(2),(3) | Consumer Services | LIBOR + 8.25% | 11.06 | % | 12/21/2026 | 5,000,000 | 4,950,000 | 4,950,000 | 3.40 | % | ||||||||||||||||||||
Total Senior Secured – Second Lien | 42,210,313 | 42,549,396 | 29.18 | % | ||||||||||||||||||||||||||
CLO/Structured Credit — 1.20% | ||||||||||||||||||||||||||||||
Goldentree
Loan Management US CLO 2 Ltd.(3),(10) | USD CLO | LIBOR + 4.70% | 7.06 | % | 11/28/2030 | 2,000,000 | $ | 1,948,058 | $ | 1,739,600 | 1.20 | % | ||||||||||||||||||
Total CLO/Structured Credit | 1,948,058 | 1,739,600 | 1.20 | % |
See notes to consolidated financial statements
12 |
Alcentra Capital Corporation and Subsidiary
Consolidated Schedule of Investments (continued)
As of December 31, 2018
Company(+)*** | Industry | Spread Above Index | Base
Rate Floor | Interest Rate | Maturity Date | No.
Shares/ Principal Amount | Cost(1) | Fair Value | %
of Net Assets | |||||||||||||||||||||||
Equity/Other — 4.37% | ||||||||||||||||||||||||||||||||
Champion ONE, Common Shares(2),(4) | Technology & Telecom | 11,250 | $ | 1,125,000 | $ | 908,410 | 0.62 | % | ||||||||||||||||||||||||
Envocore Holding,
LLC, Preferred Shares(2),(4),(6),(7) | Industrial Services | 1,139,725 | 1,160,360 | 788,000 | 0.54 | % | ||||||||||||||||||||||||||
IGT, Preferred Shares(2),(4) | Industrial Services | 11% PIK | 11.00 | % | 12/10/2024 | 1,110,922 | 1,110,922 | — | — | |||||||||||||||||||||||
Common Shares(2),(4) | 44,000 | 44,000 | — | — | ||||||||||||||||||||||||||||
Preferred AA Shares(2),(4) | 15% PIK | 15.00 | % | 12/10/2024 | 326,789 | 326,789 | 271,789 | 0.19 | % | |||||||||||||||||||||||
1,481,711 | 271,789 | 0.19 | % | |||||||||||||||||||||||||||||
Lugano Diamonds &
Jewelry, Inc., Warrants(2),(4) | Retail | 666,615 | 666,615 | 1,000,000 | 0.69 | % | ||||||||||||||||||||||||||
Metal Powder Products, LLC, Common Shares(2),(4) | Industrial Manufacturing | 500,000 | 500,000 | 666,047 | 0.46 | % | ||||||||||||||||||||||||||
My Alarm Center, LLC,
Common Shares(2),(4) | Security | 129,582 | 256,793 | — | — | |||||||||||||||||||||||||||
Junior Preferred Shares(2),(4) | 2,420 | 2,366,549 | — | — | ||||||||||||||||||||||||||||
Senior Preferred Shares(2),(4) | 8% PIK | 8.00 | % | 7/14/2022 | 2,998 | 2,862,059 | 1,023,999 | 0.70 | % | |||||||||||||||||||||||
5,485,401 | 1,023,999 | 0.70 | % | |||||||||||||||||||||||||||||
Palmetto Moon LLC, Common Shares(2),(4) | Retail | 61 | 434,145 | 106,000 | 0.07 | % | ||||||||||||||||||||||||||
Superior Controls, Inc., Preferred Shares(2),(4) | Wholesale/ Distribution | 400,000 | 400,000 | 789,192 | 0.54 | % | ||||||||||||||||||||||||||
Tunnel Hill, Class B Common Units(2),(4),(11),(14) | Waste Services | 98,418 | 2,529,303 | 820,437 | 0.56 | % | ||||||||||||||||||||||||||
Total Equity/Other | 13,782,535 | 6,373,874 | 4.37 | % | ||||||||||||||||||||||||||||
Total Investments in Non-Controlled, Non-Affiliated Portfolio Companies | 212,280,172 | 205,411,779 | 140.89 | % | ||||||||||||||||||||||||||||
Investments in Non-Controlled, Affiliated Portfolio Companies — 8.90%* | ||||||||||||||||||||||||||||||||
Senior Subordinated — 0.83% | ||||||||||||||||||||||||||||||||
Battery Solutions, Inc.(2) | Environmental/ Recycling Services | 12% Cash, 2% PIK | 14.00 | % | 11/6/2021 | 1,212,773 | $ | 1,212,773 | $ | 1,212,774 | 0.83 | % | ||||||||||||||||||||
Southern Technical Institute, Inc.(2),(4) | Education | 6% PIK | 6.00 | % | 12/31/2021 | 3,528,988 | 3,528,988 | — | — | |||||||||||||||||||||||
Total Senior Subordinated | 4,741,761 | 1,212,774 | 0.83 | % | ||||||||||||||||||||||||||||
Equity/Other — 8.07% | ||||||||||||||||||||||||||||||||
Battery Solutions, Inc., Class A Units(2),(4),(12) | Environmental/ Recycling Services | 5,000,000 | $ | 1,058,000 | $ | — | — | |||||||||||||||||||||||||
Class E Units(2) | 8% PIK | 8.00 | % | 11/6/2021 | 4,487,017 | 4,487,017 | 4,487,017 | 3.08 | % | |||||||||||||||||||||||
Class F Units(2),(4) | 3,333,333 | — | — | — | ||||||||||||||||||||||||||||
5,545,017 | 4,487,017 | 3.08 | % | |||||||||||||||||||||||||||||
Conisus, LLC, Common Shares(2),(4) | Media: Advertising, Printing & Publishing | 4,914,556 | — | — | — | |||||||||||||||||||||||||||
Preferred Equity(2) | 12% PIK | 12.00 | % | 12,677,834 | 12,677,834 | 6,554,225 | 4.49 | % | ||||||||||||||||||||||||
12,677,834 | 6,554,225 | 4.49 | % | |||||||||||||||||||||||||||||
Southern Technical Institute, Inc., Class A Units(2),(4) | Education | 3,164,063 | 2,167,000 | — | — | |||||||||||||||||||||||||||
Class A1 Units(2),(4),(13) | 6,000,000 | — | — | — | ||||||||||||||||||||||||||||
2,167,000 | — | — | ||||||||||||||||||||||||||||||
Xpress Global Systems, LLC, Class B Units(2),(4) | Transportation Logistics | 12,544 | 1,254,000 | 726,000 | 0.50 | % | ||||||||||||||||||||||||||
Total Equity/Other | 21,643,851 | 11,767,242 | 8.07 | % | ||||||||||||||||||||||||||||
Total Investments in Non-Controlled, Affiliated Portfolio Companies | 26,385,612 | 12,980,016 | 8.90 | % |
See notes to consolidated financial statements
13 |
Alcentra Capital Corporation and Subsidiary
Consolidated Schedule of Investments (continued)
As of December 31, 2018
Company(+)*** | Industry | Spread Above Index | Base
Rate Floor | Interest Rate | Maturity Date | No.
Shares/ Principal Amount | Cost(1) | Fair Value | %
of Net Assets | |||||||||||||||||||||
Investments in Controlled, Affiliated Portfolio Companies — 11.25%** | ||||||||||||||||||||||||||||||
Senior Secured – First Lien — 9.19% | ||||||||||||||||||||||||||||||
FST Technical Services, LLC(2) | Technology & Telecom | 14% Cash | 14.00 | % | 6/30/2019 | 13,406,020 | $ | 13,406,020 | $ | 13,406,020 | 9.19 | % | ||||||||||||||||||
Total Senior Secured – First Lien | 13,406,020 | 13,406,020 | 9.19 | % | ||||||||||||||||||||||||||
Equity/Other — 2.06% | ||||||||||||||||||||||||||||||
FST Technical Services, LLC, Class B Units(2),(4) | Technology & Telecom | 9% PIK | 9.00 | % | 1,750,000 | $ | 1,806,542 | $ | 3,000,001 | 2.06 | % | |||||||||||||||||||
Total Equity/Other | 1,806,542 | 3,000,001 | 2.06 | % | ||||||||||||||||||||||||||
Total Investments in Controlled, Affiliated Portfolio Companies | 15,212,562 | 16,406,021 | 11.25 | % | ||||||||||||||||||||||||||
Total Investments | 253,878,346 | 234,797,816 | 161.04 | % | ||||||||||||||||||||||||||
Liabilities In Excess Of Other Assets | (88,802,284 | ) | (61.04 | )% | ||||||||||||||||||||||||||
Net Assets | $ | 145,802,532 | 100.00 | % |
(+) | All investments are qualifying assets under Section 55(a) of the 1940 Act, with the exception of the Company’s investments in Goldentree Loan Management US CLO 2 Ltd., Clanwilliam Group Ltd., and CGGR Operations Holdings Corporation. As of December 31, 2018, non-qualifying assets represented 13.2% of the Company’s total assets, at fair value. |
* | Denotes investments in connection with which the Company is deemed to be an “Affiliated Person” under the 1940 Act because it owns 5% or more of the portfolio company’s outstanding voting securities or it has the power to exercise control over the management or policies of such portfolio company (including through a management agreement). Transactions as of and during the year ended December 31, 2018 in which the issuer was an Affiliated Person (but not a portfolio company that the Company is deemed to Control) are as follows: |
Name of Issuers | Fair
Value at December 31, 2017 | Gross
Additions/ (Gross Reductions) | Transfers
In/Out | Change
in Unrealized Appreciation (Depreciation) | Realized
Gain (Loss) | Fair
Value at December 31 2018 | Interest/
Dividend/ Other Income | |||||||||||||||||||||
Battery Solutions, Inc. | $ | 7,820,167 | $ | (843,377 | ) | $ | — | $ | (1,276,999 | ) | $ | — | $ | 5,699,791 | $ | 550,223 | ||||||||||||
Conisus, LLC | 6,678,442 | — | — | (124,217 | ) | — | 6,554,225 | — | ||||||||||||||||||||
Show Media, Inc. | 1 | 7,900,820 | (7,900,821 | ) | — | |||||||||||||||||||||||
Southern Technical Institute, Inc. | 1 | — | — | 10,167,528 | (10,167,529 | ) | — | — | ||||||||||||||||||||
Xpress Global Systems, LLC | 5,474,294 | 38,166 | — | 1,689,002 | (6,475,462 | ) | 726,000 | 162,603 | ||||||||||||||||||||
$ | 19,972,905 | $ | (805,211 | ) | $ | — | $ | 18,356,134 | $ | (24,543,812 | ) | $ | 12,980,016 | $ | 712,826 |
** | Denotes investments in connection with which the Company is deemed, under the 1940 Act, to be both an “Affiliated Person” and “Control” this portfolio company because it owns more than 25% of the portfolio company’s outstanding voting securities or it has the power to exercise control over the management or policies of such portfolio company (including through a management agreement). Transactions as of and during the year ended December 31, 2018 in which the issuer was both an Affiliated Person of, and deemed to be Controlled by, the Company are as follows: |
Name of Issuers | Fair
value at December 31, 2017 | Gross
Additions/ (Gross Reductions) | Transfers
In/Out | Change
in Unrealized Appreciation (Depreciation) | Realized
Gain (Loss) | Fair
Value at December 31 2018 | Interest/
Dividend/ Other Income | |||||||||||||||||||||
FST Technical Services, LLC | $ | 15,256,237 | $ | (593,739 | ) | $ | — | $ | 1,743,523 | $ | — | $ | 16,406,021 | $ | 1,940,389 | |||||||||||||
$ | 15,256,237 | $ | (593,739 | ) | $ | — | $ | 1,743,523 | $ | — | $ | 16,406,021 | $ | 1,940,389 |
*** | Pledged as collateral under the Credit Facility with ING Capital LLC. |
(1) | The cost of debt securities is adjusted for accretion of discount/amortization of premium and interest paid-in-kind on such securities. |
(2) | Security is classified as Level 3 in the Company’s fair value hierarchy (see Note 3). |
See notes to consolidated financial statements
14 |
Alcentra Capital Corporation and Subsidiary
Consolidated Schedule of Investments (continued)
As of December 31, 2018
(3) | The principal balance outstanding for all floating rate loans is indexed to LIBOR or an alternate base rate (e.g., prime rate or Euribor), which typically resets semi-annually, quarterly, or monthly at the borrower’s option. The borrower may also elect to have multiple interest reset periods for each loan. For each of these loans, the Company has provided the applicable margin over LIBOR based on each respective credit agreement. |
(4) | Non-income producing security. |
(5) | The investment is also known as Value-Based Care Solutions Group, or VBC Technologies, or VVC Holding Corp. |
(6) | The investment represents three classes of preferred equity. |
(7) | The investment was formerly known as LRI Holding, Inc. and Integrated Efficiency Solutions, Inc. On March 16, 2018, the name was changed to Envocore Holding, LLC. |
(8) | The investment has an unfunded commitment as of December 31, 2018 which is excluded from the presentation (see Note 12). |
(9) | The investment was formerly known as Cirrus Medical Staffing, Inc. On May 25, 2018, the name was changed to Epic Healthcare Staffing Intermediate Holdco, LLC. |
(10) | Security is classified as Level 2 in the Company’s fair value hierarchy (see Note 3). |
(11) | The investment was formerly known as City Carting Holding Company, Inc. On June 3, 2016, City Carting combined with Tunnel Hill Partners, L.P. |
(12) | The Company has represented its ownership in Class A units in 919 BSI SPV, LLC (70.7% of that entity), which in turn owns 70,700 Class A Shares of Battery Solutions, LLC (representing 18.16% of ownership of Battery Solutions, LLC). |
(13) | Class A1 units of 1,764,720 are subject to a deferred purchase agreement equal to 95% of future proceeds less $1.00. |
(14) | There is a possible escrow receivable up to a maximum of $2.4 million, which is excluded from the presentation. |
(15) | Includes $2,855 of residual cost from previous tranche of debt, which will roll off in the first quarter of 2019. |
Abbreviation Legend
PIK — Payment-In-Kind
See notes to consolidated financial statements
15 |
ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)
1. | Organization and Purpose |
Alcentra Capital Corporation (the “Company” or “Alcentra”) was formed as a Maryland corporation on June 6, 2013 as an externally managed, non-diversified closed-end management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company is an investment company following the accounting and reporting guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, Financial Services – Investment Companies. Alcentra is managed by Alcentra NY, LLC (the “Adviser” or “Alcentra NY”), a registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). In addition, for U.S. federal income tax purposes, Alcentra has elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). Alcentra NY, together with certain of its affiliated companies (the "Alcentra Group"), is an indirect, majority owned subsidiary of The Bank of New York Mellon Corporation.
The Company was formed for the purpose of acquiring certain assets held by BNY Mellon-Alcentra Mezzanine III, L.P. (the “Partnership”). The Partnership is a Delaware limited partnership, which commenced operations on May 14, 2010 (the “Commencement Date”). BNY Mellon-Alcentra Mezzanine III (GP), L.P. (the “General Partner”), a Delaware limited liability company, is the General Partner of the Partnership. BNY Mellon-Alcentra Mezzanine Partners (the “Manager”), a division of Alcentra NY and an affiliate of the General Partner, manages the investment activities of the Partnership.
On May 8, 2014 (commencement of operations), the Company acquired all of the assets of the Partnership other than its investment in the shares of common stock and warrants to purchase common stock of GTT Communications (the “Fund III Acquired Assets”) for $64.4 million in cash and $91.5 million in shares of Alcentra’s common stock. Concurrent with Alcentra’s acquisition of the Fund III Acquired Assets from the Partnership, Alcentra also purchased for $29 million in cash certain debt investments (the “Warehouse Portfolio”) from Alcentra Group. The Warehouse Portfolio debt investments were originated by the investment professionals of the Adviser and purchased by Alcentra Group using funds under a warehouse credit facility provided by The Bank of New York Mellon Corporation in anticipation of the initial public offering of Alcentra’s shares of common stock. Except for the $1,500 seed capital provided by Alcentra NY in exchange for 100 shares of Alcentra's common stock, the Company had no assets or operations prior to the acquisition of the investment portfolios of the Partnership and as a result, the Partnership is considered a predecessor entity of the Company.
On May 14, 2014, Alcentra completed its initial public offering (the “IPO”), at a price of $15.00 per share. Through the IPO the Company sold 6,666,666 shares for gross proceeds of approximately $100 million. Alcentra used $94.2 million of the proceeds from the IPO to fund the purchase of the warehouse portfolio, and the cash portion of the consideration paid to Fund III. On June 6, 2014, Alcentra sold 750,000 shares through the underwriters’ exercise of the overallotment option for gross proceeds of $11,250,000.
On April 8, 2014, the Company formed Alcentra BDC Equity Holdings, LLC, a wholly-owned subsidiary for tax purposes (the “Taxable Subsidiary”). The Taxable Subsidiary allows us to hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements of a RIC under the Code. The financial statements of this entity are consolidated into the financial statements of Alcentra. All intercompany balances and transactions have been eliminated.
On May 22, 2017, Alcentra Capital Corporation completed an underwritten primary offering of 808,161 shares of its common stock at a public offering price of $13.68 per share for proceeds of approximately $10,853,602, after paying the sales load and offering expenses.
The Company’s investment objective is to generate both current income and, to a lesser extent, capital appreciation primarily by making direct investments in middle-market companies, which the Company defines as companies having annual earnings, before interest, taxes, depreciation and amortization, or EBITDA of between $15 million and $75 million, although the Company may make investments in larger or smaller companies and other types of investments. These investments are in the form of first lien, second lien, unitranche and, to a lesser extent given the current credit environment, mezzanine debt. The Company expects to source investments primarily through the network of relationships that the principals of our investment adviser have developed with financial sponsor firms, financial institutions, middle-market companies, management teams and other professional intermediaries.
Upon commencement of operations, the Company also entered into an administration and custodian agreement (the “Administration Agreement”) with State Street Bank and Trust Company (the “Administrator”) to provide the Company with financial reporting, post-trade compliance and treasury services.
16 |
ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2019
(Unaudited)
2. | Summary of Significant Accounting Policies |
Basis of Presentation – The accompanying financial statements of the Company have been prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the requirements for reporting on Form 10-Q and Articles 10 and 12 of Regulation S-X. Accordingly, certain financial information that is normally included in annual financial statements, including certain financial statement notes, prepared in accordance with GAAP, is not required for interim reporting purposes and have been omitted. In the opinion of management, the unaudited financial results included herein contain all adjustments considered necessary for the fair presentation of financial statements for the interim periods included herein. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending December 31, 2019.
The accounting records of the Company are maintained in United States dollars.
Use of Estimates – The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates and such differences could be material. The most significant estimates relate to the valuation of the Company’s portfolio investments.
Consolidation – In accordance with ASC Topic 810 - Consolidation, the Company generally will not consolidate its interest in any operating company other than in investment company subsidiaries, certain financing subsidiaries, and controlled operating companies substantially all of whose business consists of providing services to the Company.
Portfolio Investment Classification – The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “Control Investments” are defined as investments in which the Company owns more than 25% of the voting securities or has rights to maintain greater than 50% of the board representation. Under the 1940 Act, “Affiliate Investments” are defined as investments in which the Company owns between 5% and 25% of the voting securities and does not have rights to maintain greater than 50% of the board representation. “Non-controlled, non-affiliate investments” are defined as investments that are neither Control Investments or Affiliate Investments.
Cash – At June 30, 2019, cash balances totaling $7.6 million exceeded FDIC insurance protection levels, subjecting the Company to risk related to the uninsured balance. All of the Company’s cash deposits are held by the Administrator and management believes that the risk of loss associated with any uninsured balance is remote.
Deferred Financing Costs – Deferred financing costs consist of fees and expenses paid in connection with the Credit Facility (as defined in Note 10) and are capitalized at the time of payment. These costs are amortized using the straight line method, which approximate the effective interest method over the term of the Credit Facility.
Deferred Note Offering Costs – Deferred note offering costs consist of fees and expenses paid in connection with the Notes (as defined in Note 9) and are capitalized at the time these fees and expenses are incurred before the issuance commenced. These costs are amortized using the straight line method, which approximate the effective interest method over the term of the Notes.
Valuation of Portfolio Investments – Portfolio investments are carried at fair value as determined by the Board of Directors (the ‘‘Board’’) of Alcentra.
The methodologies used in determining these valuations include:
(1) Preferred shares/membership units and common shares/membership units
In determining estimated fair value for common shares/membership units and preferred shares, the Company makes assessments of the methodologies and value measurements which market participants would use in pricing comparable investments, based on market data obtained from independent sources as well as from the Company’s own assumptions and taking into account all material events and circumstances which would affect the estimated fair value of such investments. Several types of factors, circumstances and events could affect the estimated fair value of the investments. These include but are not limited to the following:
17 |
ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2019
(Unaudited)
(i) Any material changes in the (a) competitive position of the portfolio investment, (b) legal and regulatory environment within which the portfolio investment operates, (c) management or key managers of the portfolio investment, (d) terms and/or cost of financing available to the portfolio investment, and (e) financial position or operating results of the investment;
(ii) pending disposition by the Company of the major portfolio investment; and
(iii) sales prices of recent public or private transactions in identical or comparable investments.
One or a combination of the following valuation techniques are used to fair value these investments: Market Approach and Income Approach. The Market Approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Income Approach uses valuation techniques to convert future amounts to a present amount (i.e., discounting estimated future cash flows to a net present value amount).
(2) Debt
The fair value of performing debt investments is typically derived utilizing a market yield analysis. In a market yield analysis, a price is ascribed to each debt investment based upon an assessment of current and expected market yields for similar debt investments and risk profiles. Additional consideration is given to current contractual interest rates, relative maturities and other key terms and risks associated with a debt investment.
The Company considers many factors in evaluating the most suitable point within the range of fair values, including, but not limited to, the following:
· | the portfolio company’s underlying operating performance and any related trends; |
· | the improvement or decline in the underlying credit quality measured on the basis of a loan-to-enterprise value ratio and total outstanding debt to EBITDA ratio; and |
· | changes or issues related to the portfolio company’s customer/supplier concentration, regulatory developments and other portfolio company specific considerations. |
(3) Warrants
Where warrants are considered to be in the money, their incremental value is included within the valuation of the investments.
Valuation techniques are applied consistently from period to period, except when circumstances warrant a change to a different valuation technique that will provide a better estimate of fair value.
With respect to the Company’s valuation process, the Board undertakes a similar multi-step valuation process each quarter in connection with determining the fair value of the Company's investments for which no market quotation is readily available, as described below:
· | Alcentra’s quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of the Adviser responsible for the portfolio investment; |
· | preliminary valuation conclusions will then be documented and discussed with the investment committee of the Adviser; |
· | Independent valuation firms engaged by the valuation committee of the Board prepare preliminary valuations on a select portion of the Company's investment portfolio on a quarterly basis and submit the reports to the Board; and |
· | the valuation committee of the Board then reviews these preliminary valuations and makes a recommendation to the Board with respect thereto; and |
· | the Board then discusses valuations and approves the fair value of each such investment in good faith, based on the input of the Adviser, the independent valuation firms and the valuation committee. |
The valuation committee of the Board has authorized the engagement of independent valuation firms to provide Alcentra with valuation assistance. Alcentra intends to have independent valuation firms provide it with valuation assistance on a portion of its portfolio on a quarterly basis and its entire portfolio will be reviewed at least annually by independent valuation firms; however, the Board does not have de minimis investments of less than 1% of the Company’s gross assets (up to an aggregate of 10% of the Company’s gross assets) independently reviewed. The Board is ultimately responsible for the valuation of portfolio investments at fair value as approved in good faith pursuant to Alcentra’s valuation policy and a consistently applied valuation process.
18 |
ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2019
(Unaudited)
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, as determined by the Board, may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material. 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 valuations previously assigned.
Offering Costs – Offering expenses are expensed on the Company’s Consolidated Statements of Operations. Offering expenses consist principally of underwriter’s fee, legal, accounting, printing fees and other related expenses associated with the filing of a registration statement.
Paid-In-Capital – The Company records the proceeds from the sale of its common stock on a net basis to (i) capital stock and (ii) paid in capital in excess of par value, excluding all commissions.
Earnings and Net Asset Value Per Share – Earnings per share is calculated based upon the weighted average number of shares of common stock outstanding during the reported period. Net Asset Value per share is calculated using the number of shares outstanding as of the end of the period.
Investments – Investment security transactions are accounted for on a trade date basis. Cost of portfolio investments represents the actual purchase price of the securities acquired including capitalized legal, brokerage and other fees as well as the value of interest and dividends received in-kind and the accretion of original issue discounts. Fees may be charged to the issuer by the Company in connection with the origination of a debt security financing. Such fees are reflected as a discount to the cost of the portfolio security and the discount is accreted into income over the life of the related debt security.
Original Issue Discount – When the Company receives warrants with a nominal or discounted exercise price upon origination of a debt or preferred stock investment, a portion of the cost basis is allocated to the warrants. When the investment is made concurrently with the sale of a substantial amount of equity, the value of the warrants is based on the sales price. The value of the warrants is recorded as original issue discount (“OID”) to the value of the debt or preferred stock investment and the OID is amortized over the life of the investment.
Interest and Dividend Income – Interest is recorded on the accrual basis to the extent that the Company expects to collect such amounts. The Company accrues paid in-kind interest (“PIK”) by recording income and an increase to the cost basis of the related investments. Dividend income is recorded on ex-dividend date. Dividends in-kind are recorded as an increase in cost basis of investments and as income.
Investments that are expected to pay regularly scheduled interest in cash are generally placed on non-accrual status when principal or interest cash payments are past due 30 days or more and/or when it is no longer probable that principal or interest cash payments will be collected. Such non-accrual investments are restored to accrual status if past due principal and interest are paid in cash, and in management’s judgment, are likely to continue timely payment of their remaining principal and interest obligations. Cash interest payments received on non-accrual designated investments may be recognized as income or applied to principal depending on management’s judgment. There was one non-accrual investment as of each of June 30, 2019 and December 31, 2018.
Other Income – The Company may also receive structuring or closing fees in connection with its investments. Such upfront fees are accreted into income over the life of the investment. These fees are non-recurring in nature.
Prepayment penalties received by the Company for debt instruments paid back to the Company prior to the maturity date are recorded as income upon receipt.
Income Taxes – The Company has elected to be treated for U.S. federal income tax purposes as a RIC under Subchapter M of the Code, and to operate in a manner to qualify for the tax treatment applicable to RIC’s. To obtain and maintain our qualification for taxation as a RIC, the Company must, among other things, meet certain source-of-income and asset diversification requirements. In addition, the Company must distribute to its stockholders, for each taxable year, at least 90% of ‘‘investment company taxable income,’’ which is generally net ordinary taxable income plus the excess of realized net short-term capital gains over realized net long-term capital losses, or the Annual Distribution Requirement. As a RIC, the Company generally will not pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that are timely distributed to stockholders as dividends.
19 |
ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2019
(Unaudited)
The Taxable Subsidiary permits the Company to hold equity investments in portfolio companies which are “pass through” entities for tax purposes and continue to comply with the “source income” requirements contained in RIC tax provisions of the Code. The Taxable Subsidiary is not consolidated with the Company for income tax purposes and may generate income tax expense, benefit, and the related tax assets and liabilities, as a result of its ownership of certain portfolio investments. The income tax expense, or benefit, if any, and related tax assets and liabilities are reflected in the Company’s consolidated financial statements. The Taxable Subsidiary uses the asset and liability method of accounting for income taxes. This method requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between financial accounting bases and tax bases of assets and liabilities. The tax benefits of tax loss carryforwards and other deferred taxes are recorded as an asset to the extent that management assesses the utilization of such assets to be more likely than not. Management routinely assesses the realizability of the deferred income tax assets, and a valuation allowance is recognized if it is determined that deferred income tax assets may not be fully utilized in future periods. Management considers future taxable earnings in making such assessments. Numerous judgments and assumptions are inherent in the determination of future taxable earnings, including such factors as future operating conditions. When the future utilization of some portion of the deferred tax asset is determined not to be more likely than not, a valuation allowance is provided to reduce the recorded deferred tax asset. When management can project that a portion of the deferred tax asset can be realized through application of a portion of tax loss carryforward, management will record that utilization as a deferred tax benefit and recognize a deferred tax asset in the same amount. There can be no assurance that facts and circumstances will not materially change and require the recording of any deferred tax asset valuation allowance in future periods. For the three and six months ended June 30, 2019, the Company recognized a provision for income tax on unrealized gain on investments of $0.9 million and $1.1 million, respectively, for the Taxable Subsidiary. For the three and six months ended June 30, 2018, the Company recognized a benefit for income taxes on unrealized loss on investments of $1.0 million and $1.0 million, respectively, for the Taxable Subsidiary. As of June 30, 2019 and December 31, 2018, the Company had a deferred tax asset in the amount of $4.3 million and $5.4 million, respectively, primarily relating to tax loss carryforwards. The decrease in the deferred tax asset resulted from a valuation allowance recorded during the quarter.
The deferred tax asset of $4.3 million (after a 21% tax rate) is comprised of the following: (1) $1.0 million of NOL’s; (2) $0.7 million of capital losses; (3) $3.4 million of partnership losses, offset by (4) $0.8 of a valuation allowance. GAAP provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. GAAP requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s financial statements to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. The Company has analyzed such tax positions and has concluded that no unrecognized tax benefits should be recorded for uncertain tax positions for tax years that may be open for the quarter ended June 30, 2019. This conclusion may be subject to review and adjustment at a later date based on factors, including but not limited to, ongoing analysis and changes to laws, regulations, and interpretations thereof.
Indemnification – 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 Company’s 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 management’s experience, the Company expects the risk of loss to be remote.
Recently Issued Accounting Standards – In March 2017, the FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities, which amended FASB ASC 310-20. The amendments in ASU 2017-08 shortened the amortization period for certain callable debt securities held at a premium, generally requiring the premium to be amortized to the earliest call date. For public business entities, the amendments became effective for fiscal years beginning after December 15, 2018, as well as for interim periods within those fiscal years. The Company adopted ASU 2017-08 in connection with its quarterly report on Form 10-Q for the three months ended March 31, 2019. Such adoption did not have a material impact on the Company’s financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this Update modify the disclosure requirements on fair value measurement in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company has adopted ASU 2018-13 in its consolidated financial statements and disclosures with no material impact.
In August 2018, the U.S. Securities and Exchange Commission adopted final rules to eliminate redundant, duplicative, overlapping, outdated or superseded disclosure requirements in light of other disclosure requirements, GAAP or changes in the information environment. These rules amend certain provisions of Regulation S-X and Regulation S-K, certain rules promulgated under the Securities Act of 1933 and the Securities Exchange Act of 1934 and certain related forms. The Company has adopted these changes in its consolidated financial statements and disclosures with no material impact.
20 |
ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2019
(Unaudited)
In May 2014, the FASB issued ASC 606, Revenue From Contracts With Customers, originally effective for public business entities with annual reporting periods beginning after December 15, 2016. On August 12, 2015, the FASB issued an ASU, Revenue From Contracts With Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASC 606 for one year. ASC 606 provides accounting guidance related to revenue from contracts with customers. For public business entities, ASC 606 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company has evaluated the impact of ASC 606 and determined that it will not have a material impact on its consolidated financial statements and disclosures.
3. | Fair Value of Portfolio Investments |
The Company accounts for its investments in accordance with FASB Accounting Standards Codification Topic 820 (“ASC Topic 820”), Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value. ASC Topic 820 established a fair value hierarchy which prioritizes and ranks the level of market price observability used in measuring investments at fair value.
Market price observability is impacted by a number of factors, including the type of investment, the characteristics specific to the investment, and the state of the marketplace (including the existence and transparency of transactions between market participants). Investments with readily-available actively quoted prices or for which fair value can be measured from actively-quoted prices in an orderly market will generally have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
Investments measured and reported at fair value are classified and disclosed in one of the following categories (from highest to lowest) based on inputs:
Level 1 – Quoted prices (unadjusted) are available in active markets for identical investments that the Company has the ability to access as of the reporting date. The type of investments which would generally be included in Level 1 includes listed equity securities and listed derivatives. As required by ASC Topic 820, the Company, to the extent that it holds such investments, does not adjust the quoted price for these investments, even in situations where the Company holds a large position and a sale could reasonably impact the quoted price.
Level 2 – Pricing inputs are observable for the investments, either directly or indirectly, as of the reporting date, but are not the same as those used in Level 1. Fair Value is based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3 – Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant judgment or estimation by the Company. The types of investments which would generally be included in this category include debt and equity securities issued by private entities.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given investment is based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.
The fair values of our investments disaggregated into the three levels of the fair value hierarchy based upon the lowest level of significant input used in the valuation as of June 30, 2019 are as follows:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Senior Secured - First Lien | $ | — | $ | 7,162,215 | $ | 128,361,939 | $ | 135,524,154 | ||||||||
Senior Secured - Second Lien | — | — | 65,239,620 | 65,239,620 | ||||||||||||
Subordinated Debt | — | — | 1,225,020 | 1,225,020 | ||||||||||||
CLO/Structured Credit | — | 1,828,490 | — | 1,828,490 | ||||||||||||
Equity/Other | — | — | 15,389,916 | 15,389,916 | ||||||||||||
Total Investments | $ | — | $ | 8,990,705 | $ | 210,216,495 | $ | 219,207,200 |
The fair values of our investments disaggregated into the three levels of the fair value hierarchy based upon the lowest level of significant input used in the valuation as of December 31, 2018 are as follows:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Senior Secured – First Lien | $ | - | $ | 3,800,000 | $ | 164,354,929 | $ | 168,154,929 | ||||||||
Senior Secured – Second Lien | - | - | 42,549,396 | 42,549,396 | ||||||||||||
Subordinated Debt | - | - | 1,212,774 | 1,212,774 | ||||||||||||
CLO/Structured Credit | - | 1,739,600 | - | 1,739,600 | ||||||||||||
Equity/Other | - | - | 21,141,117 | 21,141,117 | ||||||||||||
Total investments | $ | - | $ | 5,539,600 | $ | 229,258,216 | $ | 234,797,816 |
21 |
ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2019
(Unaudited)
The changes in investments classified as Level 3 are as follows for the six months ended June 30, 2019 and June 30, 2018.
As of June 30, 2019:
Senior | Senior | |||||||||||||||||||
Secured - | Secured - | Senior | Equity/ | |||||||||||||||||
First Lien | Second Lien | Subordinated | Other | Total | ||||||||||||||||
Balance as of January 1, 2019 | $ | 164,354,929 | $ | 42,549,396 | $ | 1,212,774 | $ | 21,141,117 | $ | 229,258,216 | ||||||||||
Amortized discounts/premiums | 745,945 | 242,474 | - | - | 988,419 | |||||||||||||||
Paid in-kind interest | 113,301 | - | 6,074 | 183,529 | 302,904 | |||||||||||||||
Net realized gain (loss) | 68,711 | - | - | 1,013,030 | 1,081,741 | |||||||||||||||
Net change in unrealized appreciation (depreciation) | (1,920,653 | ) | 43,697 | - | 592,730 | (1,284,226 | ) | |||||||||||||
Purchases | 33,819,312 | 17,200,000 | 6,172 | 400,000 | 51,425,484 | |||||||||||||||
Sales/Return of capital | (59,295,553 | ) | (8,120,000 | ) | - | (7,940,490 | ) | (75,356,043 | ) | |||||||||||
Lien status change | (13,324,053 | ) | 13,324,053 | - | - | - | ||||||||||||||
Transfers in | 3,800,000 | - | - | - | 3,800,000 | |||||||||||||||
Transfers out | - | - | - | - | - | |||||||||||||||
Balance as of June 30, 2019 | $ | 128,361,939 | $ | 65,239,620 | $ | 1,225,020 | $ | 15,389,916 | $ | 210,216,495 | ||||||||||
Net change in unrealized appreciation (depreciation) from investments still held as of June 30, 2019 | $ | (1,522,345 | ) | $ | 128,749 | $ | - | $ | 583,310 | $ | (810,286 | ) |
As of June 30, 2018:
Senior | Senior | |||||||||||||||||||
Secured - | Secured - | Senior | Equity/ | |||||||||||||||||
First Lien | Second Lien | Subordinated | Other | Total | ||||||||||||||||
Balance as of January 1, 2018 | $ | 177,340,027 | $ | 14,203,691 | $ | 66,884,849 | $ | 29,125,978 | $ | 287,554,545 | ||||||||||
Amortized discounts/premiums | 165,255 | 24,736 | 155,059 | - | 345,050 | |||||||||||||||
Paid in-kind interest | 81,763 | - | 207,222 | 169,276 | 458,261 | |||||||||||||||
Net realized gain (loss) | (24,418 | ) | (4,922,041 | ) | (10,098,674 | ) | (5,245,476 | ) | (20,290,609 | ) | ||||||||||
Net change in unrealized appreciation (depreciation) | (163,436 | ) | 7,750,383 | 5,280,892 | 565,315 | 13,433,154 | ||||||||||||||
Purchases | 10,880,846 | 18,189,499 | 2,277,803 | - | 31,348,148 | |||||||||||||||
Sales/Return of capital | (37,984,277 | ) | (3,529,000 | ) | (41,252,701 | ) | - | (82,765,978 | ) | |||||||||||
Transfers in | - | - | - | - | - | |||||||||||||||
Transfers out | - | - | - | - | - | |||||||||||||||
Balance as of June 30, 2018 | $ | 150,295,760 | $ | 31,717,268 | $ | 23,454,450 | $ | 24,615,093 | $ | 230,082,571 | ||||||||||
Net change in unrealized appreciation (depreciation) from investments still held as of June 30, 2018 | $ | (60,534 | ) | $ | (700,657 | ) | $ | (5,373,294 | ) | $ | (4,680,161 | ) | $ | (10,814,646 | ) |
22 |
ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2019
(Unaudited)
The following is a summary of the quantitative inputs and assumptions used for items categorized in Level 3 of the fair value hierarchy as of June 30, 2019 and December 31, 2018, respectively.
As of June 30, 2019:
Fair Value at | ||||||||||||||
Assets at Fair Value | June 30, 2019 | Valuation Technique | Unobservable Input | Range of Inputs | Weighted Average | |||||||||
Senior Secured - First Lien | $ | 128,361,939 | Yield to Maturity | Comparable Market Rate | 6.8% - 17.1% | 10.1 | % | |||||||
Senior Secured - Second Lien | 65,239,620 | Yield to Maturity | Comparable Market Rate | 10.3% - 14.3% | 10.5 | % | ||||||||
Senior Subordinated | 1,225,020 | Yield to Maturity | Comparable Market Rate | 14.0% - 14.2% | 14.1 | % | ||||||||
Preferred Ownership | 13,847,543 | Market Approach | Enterprise Value / LTM EBITDA Multiple / Transaction price | 6.0x - 10.5x | 8.2 | x | ||||||||
Common Ownership/ Common Warrants | 1,542,373 | Market Approach | Enterprise Value / LTM EBITDA Multiple / Transaction price | 4.5x - 10.5x | 6.5 | x | ||||||||
Total | $ | 210,216,495 |
As of December 31, 2018:
Fair Value at | ||||||||||||||
Assets at Fair Value | December 31, 2018 | Valuation Technique | Unobservable Input | Range of Inputs | Weighted Average | |||||||||
Senior Secured - First Lien | $ | 164,354,929 | Yield to Maturity | Comparable Market Rate | 7.0% - 14.0% | 10.7 | % | |||||||
Senior Secured - Second Lien | 42,549,396 | Yield to Maturity | Comparable Market Rate | 10.3% - 13.0% | 11.0 | % | ||||||||
Senior Subordinated | 1,212,774 | Yield to Maturity | Comparable Market Rate | 14.0% | 14.0 | % | ||||||||
Preferred Ownership | 16,914,223 | Market Approach | Enterprise Value / LTM EBITDA Multiple / Transaction price | 5.5x - 12.0x | 7.4 | x | ||||||||
Common Ownership/ Common Warrants | 4,226,894 | Market Approach | Enterprise Value / LTM EBITDA Multiple / Transaction price | 4.5x - 12.0x | 8.1 | x | ||||||||
Total | $ | 229,258,216 |
4. | Share Transactions |
On November 2, 2017, the Board approved a $2.5 million open market stock repurchase program. Pursuant to the program, the Company was authorized to repurchase up to $2.5 million in aggregate of our common stock in the open market. The timing, manner, price and amount of any share repurchases were determined by our management, in its discretion, based upon the evaluation of economic conditions, stock price, applicable legal and regulatory requirements and other factors. Repurchases under the program were authorized through November 2, 2018.
On November 16, 2017, the Board approved expansion of the open market stock repurchase program to $5.0 million and extension of the length of the program to January 31, 2019.
As of August 8, 2018, the Company repurchased an aggregate of $5.0 million shares of our common stock under the discretionary open-market share repurchase program and, as a result, the program terminated on such date in accordance with its terms. Subsequently, pursuant to the Board authorization on November 5, 2018, the Company adopted a trading plan on December 10, 2018 for the purpose of repurchasing shares of its common stock in the open market (the "Plan"). Under the Plan, the Company may repurchase up to the lesser of (1) 5.0% of the amount of shares of the Company's common stock outstanding as of the date of the Plan, December 10, 2018 and (2) $10.0 million in aggregate amount of the Company's common stock.
23 |
ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2019
(Unaudited)
The following tables set forth the number of shares of common stock repurchased by the Company under its share repurchase programs for the six months ended June 30, 2019 and June 30, 2018:
Six months ended June 30, 2019:
Month Ended | Shares Repurchased | Repurchase Price Per Share | Aggregate Consideration for Repurchased Shares | |||||||
January 2019 | 207,220 | $6.50 - $6.99 | $ | 1,318,920 | ||||||
February 2019 | 22,509 | $6.95 - $7.00 | 157,495 | |||||||
Total | 229,729 | $ | 1,476,415 |
Six months ended June 30, 2018:
Month Ended | Shares Repurchased | Repurchase Price Per Share | Aggregate Consideration for Repurchased Shares | |||||||
January 2018 | 16,786 | $8.01 - $8.22 | $ | 136,949 | ||||||
March 2018 | 195,785 | $6.05 - $7.24 | 1,373,656 | |||||||
April 2018 | 231,343 | $6.12 - $7.20 | 1,599,304 | |||||||
May 2018 | 136,819 | $6.18 - $6.85 | 901,837 | |||||||
June 2018 | 59,461 | $6.30 - $6.80 | 397,913 | |||||||
Total | 640,194 | $ | 4,409,659 |
5. | Distributions |
The Company intends to make quarterly distributions of available net investment income determined on a tax basis to its stockholders. Distributions to stockholders are recorded on the record date. The amount, if any, to be distributed to stockholders is determined by the Board each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, will be distributed at least annually. If the Company does not distribute (or are not deemed to have distributed) at least (i) 98% of the Company's annual ordinary income in the calendar year earned (the “required distribution”), (ii) 98.2% of capital gain net income (adjusted for certain ordinary losses) for the one-year period ending October 31 of that calendar year, and (iii) any income or capital gains recognized, but not distributed, in preceding calendar years and on which the Company incurred no federal income tax, the Company will generally be required to pay an excise tax equal to 4% of the amount by which the required distribution exceeds the distributions from such taxable income for the year. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, the Company accrues excise taxes, if any, on estimated excess taxable income. As of June 30, 2019 and December 31, 2018, the Company accrued $392,007 and $435,797, respectively, for any unpaid potential excise tax liability and have included these amounts within income tax asset or liability on the accompanying Consolidated Statements of Assets and Liabilities.
The following table reflects the dividends on the Company’s common stock declared by the Board and paid for the six months ended June 30, 2019:
Date Declared | Record Date | Payment Date | Amount Per Share | |||||
March 11, 2019 | March 29, 2019 | April 4, 2019 | $ | 0.18 | ||||
May 3, 2019 | June 28, 2019 | July 3, 2019 | $ | 0.33 |
The following table reflects the dividends on the Company’s common stock declared by the Board and paid for the six months ended June 30, 2018:
Date Declared | Record Date | Payment Date | Amount Per Share | |||||
March 8, 2018 | March 30, 2018 | April 4, 2018 | $ | 0.18 | ||||
May 4, 2018 | June 29, 2018 | July 5, 2018 | $ | 0.18 |
24 |
ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2019
(Unaudited)
The Company has adopted a dividend reinvestment plan (“DRIP”) that provides for the reinvestment of dividends on behalf of its stockholders, unless a stockholder has elected to receive dividends in cash. As a result, if the Company declares a cash dividend, the stockholders who have not “opted out” of the DRIP no later than the record date will have their cash dividend automatically reinvested into additional shares of the Company’s common stock. The Company has the option to satisfy the share requirements of the DRIP through the issuance of new shares of common stock or through open market purchases of common stock by the DRIP plan administrator. Newly issued shares are valued based upon the final closing price of the common stock on the NASDAQ Global Select Market on the dividend payment date. Shares purchased in the open market to satisfy the DRIP requirements will be valued upon the average price of the applicable shares purchased by the plan administrator, before any associated brokerage or other costs.
6. | Related Party Transactions |
Management Fee
Under the Investment Advisory Agreement, the Company has agreed to pay Alcentra NY an annual base management fee, which is calculated at an annual rate as follows: 1.50% of its gross assets (i.e., total assets held before deduction of any liabilities), including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents (such as investments in U.S. Treasury Bills), if its gross assets are less than or equal to $625,000,000; 1.40% if its gross assets are greater than or equal to $625,000,001 but less than or equal to $750,000,000; and 1.25% if its gross assets are greater than or equal to $750,000,001. The various management fee percentages (i.e. 1.50%, 1.40% and 1.25%) would apply to the Company’s entire gross assets in the event its gross assets exceed the various gross asset thresholds. The base management fee is payable quarterly in arrears and is calculated based on the average value of the Company’s gross assets, excluding cash and cash equivalents, at the end of the two most recently completed calendar quarters.
On May 4, 2018, the Adviser agreed to a temporary voluntary 25 basis point reduction, from May 1, 2018 to April 30, 2019, across all of these base management fee breakpoints. On May 3, 2019, the Adviser agreed to a continuation of the temporary 25 basis point reduction across all of the base management fee breakpoints under the Investment Advisory Agreement, effective from May 1, 2019 to April 30, 2020.
The incentive fee consists of two parts. The first part, which is calculated and payable quarterly in arrears, equals 20% of the Company's ‘‘pre-incentive fee net investment income’’ for the immediately preceding quarter, subject to a hurdle rate of 2% per quarter, and is subject to a ‘‘catch-up’’ feature. The “catch-up” feature is intended to provide the Adviser with an incentive fee of 50% of the Company’s “pre-incentive fee net investment income” as if a preferred return did not apply when our net investment income exceeds 2.5% in any quarter.
The foregoing incentive fee is subject to a total return requirement, which provides that no incentive fee in respect of our pre-incentive fee net investment income is payable except to the extent 20.0% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding quarters exceeds the cumulative incentive fees accrued and/or paid for the 11 preceding quarters. In other words, any ordinary income incentive fee that is payable in a calendar quarter is limited to the lesser of (i) 20.0% of the amount by which our pre-incentive fee net investment income for such calendar quarter exceeds the 2.0% hurdle, subject to the “catch-up” provision, and (ii) (x) 20.0% of the cumulative net increase in net assets resulting from operations for the then current and 11 preceding calendar quarters minus (y) the cumulative incentive fees accrued and/or paid for the 11 preceding calendar quarters. For the foregoing purpose, the “cumulative net increase in net assets resulting from operations” is the amount, if positive, of the sum of pre-incentive fee net investment income, realized gains and losses and unrealized appreciation and depreciation for our then current and 11 preceding calendar quarters. In addition, the portion of such incentive fee that is attributable to deferred interest (such as PIK interest or OID) is paid to the Adviser, together with interest thereon from the date of deferral to the date of payment, only if and to the extent that the Company actually receives such interest in cash, and any accrual thereof will be reversed if and to the extent such interest is reversed in connection with any write-off or similar treatment of the investment giving rise to any deferred interest accrual. Any reversal of such accounts would reduce net income for the quarter by the net amount of the reversal (after taking into account the reversal of incentive fees payable) and would result in a reduction and possible elimination of the incentive fees for such quarter. There is no accumulation of amounts on the hurdle rate from quarter to quarter, and accordingly there is no clawback of amounts previously paid if subsequent quarters are below the quarterly hurdle, and there is no delay of payment if prior quarters are below the quarterly hurdle. The Adviser has agreed to permanently waive any interest accrued on the portion of the incentive fee attributable to deferred interest (such as PIK interest or OID).
The second part is calculated and payable in arrears as of the end of each calendar year (or, upon termination of the Investment Advisory Agreement, as of the termination date) and equals 20% of our aggregate cumulative realized capital gains from inception through the end of each calendar year, computed net of aggregate cumulative realized capital losses and aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid capital gain incentive fees. Pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees, such as commitment, origination, structuring, diligence, managerial assistance and consulting fees or other fees that the Company receives from portfolio companies) accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable for administrative services under the Investment Advisory Agreement, and any interest expense and any distributions paid on any issued and outstanding preferred stock, but excluding the incentive fee and any offering expenses and other expenses not charged to operations but excluding certain reversals to the extent such reversals have the effect of reducing previously accrued incentive fees based on the deferral of non-cash interest). Pre-incentive fee net investment income excludes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities), accrued income until the Company has received such income in cash.
25 |
ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2019
(Unaudited)
For the three and six months ended June 30, 2019, the Company recorded expenses for base management fees of $841,566 and $1,707,184, respectively, of which $140,261 and $284,531, respectively, was waived by the Adviser pursuant to the voluntary waiver as part of the Investment Advisory Agreement and $701,305 was payable at June 30, 2019. For the three and six months ended June 30, 2018, the Company recorded expenses for base management fees of $1,036,122 and $2,270,985, respectively, of which $109,281 and $109,281, respectively, was waived by the Adviser and $926,841 was payable at June 30, 2018.
For the three and six months ended June 30, 2019, the Company reversed $204,867 and $691,991, respectively, in previously accrued income-based incentive fees. For the three and six months ended June 30, 2018, the Company incurred no incentive fees. As of June 30, 2019 and June 30, 2018, $198,805 and $1,294,985 in income-based incentive fees, respectively, was payable by the Company. For each of the three and six months ended June 30, 2019 and June 30, 2018, the Company incurred capital gains incentive fees of $0.
The Company’s officers are employees of the Adviser and the Company may pay the allocable portion of the compensation of the Company’s Chief Financial Officer and Chief Compliance Officer and their staffs pursuant to the Investment Advisory Agreement.
7. | Directors' Fees |
The Company’s independent directors each receive an annual fee of $40,000. They also receive $2,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending in-person each Board meeting and $1,000 for each Board meeting they participate in telephonically. In addition, each independent director receives $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with each audit committee, compensation committee, nominating and corporate governance committee, and valuation committee meeting attended in person or telephonically. The chair of the audit committee receives an annual fee of $10,000, and the respective chairs of the compensation committee, the nominating and corporate governance committee and the valuation committee each receives an annual fee of $5,000. The lead independent director also receives an annual fee of $15,000. The Board may establish ad hoc committees or working groups from time to time to assist the Board in fulfilling its oversight responsibilities, and the independent directors may receive fees and be reimbursed for reasonable out-of-pocket expenses incurred in connection therewith.
In connection with the Board’s review of strategic alternatives, the Board established a Committee of Independent Directors during 2018, which is comprised of each of the Board’s independent directors and met throughout 2018 on a periodic basis. Effective April 2018, each member of the Committee of Independent Directors received a monthly fee of $1,000, and the chair of the Committee of Independent Directors received an additional monthly retainer of $5,000 for his services as chair and the increased responsibilities associated therewith. Effective November 2018, each member of the Committee of Independent Directors received $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with each meeting of the committee attended in person or telephonically. In addition, the chair of the Committee of Independent Directors receives a monthly retainer of $4,000 for his services as chair and the increased responsibilities associated therewith. Effective May 1, 2019, each member of the Committee of the Independent Directors receives a $10,000 monthly retainer in lieu of the $1,000 per meeting fee that was effective starting in November 2018. In addition, the chair of the Committee of Independent Directors receives an additional $5,000 monthly retainer in lieu of the previous $4,000 monthly retainer.
The Company has obtained directors’ and officers’ liability insurance on behalf of its directors and officers.
For the three and six months ended June 30, 2019, the Company recorded directors' fee expense of $215,000 and $374,676, respectively, of which $197,154 was payable at June 30, 2019. For the three and six months ended June 30, 2018, the Company recorded directors' fee expense of $116,826 and $213,028, respectively, of which $36,125 was payable at June 30, 2018.
8. | Purchases and Sales (Investment Transactions) |
Investment purchases, sales and principal payments/paydowns are summarized below for the six months ended June 30, 2019 and June 30, 2018.
For the six months ended June 30, | ||||||||
2019 | 2018 | |||||||
Investment purchases, at cost (including PIK interest and dividends) | $ | 59,038,873 | $ | 44,507,064 | ||||
Investment sales, proceeds (including principal payments/paydown proceeds) | 75,393,530 | 79,266,967 |
26 |
ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2019
(Unaudited)
9. | Alcentra Capital InterNotes® |
On January 30, 2015, the Company entered into a Selling Agent Agreement with Incapital LLC, as purchasing agent for the Company's issuance of $40.0 million of Alcentra Capital InterNotes®. On January 25, 2016, the Company entered into an additional Selling Agent Agreement with Incapital LLC, as purchasing agent for the Company’s issuance of up to $15 million of Alcentra Capital InterNotes®.
These notes (the "Notes") are direct unsecured obligations and each series of notes has been issued by a separate trust (administered by U.S. Bank). The notes bear interest at fixed interest rates and offer a variety of maturities no less than twelve months from the original date of issuance.
During each of the six months ended June 30, 2019 and June 30, 2018, the Company did not issue any Alcentra Capital InterNotes®. For the three and six months ended June 30, 2019, the Company had average Notes outstanding of $55.0 million and $55.0 million (principal amount), respectively, with a weighted average interest rate of 6.40% and 6.44%, respectively. For the three and six months ended June 30, 2018, the Company borrowed an average of $55.0 million and $55.0 million, respectively, with a weighted average interest rate of 6.40% and 6.44%, respectively.
The following table summarizes the Alcentra Capital InterNotes® issued and outstanding as of June 30, 2019.
Tenor at | Principal | Interest | Weighted | |||||||||
Origination | Amount | Rate | Average | |||||||||
(in years) | (000’s omitted) | Range | Interest Rate | Maturity Date Range | ||||||||
5 | $ | 53,582 | 6.25% - 6.50% | 6.38 | % | February 15, 2020 - June 15, 2021 | ||||||
7 | 1,418 | 6.50% - 6.75% | 6.63 | % | January 15, 2022 - April 15, 2022 | |||||||
$ | 55,000 |
In connection with the issuance of the Alcentra Capital InterNotes®, the Company incurred $1.196 million of fees which are being amortized over the term of the notes and are included within deferred financing costs on the Consolidated Statements of Assets and Liabilities as of June 30, 2019. During the six months ended June 30, 2019 and June 30, 2018, the Company recorded $0.243 million and $0.246 million of amortization of deferred note offering costs on the Alcentra Capital InterNotes®.
10. | Credit Facility/Line of Credit |
On May 8, 2014, the Company entered into a senior secured revolving credit agreement (as amended and restated from time to time, the “Credit Facility”) with ING Capital LLC (“ING”), as administrative agent, collateral agent and lender, and the lenders from time to time party thereto, to provide liquidity in support of its investment and operational activities. The Credit Facility had an initial commitment of $80 million with an accordion feature that allowed for an increase in the total commitments up to $160 million, subject to certain conditions and the satisfaction of specified financial covenants. The Credit Facility was amended on August 11, 2015 to increase the commitments and the accordion feature. The total commitments and accordion feature were $135 million and up to $250 million, respectively, subject to satisfaction of certain conditions at the time of any such future increase. As amended, the Credit Facility had a maturity date of August 11, 2020 and bore interest, at our election, at a rate per annum equal to (i) 2.25% plus the highest of a prime rate, the Federal Funds rate plus 0.5%, three month LIBOR plus 1%, and zero or (ii) 3.25% plus the one, three or six month LIBOR rate, as applicable.
On September 21, 2018, the Company amended certain provisions of the Credit Facility. Under the Amended Credit Agreement, (i) revolving commitments by lenders were reduced from $135 million to $115 million, with an accordion feature that allows for an increase in total commitments up to $180 million, subject to satisfaction of certain conditions at the time of any such future increase, (ii) the maturity date of the Credit Facility was extended to September 21, 2022 and the revolving period was extended to September 21, 2021, and (iii) borrowings under the Credit Facility bear interest, at the Company’s election, at a rate per annum equal to (a) 2.50% if the contribution to the borrowing base of eligible portfolio investments that are long-term U.S. government securities and first lien bank loans is greater than or equal to 70% (or 2.75% if such contribution is less than 70%) plus the one, three or six month LIBOR rate, as applicable, or (b) 1.50% if the contribution to the borrowing base of eligible portfolio investments that are long-term U.S. government securities and first lien bank loans is greater than or equal to 70% (or 1.75% if such contribution is less than 70%) plus the highest of (A) a prime rate, (B) the Federal Funds rate plus 0.5%, (C) three month LIBOR plus 1.0%, and (D) zero.
27 |
ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2019
(Unaudited)
The Amended Credit Agreement also modifies certain covenants in the Credit Facility, including to provide for a minimum asset coverage ratio of 2.00 to 1, a minimum interest coverage ratio of 2.00 to 1 as of the last day of any fiscal quarter, and a requirement to maintain stockholder’s equity as of the last day of any fiscal quarter to be no less than the greater of (i) 45% of the total assets of the Company and its subsidiaries as at the last day of such fiscal quarter and (ii) the sum of (x) $120,000,000 plus (y) 65% of the aggregate net proceeds of all sales of equity interests by the Company and its subsidiaries after the closing date of the Amended Credit Agreement. In addition, the Amended Credit Agreement requires payment of a commitment fee ranging from 0.5% to 1.0% per annum based on the size of the unused portion of the Credit Facility. This fee is included in interest expense on the Company’s Consolidated Statements of Operations. The Credit Facility is secured by a first priority security interest in all of our portfolio investments, the equity interests in certain of our direct and indirect subsidiaries, and substantially all of our other assets.
The Credit Facility agreement also contains customary terms and conditions, including, without limitation, affirmative and negative covenants, including, without limitation, information reporting requirements, a minimum liquidity test, and maintenance of RIC and BDC status. The Credit Facility agreement also contains customary events of default, including, without limitation, nonpayment, misrepresentation of representations and warranties in a material respect, breach of covenant, cross-default to other indebtedness, bankruptcy, and certain change in control events. As of June 30, 2019, the Company was in compliance in all material respects with the terms of the Credit Facility.
As of June 30, 2019 and December 31, 2018, the Company had United States dollar borrowings of $26.6 million and $28.5 million outstanding under the Credit Facility, respectively. For the three and six months ended June 30, 2019, the Company had average borrowings under the Credit Facility of $18.9 million and $24.6 million, respectively, with a weighted average interest rate of 4.29% and 4.58%, respectively. For the three and six months ended June 30, 2018, the Company had average borrowings under the Credit Facility of $58.4 million and $57.4 million, respectively, with a weighted average interest rate of 5.29% and 5.11%, respectively.
In accordance with the 1940 Act, during the three months ended March 31, 2019, the Company was allowed to borrow amounts such that its asset coverage, calculated pursuant to the 1940 Act, was at least 200% after such borrowing. On May 4, 2018, the Board, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of the Board, approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act, as amended by the Small Business Credit Availability Act. As a result, effective on May 4, 2019, the Company’s asset coverage requirement applicable to senior securities, under the 1940 Act, was reduced to 150%; however, the Company remains subject to a 200% minimum asset coverage ratio covenant under the Credit Facility and thus will not be able to take advantage of the reduced asset coverage requirement under the 1940 Act unless and until it negotiates revised terms and conditions with the lenders under the Credit Facility. As of June 30, 2019, the aggregate amount outstanding of the senior securities issued by the Company was $26.6 million under The Credit Facility (also outstanding are the Alcentra Capital InterNotes® of $55.0 million) and the Company’s asset coverage was 274%.
11. | Market and Other Risk Factors |
At June 30, 2019, a significant portion of the Company’s portfolio investments are comprised of non-publicly-traded securities. The non-publicly-traded securities trade in an illiquid marketplace. The portfolio is comprised of investments in the 17 industries listed in Note 13. Risks affecting these industries include, but are not limited to, increasing competition, rapid changes in technology, government actions and changes in economic conditions. These risk factors could have a material effect on the ultimate realizable value of the Company’s investments.
The Company estimates the fair value of investments for which observable market prices in active markets do not exist based on the best information available, which may differ significantly from values that would have otherwise been used had a ready market for the investments existed and the differences could be material.
Market conditions may deteriorate, which may negatively impact the estimated fair value of the Company’s investments or the amounts which are ultimately realized for such investments.
The above events are beyond the control of the Company and cannot be predicted. Furthermore, the ability to liquidate investments and realize value is subject to significant limitations and uncertainties. There may also be risk associated with the concentration of investments in one geographic region or in certain industries.
12. | Commitments and Contingencies |
In the normal course of business, the Company enters into contracts that contain a variety of representations and warranties and which provide general indemnifications. In addition, the Company has agreed to indemnify its officers, directors, employees, agents or any person who serves on behalf of the Company from any loss, claim, damage, or liability which such person incurs by reason of his performance of activities of the Company, provided they acted in good faith. The Company expects the risk of loss related to its indemnifications to be remote.
28 |
ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2019
(Unaudited)
The Company’s investment portfolio may contain debt investments that are in the form of lines of credit and unfunded delayed draw commitments, which require the Company to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of June 30, 2019 and December 31, 2018, the Company had $14.4 million and $15.0 million in unfunded commitments under loan and financing agreements, respectively. The Company’s unfunded commitment under loan and financing agreements as of June 30, 2019 and December 31, 2018 are presented below.
As of | ||||||||
June 30, 2019 | December 31, 2018 | |||||||
BayMark Health Services, Inc. | $ | 4,000,000 | $ | - | ||||
Clanwilliam Group Ltd. | 3,505,227 | 3,753,476 | ||||||
Epic Healthcare Staffing Intermediate Holdco, LLC | 2,836,363 | 363,637 | ||||||
Manna Pro Products, LLC | 2,589,092 | 92,764 | ||||||
Healthcare Associates of Texas, LLC | 1,454,003 | 1,572,225 | ||||||
Pharmalogic Holdings Corp. | - | 4,760,000 | ||||||
Superior Controls, Inc. | - | 2,500,000 | ||||||
CGGR Operations Holding Corporation | - | 2,000,000 | ||||||
Total | $ | 14,384,685 | $ | 15,042,102 |
13. | Classification of Portfolio Investments |
As of June 30, 2019, the Company’s portfolio investments were categorized as follows:
Investment Type | Cost | Fair Value | % of Net Assets* | |||||||||
Senior Secured - First Lien | $ | 137,153,769 | $ | 135,524,154 | 95.48 | % | ||||||
Senior Secured - Second Lien | 64,856,841 | 65,239,620 | 45.97 | % | ||||||||
Equity/Other | 30,888,997 | 15,389,916 | 10.84 | % | ||||||||
CLO/Structured Credit | 1,949,886 | 1,828,490 | 1.29 | % | ||||||||
Senior Subordinated | 4,754,007 | 1,225,020 | 0.86 | % | ||||||||
Total | $ | 239,603,500 | $ | 219,207,200 | 154.44 | % | ||||||
Geographic Region | ||||||||||||
South | $ | 47,377,522 | $ | 46,345,318 | 32.65 | % | ||||||
West | 33,412,457 | 33,455,553 | 23.57 | % | ||||||||
Midwest | 33,896,464 | 32,146,637 | 22.65 | % | ||||||||
Southeast | 42,533,288 | 31,823,914 | 22.42 | % | ||||||||
Northeast | 30,730,520 | 26,518,960 | 18.68 | % | ||||||||
Mid-Atlantic | 28,674,664 | 25,960,951 | 18.29 | % | ||||||||
Canada | 14,457,969 | 14,567,996 | 10.27 | % | ||||||||
Ireland | 6,570,730 | 6,559,381 | 4.62 | % | ||||||||
US (CLO) | 1,949,886 | 1,828,490 | 1.29 | % | ||||||||
Total | $ | 239,603,500 | $ | 219,207,200 | 154.44 | % | ||||||
Industry | ||||||||||||
Business Services | $ | 46,855,927 | $ | 47,002,952 | 33.12 | % | ||||||
Healthcare Services | 44,373,007 | 44,545,329 | 31.38 | % | ||||||||
Consumer Services | 33,419,981 | 32,968,796 | 23.23 | % | ||||||||
High Tech Industries | 18,535,483 | 18,654,396 | 13.14 | % | ||||||||
Industrial Services | 20,298,185 | 16,372,678 | 11.54 | % | ||||||||
Technology & Telecom | 13,172,751 | 13,233,217 | 9.32 | % | ||||||||
Oil & Gas Services | 10,955,419 | 10,955,419 | 7.72 | % | ||||||||
Media: Advertising, Printing & Publishing | 12,677,834 | 8,679,689 | 6.12 | % | ||||||||
Financial Services | 8,244,193 | 8,619,188 | 6.07 | % | ||||||||
Environmental/Recycling Services | 6,953,565 | 5,098,537 | 3.59 | % | ||||||||
Telecommunications | 4,414,967 | 4,417,330 | 3.11 | % | ||||||||
Retail | 4,816,914 | 4,346,403 | 3.06 | % | ||||||||
USD CLO | 1,949,886 | 1,828,490 | 1.29 | % | ||||||||
Security | 5,485,400 | 1,023,603 | 0.72 | % | ||||||||
Transportation Logistics | 1,254,000 | 795,212 | 0.56 | % | ||||||||
Industrial Manufacturing | 500,000 | 665,961 | 0.47 | % | ||||||||
Education | 5,695,988 | — | 0.00 | % | ||||||||
Total | $ | 239,603,500 | $ | 219,207,200 | 154.44 | % |
*Fair value as a percentage of Net Assets
29 |
ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2019
(Unaudited)
As of December 31, 2018, the Company’s portfolio investments were categorized as follows:
Investment Type | Cost | Fair Value | % of Net Assets* | |||||||||
Senior Secured - First Lien | $ | 167,745,286 | $ | 168,154,929 | 115.33 | % | ||||||
Senior Secured - Second Lien | 42,210,313 | 42,549,396 | 29.18 | % | ||||||||
Equity/Other | 37,232,929 | 21,141,117 | 14.50 | % | ||||||||
CLO/Structured Credit | 1,948,058 | 1,739,600 | 1.20 | % | ||||||||
Senior Subordinated | 4,741,760 | 1,212,774 | 0.83 | % | ||||||||
Total | $ | 253,878,346 | $ | 234,797,816 | 161.04 | % | ||||||
Geographic Region | ||||||||||||
West | $ | 52,427,327 | $ | 54,266,593 | 37.22 | % | ||||||
Southeast | 56,535,014 | 44,026,689 | 30.20 | % | ||||||||
South | 45,437,808 | 43,758,859 | 30.01 | % | ||||||||
Northeast | 43,622,806 | 38,144,071 | 26.16 | % | ||||||||
Midwest | 24,841,625 | 23,614,916 | 16.20 | % | ||||||||
Canada | 22,721,398 | 22,900,000 | 15.71 | % | ||||||||
Ireland | 6,344,310 | 6,347,088 | 4.35 | % | ||||||||
US | 1,948,058 | 1,739,600 | 1.19 | % | ||||||||
Total | $ | 253,878,346 | $ | 234,797,816 | 161.04 | % | ||||||
Industry | ||||||||||||
Business Services | $ | 45,913,805 | $ | 46,130,114 | 31.64 | % | ||||||
Healthcare Services | 44,727,905 | 45,038,816 | 30.89 | % | ||||||||
Technology & Telecom | 32,324,555 | 33,345,749 | 22.87 | % | ||||||||
Consumer Services | 26,231,367 | 26,237,699 | 17.99 | % | ||||||||
Industrial Services | 21,095,416 | 19,559,789 | 13.42 | % | ||||||||
Retail | 12,051,199 | 12,119,708 | 8.31 | % | ||||||||
Oil & Gas Services | 11,385,108 | 11,382,254 | 7.81 | % | ||||||||
Wholesale/Distribution | 10,189,394 | 10,614,192 | 7.28 | % | ||||||||
High Tech Industries | 8,701,223 | 8,729,396 | 5.99 | % | ||||||||
Media: Advertising, Printing & Publishing | 12,677,834 | 6,554,225 | 4.50 | % | ||||||||
Environmental/Recycling Services | 6,757,790 | 5,699,791 | 3.91 | % | ||||||||
Telecommunications | 4,410,000 | 4,410,000 | 3.02 | % | ||||||||
USD CLO | 1,948,058 | 1,739,600 | 1.19 | % | ||||||||
Security | 5,485,401 | 1,023,999 | 0.70 | % | ||||||||
Waste Services | 2,529,303 | 820,437 | 0.56 | % | ||||||||
Transportation Logistics | 1,254,000 | 726,000 | 0.50 | % | ||||||||
Industrial Manufacturing | 500,000 | 666,047 | 0.46 | % | ||||||||
Education | 5,695,988 | - | 0.00 | % | ||||||||
Total | $ | 253,878,346 | $ | 234,797,816 | 161.04 | % |
*Fair value as a percentage of Net Assets
30 |
ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2019
(Unaudited)
14. | Financial Highlights |
The following per share data and financial ratios have been derived from information provided in the consolidated financial statements of the Company. The following is a schedule of financial highlights for one share of common stock for the six months ended June 30, 2019 and June 30, 2018.
For the six months ended | For the six months ended | |||||||
June 30, 2019 | June 30, 2018 | |||||||
(Unaudited) | (Unaudited) | |||||||
Per share data(1) | ||||||||
Net asset value, beginning of period | $ | 11.13 | $ | 11.09 | ||||
Net investment income (loss) | 0.42 | 0.52 | ||||||
Net realized and unrealized gains (losses)(2) | 0.07 | (0.31 | ) | |||||
Benefit (Provision) for income taxes on unrealized gain (loss) on investments | (0.09 | ) | 0.07 | |||||
Net increase (decrease) in net assets resulting from operations | 0.40 | 0.28 | ||||||
Distributions to shareholders:(3) | ||||||||
From net investment income | (0.51 | ) | (0.36 | ) | ||||
Total dividend distributions declared(7) | (0.51 | ) | (0.36 | ) | ||||
Net asset value, end of period | $ | 11.02 | $ | 11.01 | ||||
Market value per share, end of period | $ | 8.38 | $ | 6.39 | ||||
Total return based on net asset value(4)(5) | 3.6 | % | 2.5 | % | ||||
Total return based on market value(4)(5) | 37.4 | % | (19.5 | )% | ||||
Shares outstanding at end of period | 12,875,566 | 13,582,751 | ||||||
Ratio/Supplemental Data: | ||||||||
Net assets, at end of period | $ | 141,937,995 | $ | 149,594,744 | ||||
Ratio of total expenses before waiver to average net assets(6) | 10.25 | % | 10.47 | % | ||||
Ratio of interest expenses to average net assets(6) | 4.42 | % | 4.75 | % | ||||
Ratio of incentive fees to average net assets(6) | (0.97 | )% | — | % | ||||
Ratio of waiver of management and incentive fees to average net assets(6) | 0.40 | % | 0.14 | % | ||||
Ratio of net expenses to average net assets(6) | 9.86 | % | 10.33 | % | ||||
Ratio of net investment income (loss) before waiver to average net assets(6) | 7.36 | % | 9.63 | % | ||||
Ratio of net investment income (loss) after waiver to average net assets(6) | 6.96 | % | 9.49 | % | ||||
Total Credit Facility payable outstanding | $ | 26,565,008 | $ | 58,553,273 | ||||
Total Notes payable outstanding | $ | 55,000,000 | $ | 55,000,000 | ||||
Asset coverage ratio(7) | 2.7 | 2.3 | ||||||
Portfolio turnover rate(5) | 27 | % | 16 | % |
(1) | The per share data was derived by using the average shares outstanding during the period. |
(2) | The amount shown at this caption is the balancing figure derived from the other figures in the schedule. The amount shown at this caption for a share outstanding throughout the year may not agree with the change in the aggregate gains and losses in portfolio securities for the year because of the timing of purchases or sales of the Company's shares in relation to fluctuating market values for the portfolio. |
(3) | The per share data for distributions is the actual amount of distributions paid or payable per share of common stock outstanding during the entire period. |
(4) | Returns are historical and are calculated by determining the percentage change in net asset value or market value with all distributions reinvested. Distributions are assumed to be reinvested at prices obtained under the Company’s dividend reinvestment plan. |
(5) | Not annualized. |
(6) | Annualized, except for consulting fees. |
(7) | Includes a special dividend of $0.15 per share paid to stockholders of record as of June 28, 2019. |
31 |
ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2019
(Unaudited)
(6) | Annualized, except for non-recurring expenses. |
(7) | Asset coverage ratio is equal to (i) the sum of (A) net assets at the end of the period and (B) debt outstanding at the end of the period, divided by (ii) total debt outstanding at the end of the period. |
15. | Unconsolidated Significant Subsidiaries |
In accordance with the SEC’s Regulation S-X and GAAP, the Company has one subsidiary, Southern Technical College (“STI”), that is deemed to be a “significant subsidiary” as of and for the six months ended June 30, 2019 and two subsidiaries, FST Technical Services, LLC ("FST") and STI, that are deemed to be "significant subsidiaries" as of and for the year ended December 31, 2018 for which summarized financial information is presented below as of and for the six months ended June 30, 2019 and as of and for the year ended December 31, 2018 in aggregate.
Southern Technical College
As of | For the six months ended | |||||||||
Balance Sheet | June 30, 2019 | Income Statement | June 30, 2019 | |||||||
Current Assets | $ | 6,496,255 | Net Sales | $ | 10,708,883 | |||||
Noncurrent Assets | 43,646,754 | Gross Profit | 1,779,926 | |||||||
Current Liabilities | 8,273,232 | Net Income/EBITDA | 1,798,415 | |||||||
Noncurrent Liabilities | 18,458,702 |
Southern Technical College and FST Technical Services, LLC
As of | For the year ended | |||||||||
Balance Sheet | December 31, 2018 | Income Statement | December 31, 2018 | |||||||
Current Assets | $ | 15,536,556 | Net Sales | $ | 50,355,783 | |||||
Noncurrent Assets | 64,090,276 | Gross Profit | 12,732,260 | |||||||
Current Liabilities | 10,838,139 | Net Income/EBITDA | 7,318,579 | |||||||
Noncurrent Liabilities | 32,322,997 |
In addition to the risks associated with our investments in general, there are unique risks associated with our investments in these entities. The business and growth of FST at December 31, 2018 depended in large part on the continued trend toward outsourcing of certain services in the semiconductor and biopharmaceutical industries and there was no assurance that this trend in outsourcing would have continued, as companies may elect to perform such services internally. A significant change in the direction of that trend generally, or a trend in the semiconductor and biopharmaceutical industry not to use, or to reduce the use of, outsourced services such as those provided by FST, could have significantly decreased its revenues and such decreased revenues could have had a material adverse effect on it or its results of operations or financial condition. The Company sold its investment in FST on February 8, 2019.
The business and growth of STI have been impacted by regulatory changes that have affected for-profit institutions. Although the regulatory climate has since improved, there is no assurance that this will continue to improve enrollment or retention rates.
16. | Subsequent Events |
Subsequent to June 30, 2019, the following activity occurred:
On July 3, 2019, the Company paid a quarterly dividend of $0.18 per share and a special dividend of $0.15 per share to stockholders of record as of June 28, 2019.
On August 5, 2019, the Board approved the 2019 third quarter dividend of $0.18 per share for stockholders of record as of September 26, 2019, payable on October 3, 2019.
32 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements
Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements as to:
§ | our future operating results, including the performance of our existing investments; |
§ | the introduction, withdrawal, success and timing of business initiatives and strategies; |
§ | changes in political, economic or industry conditions, the interest rate environment or financial and capital markets, which could result in changes in the value of our assets; |
§ | the relative and absolute investment performance and operations of our investment adviser; |
§ | the impact of increased competition; |
§ | the impact of investments we intend to make and future acquisitions and divestitures; |
§ | our ability to turn potential investment opportunities into transactions and thereafter into completed and successful investments; |
§ | the unfavorable resolution of any future legal proceedings; |
§ | our business prospects and the prospects of our portfolio companies; |
§ | our regulatory structure and tax status; |
§ | the adequacy of our cash resources and working capital; |
§ | the timing of cash flows, if any, from the operations of our portfolio companies; |
§ | the impact of interest rate volatility on our results, particularly because we use leverage as part of our investment strategy; |
§ | the ability of our portfolio companies to achieve their objective; |
§ | the impact of legislative and regulatory actions and reforms and regulatory, supervisory or enforcement actions of government agencies relating to us or our investment adviser; |
§ | the impact of activist stockholder activities and the strategic alternative review process being undertaken by the Committee of Independent Directors of our Board of Directors (the “Board”) on our professional and consulting fees and expenses and on management distractions; |
§ | our contractual arrangements and relationships with third parties; |
§ | our ability to access capital and any future financings by us; |
§ | the ability of our investment adviser to attract and retain highly talented professionals; and |
§ | the impact of changes to tax legislation and, generally, our tax position. |
Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “anticipate,” “predict,” “potential,” “plan” or similar words.
33 |
We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q, and we assume no obligation to update any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements, and future results could differ materially from historical performance. We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law or SEC rule or regulation. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto contained elsewhere in this quarterly report on Form 10-Q.
Overview
Alcentra Capital Corporation (the “Company”, “Alcentra”, “we”, “us” or “our”) was formed as a Maryland corporation in 2013 as an externally managed, non-diversified closed-end management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”). Alcentra is managed by Alcentra NY, LLC (the “Adviser”, or “Alcentra NY”), a registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). State Street Bank and Trust Company (“State Street”) provides us with financial reporting, post-trade compliance, and treasury services. In addition, for U.S. federal income tax purposes, Alcentra has elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code. Alcentra NY, LLC is a majority-owned, indirect subsidiary of The Bank of New York Mellon Corporation.
The Company’s investment objective is to generate both current income and, to a lesser extent, capital appreciation primarily by making direct investments in middle-market companies, which we define as companies having annual earnings, before interest, taxes, depreciation and amortization, or EBITDA of between $15 million and $75 million, although we may make investments in larger or smaller companies and other types of investments. These investments are in the form of first lien, second lien, unitranche debt and, to a lesser extent given the current credit environment, mezzanine debt. We expect to source investments primarily through the network of relationships that the principals of our investment adviser have developed with financial sponsor firms, financial institutions, middle-market companies, management teams and other professional intermediaries.
The Company is required to comply with certain regulatory requirements such as not acquiring 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. Qualifying assets include investments in “eligible portfolio companies.” Under the relevant SEC rules, the term “eligible portfolio company” includes all private operating companies, operating companies whose securities are not listed on a national securities exchange, and certain public operating companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million, in each case organized and with their principal place of business in the United States.
Portfolio Composition, Investment Activity and Yield
Expanded Investment Strategy and Portfolio Composition and Diversification
We originate and invest primarily in middle-market companies (typically those with $15 million up to $75 million of EBITDA) through first lien, second lien, unitranche and, to a lesser extent given the current credit environment, mezzanine debt. Starting in June 2017, we expanded our investment strategy to include larger middle-market companies and investments that have more seniority in a portfolio company’s capital structure, a security interest in the company’s collateral, and floating rate exposure and generally have more propensity to withstand changes in the economy, capital markets or other factors affecting such portfolio company. This expansion is a reflection of the current conditions of the debt capital markets combined with the Adviser’s view that we are in the later stages of the credit cycle. We are also executing this portfolio rotation to focus on stabilizing net asset value per share and minimizing credit losses associated with our historic focus on unsecured mezzanine debt and equity investments. The rotation to having a larger percentage of our portfolio in the senior part of the capital structure provides added protections, rights and remedies in case of a downturn in the economy or specific company performance issues. The addition of collateral also enhances our creditor rights during a workout or bankruptcy proceeding relative to other unsecured creditors. Lastly, more floating rate debt investments, versus fixed rate mezzanine debt, should reduce our exposure to interest rate increases. We believe that these measures are in the best interests of our stockholders. Although we expect that these measures will mitigate our investment-related risks to an extent, we also expect the weighted average yields on our portfolio will decrease as a result of the change in our investment strategy.
Additionally, we continue to seek to increase the diversification of our portfolio through several measures including, but not limited to syndication of larger exposures to single issuers, the addition of “club” and syndicated loans that may, or may not be rated, through both primary and secondary market purchases and through co-investment with other funds sponsored by our Adviser in accordance with our SEC co-investment exemptive order. We will utilize our risk rating system, implemented in the third quarter of 2017, to guide the implementation of our diversification strategy and provide enhanced transparency to our stockholders.
For the three months ended June 30, 2019, we invested approximately $28.6 million in debt investments, including 2 new portfolio companies and 3 add-on fundings. During the three months ended June 30, 2019 we received proceeds from sales or repayments, including principal, return of capital dividends and net realized gains (losses), of approximately $22.1 million. During the three months ended June 30, 2018, we invested $19.6 million in debt investments, including 1 new portfolio company, 2 add-on investments, and 1 loan refinancing. During the three months ended June 30, 2018 we received proceeds from repayments, amortizations on investments, and a loan refinancing of $30.9 million.
As of June 30, 2019, we had $219.2 million (at fair value) invested in 28 companies and 1 CLO. Our portfolio included approximately 61.8% of first lien debt, 29.8% of second lien debt, 0.6% of subordinated debt, 0.8% in CLO debt and 7.0% of equity investments. At June 30, 2019, our average portfolio company investment at amortized cost and fair value was approximately $7.2 million and $7.0 million, respectively, and our largest portfolio company investment by amortized cost and fair value was approximately $20.4 million.
As of December 31, 2018, we had $234.8 million (at fair value) invested in 30 companies. Our portfolio included approximately 71.6% of first lien debt, 18.1% of second lien debt, 0.5% of mezzanine debt, 0.7% of CLO investments and 9.0% of equity investments at fair value. At December 31, 2018, our average portfolio company investment at amortized cost and fair value was approximately $8.7 million and $8.9 million, respectively, and our largest portfolio company investment by amortized cost and fair value was approximately $22.7 million and $22.9 million, respectively.
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At June 30, 2019, 93.0% of our debt investments bore interest based on floating rates (with a majority subject to interest rate floors), such as LIBOR, and 7.0% bore interest at fixed rates. At December 31, 2018, 86.9% of our debt investments bore interest based on floating rates (with a majority subject to interest rate floors), such as LIBOR, and 13.1% bore interest at fixed rates. The weighted average coupon on all of our debt investments as of June 30, 2019 and December 31, 2018 was approximately 10.0% and 11.0%, respectively. The weighted average yield on our debt investments as of June 30, 2019 and December 31, 2018 was approximately 10.7% and 11.0%, respectively.
The following table shows the portfolio composition by investment type at fair value and cost with the corresponding percentage of total investments.
Cost | Fair Value | |||||||||||||||||||||||||||||||
June 30, 2019 | December 31, 2018 | June 30, 2019 | December 31, 2018 | |||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||
Senior Secured - First Lien | $ | 137,154 | 57.2 | % | $ | 167,745 | 66.1 | % | $ | 135,524 | 61.8 | % | $ | 168,155 | 71.6 | % | ||||||||||||||||
Senior Secured - Second Lien | 64,857 | 27.1 | % | 42,210 | 16.5 | % | 65,240 | 29.8 | % | 42,549 | 18.1 | % | ||||||||||||||||||||
Senior Subordinated | 4,754 | 2.0 | % | 4,742 | 1.9 | % | 1,225 | 0.6 | % | 1,213 | 0.6 | % | ||||||||||||||||||||
CLO/Structured Credit | 1,950 | 0.8 | % | 1,948 | 0.8 | % | 1,828 | 0.8 | % | 1,740 | 0.7 | % | ||||||||||||||||||||
Equity/Other | 30,889 | 12.9 | % | 37,233 | 14.7 | % | 15,390 | 7.0 | % | 21,141 | 9.0 | % | ||||||||||||||||||||
Total | $ | 239,604 | 100.0 | % | $ | 253,878 | 100.0 | % | $ | 219,207 | 100.0 | % | $ | 234,798 | 100.0 | % |
The following table shows portfolio composition by geographic region at fair value and cost with the corresponding percentage of total investments. The geographic composition is determined by the location of the corporate headquarters of the portfolio company, which may not be indicative of the primary source of the portfolio company’s business.
Cost | Fair Value | |||||||||||||||||||||||||||||||
June 30, 2019 | December 31, 2018 | June 30, 2019 | December 31, 2018 | |||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||
South | $ | 47,378 | 19.8 | % | $ | 45,438 | 17.9 | % | $ | 46,345 | 21.1 | % | $ | 43,759 | 18.6 | % | ||||||||||||||||
West | 33,412 | 13.9 | % | 52,427 | 20.6 | % | 33,456 | 15.3 | % | 54,266 | 23.1 | % | ||||||||||||||||||||
Midwest | 33,896 | 14.2 | % | 24,842 | 9.8 | % | 32,147 | 14.7 | % | 23,615 | 10.1 | % | ||||||||||||||||||||
Southeast | 42,533 | 17.8 | % | 56,535 | 22.3 | % | 31,824 | 14.5 | % | 44,027 | 18.8 | % | ||||||||||||||||||||
Northeast | 30,731 | 12.8 | % | 43,623 | 17.2 | % | 26,519 | 12.1 | % | 38,144 | 16.2 | % | ||||||||||||||||||||
Mid-Atlantic | 28,675 | 12.0 | % | - | - | 25,961 | 11.8 | % | - | - | ||||||||||||||||||||||
Canada | 14,458 | 6.0 | % | 22,721 | 8.9 | % | 14,568 | 6.7 | % | 22,900 | 9.8 | % | ||||||||||||||||||||
Ireland | 6,571 | 2.7 | % | 6,344 | 2.5 | % | 6,559 | 3.0 | % | 6,347 | 2.7 | % | ||||||||||||||||||||
US (CLO) | 1,950 | 0.8 | % | 1,948 | 0.8 | % | 1,828 | 0.8 | % | 1,740 | 0.7 | % | ||||||||||||||||||||
Total | $ | 239,604 | 100.0 | % | $ | 253,878 | 100.0 | % | $ | 219,207 | 100.0 | % | $ | 234,798 | 100.0 | % |
The following table shows the detailed industry composition of our portfolio at cost and fair value as a percentage of total investments.
Cost | Fair Value | |||||||||||||||
June 30, 2019 | December 31, 2018 | June 30, 2019 | December 31, 2018 | |||||||||||||
Business Services | 19.6 | % | 18.1 | % | 21.4 | % | 19.7 | % | ||||||||
Healthcare Services | 18.5 | % | 17.6 | % | 20.3 | % | 19.2 | % | ||||||||
Consumer Services | 13.9 | % | 10.3 | % | 15.0 | % | 11.2 | % | ||||||||
High Tech Industries | 7.7 | % | 3.4 | % | 8.5 | % | 3.7 | % | ||||||||
Industrial Services | 8.5 | % | 8.3 | % | 7.5 | % | 8.3 | % | ||||||||
Technology & Telecom | 5.5 | % | 12.7 | % | 6.0 | % | 14.2 | % | ||||||||
Oil & Gas Services | 4.6 | % | 4.5 | % | 5.0 | % | 4.9 | % | ||||||||
Media: Advertising, Printing & Publishing | 5.3 | % | 5.0 | % | 4.0 | % | 2.8 | % | ||||||||
Financial Services | 3.4 | % | 0.0 | % | 3.9 | % | 0.0 | % | ||||||||
Environmental/Recycling Services | 2.9 | % | 2.7 | % | 2.4 | % | 2.4 | % | ||||||||
Telecommunications | 1.8 | % | 1.7 | % | 2.0 | % | 1.9 | % | ||||||||
Retail | 2.0 | % | 4.8 | % | 2.0 | % | 5.2 | % | ||||||||
USD CLO | 0.8 | % | 0.8 | % | 0.8 | % | 0.7 | % | ||||||||
Security | 2.4 | % | 2.2 | % | 0.5 | % | 0.4 | % | ||||||||
Transportation Logistics | 0.5 | % | 0.5 | % | 0.4 | % | 0.3 | % | ||||||||
Industrial Manufacturing | 0.2 | % | 0.2 | % | 0.3 | % | 0.3 | % | ||||||||
Education | 2.4 | % | 2.2 | % | 0.0 | % | 0.0 | % | ||||||||
Wholesale/Distribution | 0.0 | % | 4.0 | % | 0.0 | % | 4.5 | % | ||||||||
Waste Services | 0.0 | % | 1.0 | % | 0.0 | % | 0.3 | % | ||||||||
Grand Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
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RESULTS OF OPERATIONS
An important measure of our financial performance is net change in net assets resulting from operations, which includes net investment income (loss), net realized gain (loss) and net unrealized appreciation (depreciation). Net investment income (loss) is the difference between our income from interest, dividends, fees and other investment income and our operating expenses, including interest on borrowed funds. Net realized gain (loss) on investments is the difference between the proceeds received from dispositions of portfolio investments and their amortized cost. Net unrealized appreciation (depreciation) on investments is the net change in the fair value of our investment portfolio.
Comparison of the three months ended June 30, 2019 and 2018
Investment Income
We generate revenue in the form of interest income on debt investments, distributions, if any, on other investment securities that we may acquire in portfolio companies and other fees generated from our investment activity. Our debt investments typically have a term of five to seven years and bear interest at a fixed or floating rate. Our investment strategy will continue to focus on more floating rate investments to protect against rising interest rates. Interest on our debt securities is generally payable quarterly. Payments of principal on our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt investments may pay interest in-kind, or PIK, however, we intend to avoid PIK features in new portfolio investments. Any outstanding principal amount of our debt securities and any accrued but unpaid interest will generally become due at the maturity date. The level of interest income we receive is directly related to the balance of interest-bearing investments multiplied by the weighted average yield of our investments. In addition, we may generate revenue in the form of prepayment fees, commitment, loan origination, structuring or due diligence fees, fees for providing significant managerial assistance and consulting fees.
For the three months ended June 30, 2019, total investment income was $6.1 million, a decrease of approximately $1.1 million or 15.4% from the $7.3 million of total investment income for the three months ended June 30, 2018. This decrease was due to the continued portfolio rotation of legacy investments to investments more senior in the capital structure of our portfolio companies, and the associated decrease in weighted-average yields.
Expenses
For the three months ended June 30, 2019, total net expenses (after the waiver of management fees) were $3.6 million, a decrease of $0.2 million or 4.3%, from the $3.8 million for the three months ended June 30, 2018. Base management fees were $0.8 million, a decrease of $0.2 million, or 18.8%, from the $1.0 million for the three months ended June 30, 2018. This decrease was due to the lower amount of gross assets outstanding between comparable periods.
For the three months ended June 30, 2019, interest and financing expense was $1.6 million, a decrease from $2.0 million for the comparable period due primarily to lower borrowings under our senior secured revolving credit agreement (as amended and restated from time to time, the “Credit Facility”) with ING Capital, LLC. For the three months ended June 30, 2019, we had average borrowings of $18.9 million under the Credit Facility while for the three months ended June 30, 2018, we had average borrowings of $58.4 million under the Credit Facility. In addition, the Credit Facility was amended on September 21, 2018 whereby our interest rate was lowered from 3.25% to 2.50% - 2.75% subject to portfolio company leverage if the contribution to the borrowing base of eligible portfolio investments that are first lien bank loans is greater than or equal to 70%.
General and administrative expenses for the three months ended June 30, 2019 were $1.5 million, an increase of $0.6 million from the comparable period. This was largely due to an increase in professional fees and directors fees, both primarily relating to stockholder activist activities and the Board’s formal review process to evaluate strategic alternatives for the Company. These were partially offset by a decrease in our excise tax payable, our consulting fees, and a reversal of accrued incentive fees, which were reversed as a result of not being distributed. We expect directors’ fees, insurance fees, consulting fees and other professional expenses to generally increase on a go-forward basis in light of recent stockholder activist activities and the Board’s review of strategic alternatives.
Net Investment Income
Net investment income was $2.5 million, or $0.20 per common share based on the weighted average of 12,875,566 common shares outstanding for the three months ended June 30, 2019, as compared to $3.5 million, or $0.25 per common share based on the weighted average of 13,725,423 common shares outstanding for the three months ended June 30, 2018.
Net Realized Gains and Losses and Net Change in Unrealized Appreciation (Depreciation) of Investments
We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, using the specific identification method, without regard to unrealized appreciation or depreciation previously recognized.
Net change in unrealized appreciation primarily reflects the net change in the portfolio investment fair values relative to its cost basis during the reporting period, including the reversal of previously recorded appreciation or depreciation when gains or losses are realized.
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For the three months ended June 30, 2019, the net realized gain from portfolio investments was $1.6 million and the net unrealized depreciation was $(1.1) million. The net realized gain was due to the repayment of Lugano Diamonds and Superior Controls. The net unrealized depreciation was due to foreign currency translation loss, and the write down on Envocore Holding, LLC and Impact Group, LLC Sales.
For the three months ended June 30, 2018, the net realized loss from portfolio investments was $(20.3) million and the net unrealized appreciation was $13.5 million. The net realized loss was due to the partial exits from our investments in (i) GST Autoleather, (ii) Southern Technical Institute, Inc. and (iii) Media Storm, LLC. The net unrealized appreciation of $13.5 million was largely due to the reversal of the unrealized losses as they became realized.
Benefit/(Provision) for Taxes on Unrealized Gain/Loss on Investments
We have a direct wholly owned subsidiary that has elected to be a taxable entity (the ‘‘Taxable Subsidiary’’). The Taxable Subsidiary permits us to hold equity investments in portfolio companies which are “pass through” entities for tax purposes and continue to comply with the “source income” requirements contained in RIC tax provisions of the Code. The Taxable Subsidiary is not consolidated with us for income tax purposes and may generate income tax expense, benefit, and the related tax assets and liabilities, as a result of its ownership of certain portfolio investments. The income tax expense, or benefit, if any, and related tax assets and liabilities are reflected in our consolidated financial statements. For the three months ended June 30, 2019, we recognized a provision for taxes on unrealized loss of investments of $(0.9) million. For the three months ended June 30, 2018, we recognized a benefit for taxes of $1.0 million.
Net Increase (Decrease) in Net Assets Resulting from Operations
Net increase in net assets resulting from operations totaled $2.1 million, or $0.17 per common share for the three months ended June 30, 2019, as compared to a net decrease in net assets resulting from operations totaling $(2.2) million, or $(0.16) per common share for the three months ended June 30, 2018. These are based on weighted average shares outstanding of 12,875,566 and 13,725,423 for June 30, 2019 and 2018, respectively.
Comparison of the six months ended June 30, 2019 and 2018
Investment Income
For the six months ended June 30, 2019, total investment income was $12.6 million, a decrease of $2.9 million, or 18.6%, from the $15.4 million of total investment income for the six months ended June 30, 2018. The decrease was primarily attributable to the rotation of legacy assets into lower yielding assets.
Expenses
For the six months ended June 30, 2019, net expenses, after the waiver of management fees, were $7.2 million, a decrease of $1.0 million, or 12.5%, from the $8.2 million of net expenses, after the waiver of management fees, for the six months ended June 30, 2018. Interest and financing expenses for the six months ended June 30, 2019 were $3.4 million, a decrease $0.5 million or 12.8%, compared to $3.9 million for the six months ended June 30, 2018, primarily due to lower average borrowings under the Credit Facility during the six months ended June 30, 2019. For the six months ended June 30, 2019, the base management fee was $1.7 million, a decrease of $0.6 million, or 24.8%, from the $2.3 million for the six months ended June 30, 2018. There was also a reversal of accrued but unearned incentive fee of $0.7 million for the six months ended June 30, 2019, which was not present in the comparable period, and a decrease in our consulting fees. The incentive fee was reversed as a result of not being distributed. These decreases were partially offset by increases in general and administrative expenses for the six months ended June 30, 2019, which totaled $3.0 million, an increase of $0.9 million, or 42.9% from the comparable period. This increase was largely due to an increase in professional fees and directors fees, both primarily relating to stockholder activist activities and the Board’s formal review process to evaluate strategic alternatives for the Company.
Net Investment Income
Net investment income for the six months ended June 30, 2019 was $5.4 million, which was a decrease of $1.8 million, or 25.5%, compared to net investment income of $7.3 million during the six months ended June 30, 2018 primarily as a result of the $2.9 million decrease in total investment income, as partially offset by the decrease in operating expenses discussed above.
Net Realized Gains and Losses and Net Change in Unrealized Appreciation (Depreciation) of Investments
For the six months ended June 30, 2019, the net realized gain from portfolio investments was $1.1 million and the net unrealized depreciation was $1.3 million. The realized gain was due to the gain from the sale of FST Technical Services, LLC common equity and the gain from the sale of Lugano Diamonds and Superior Controls netted against the loss from the sale of Tunnel Hill. The net unrealized depreciation was due to (i) the reclassification of the FST Technical Services, LLC sale of equity, and the realization of losses on our Tunnel Hill investment, (ii) the writedown of Envocore Holding, LLC and Impact Group, LLC sales and (iii) foreign currency translation unrealized depreciation.
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For the six months ended June 30, 2018, the net realized loss from portfolio investments was $(20.3) million and the net unrealized appreciation was $13.3 million. The net realized loss was due to (i) the write-off of GST Autoleather, (ii) the write-down of Southern Technical Institute, Inc. and (iii) the sale of Media Storm, LLC. The net unrealized appreciation of $ 13.3 million is largely due to the reversal of the unrealized losses as they became realized.
Benefit/(Provision) for Taxes on Unrealized Gain/Loss on Investments
For the six months ended June 30, 2019, we recognized a provision for taxes on unrealized loss of investments of $(1.1) million. For the six months ended June 30, 2018, we recognized a benefit for taxes of $1.0 million.
Net Increase (Decrease) in Net Assets Resulting From Operations
Our net increase in net assets resulting from operations during the six months ended June 30, 2019 was $4.1 million, an increase of $2.8 million, or 216%, compared to a net increase in net assets resulting from operations of $1.3 million during the six months ended June 30, 2018.
Financial Condition, Liquidity and Capital Resources
Cash Flows from Operating and Financing Activities
Our operating activities provided cash of $5.0 million for the six months ended June 30, 2019, primarily from net proceeds from sales/return of capital of portfolio investments, partially offset by the payables for investments purchased and actual purchases of portfolio investments. Our financing activities for the six months ended June 30, 2019 used cash of $8.3 million primarily for net repayments under the Credit Facility, distributions and repurchases of our common stock. As of June 30, 2019, we had a cash balance of $7.8 million, a decrease of $4.9 million from June 30, 2018.
Our liquidity and capital resources are derived from the sale of securities, borrowings under the Credit Facility and cash flows from operations, including investment sales and repayments, and income earned. Our primary use of funds from operations includes investments in portfolio companies and other operating expenses we incur, as well as distributions to our stockholders. We expect to use these capital resources as well as proceeds from turnover within our portfolio, borrowings under the Credit Facility and from any public and private offerings of securities to finance our investment activities.
Although we expect to fund the growth of our investment portfolio through the net proceeds from any future public and private equity offerings and issuances of senior securities or future borrowings to the extent permitted by the 1940 Act, our plans to raise capital may not be successful. In this regard, when our common stock is trading at a price below our then-current net asset value per share, we may be limited in our ability to raise equity capital given that we cannot sell our common stock at a price below net asset value per share unless our stockholders approve such a sale and the Board makes certain determinations in connection therewith.
As a business development company (“BDC”), we generally are required to meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities, to total senior securities, which include all of our borrowings and any outstanding preferred stock, of at least 200%. The Small Business Credit Availability Act (“the SBCAA”), which was signed into law on March 23, 2018, among other things, amended Section 61(a) of the 1940 Act to add a new Section 61(a)(2) that reduces the asset coverage requirement applicable to BDCs from 200% to 150% so long as the BDC meets certain disclosure requirements and obtains certain approvals. On May 4, 2018, the Board, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of the Board, approved the applicability of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act, as amended by the SBCAA. As a result, effective on May 4, 2019, our asset coverage requirement applicable to senior securities, under the 1940 Act, was reduced from 200% to 150%, and the risks associated with an investment in us may increase. Thus, effective as of May 4, 2019, we are permitted, under specified conditions, to issue multiple classes of debt and one class of stock senior to our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 150% immediately after each such issuance. However, we remain subject to a 200% minimum asset coverage ratio covenant under the Credit Facility and thus will not be able to take advantage of the reduced asset coverage requirement under the 1940 Act unless and until we negotiate revised terms and conditions with the lenders under the Credit Facility. As of June 30, 2019 our asset coverage ratio was 274%. The amount of leverage that we employ will depend on our assessment of market conditions and other factors at the time of any proposed borrowing, such as the maturity, covenant package and rate structure of the proposed borrowings, our ability to raise funds through the issuance of shares of our common stock and the risks of such borrowings within the context of our investment outlook. Ultimately, we only intend to use leverage if the expected returns from borrowing to make investments will exceed the cost of such borrowing.
On May 8, 2014, we entered into the Credit Facility with ING Capital LLC, as administrative agent, collateral agent and a lender, and the lenders from time to time party thereto.
On September 21, 2018, the Company amended and restated the credit agreement governing the Credit Facility. Under the Credit Facility, as amended, (i) revolving commitments by lenders were reduced from $135 million to $115 million, with an accordion feature that allows for an increase in total commitments up to $180 million, subject to satisfaction of certain conditions at the time of any such future increase, (ii) the maturity date of the Credit Facility was extended to September 21, 2022 and the revolving period was extended to September 21, 2021, and (iii) borrowings under the Credit Facility bear interest, at our election, at a rate per annum equal to (a) 2.50% if the contribution to the borrowing base of eligible portfolio investments that are long-term U.S. government securities and first lien bank loans is greater than or equal to 70% (or 2.75% if such contribution is less than 70%) plus the one, three or six month LIBOR rate, as applicable, or (b) 1.50% if the contribution to the borrowing base of eligible portfolio investments that are long-term U.S. government securities and first lien bank loans is greater than or equal to 70% (or 1.75% if such contribution is less than 70%) plus the highest of (A) a prime rate, (B) the Federal Funds rate plus 0.5%, (C) three month LIBOR plus 1.0%, and (D) zero.
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The covenants under the Credit Facility include a provision for a minimum asset coverage ratio of 2.00 to 1, a minimum interest coverage ratio of 2.00 to 1 as of the last day of any fiscal quarter, and a requirement to maintain stockholder’s equity as of the last day of any fiscal quarter to be no less than the greater of (i) 45% of our total assets and our subsidiaries as at the last day of such fiscal quarter and (ii) the sum of (x) $120,000,000 plus (y) 65% of the aggregate net proceeds of all sales of equity interests by us and our subsidiaries after September 21, 2018. In addition, the Credit Facility requires payment of a commitment fee ranging from 0.5% to 1.0% per annum based on the size of the unused portion of the Credit Facility. The Credit Facility is secured by a first priority security interest in all of our portfolio investments, the equity interests in certain of our direct and indirect subsidiaries, and substantially all of our other assets.
The Credit Facility agreement also contains customary terms and conditions, including, without limitation, affirmative and negative covenants, including, without limitation, information reporting requirements, a minimum liquidity test, and maintenance of RIC and BDC status. The Credit Facility agreement also contains customary events of default, including, without limitation, nonpayment, misrepresentation of representations and warranties in a material respect, breach of covenant, cross-default to other indebtedness, bankruptcy, and certain change in control events.
Regulated Investment Company Status and Distributions
We have elected to be treated as a RIC under Subchapter M of the Code. If we continue to qualify for taxation as a RIC, we will not be taxed on our investment company taxable income or realized net capital gains to the extent that such taxable income or gains are distributed, or, in the case of net capital gains, deemed to be distributed, to stockholders on a timely basis.
Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation until realized. Dividends declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income or the distribution of prior year taxable income carried forward into and distributed in the current year. Distributions also may include returns of capital.
To maintain our qualification for taxation as a RIC, we must, among other things, distribute, with respect to each taxable year, at least 90% of our investment company net taxable income (i.e., our net ordinary income and our realized net short-term capital gains in excess of realized net long-term capital losses, if any). In addition, if we continue to qualify for taxation as a RIC, we will be subject to a federal excise tax unless we meet certain minimum distribution requirements on a calendar year basis.
We intend to distribute to our stockholders between 90% and 100% of our annual taxable income (which includes our taxable interest and fee income).
Commitments and Contingencies
Our investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of June 30, 2019, we had 5 such investments with an aggregate unfunded commitment of $14.4 million and at December 31, 2018 we had 7 such investments with an aggregate unfunded commitment of $15.0 million. See “Note 12 - Commitments and Contingencies” in the notes to our financial statements for more information.
Critical Accounting Policies
The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. See “Note 2 - Summary of Significant Accounting Policies” in the notes to our financial statements for a description of our significant accounting policies.
Valuation of portfolio investments
We generally invest in illiquid loans and securities including debt of lower-middle and middle-market companies and, to a lesser extent, equity investments in such companies. Debt and equity securities that are not publicly traded or whose market prices are not readily available are valued at fair value as determined in good faith by the Board. Such determination of fair values may involve subjective judgments and estimates, although we engage independent valuation providers to review the valuation of each portfolio investment that does not have a readily available market quotation at least once annually. With respect to unquoted securities, we value each investment considering, among other measures, discounted cash flow models, comparisons of financial ratios of peer companies and other factors.
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Because there is not a readily available market for substantially all of the investments in our portfolio, we value most of our portfolio investments at fair value as determined in good faith by the Board using a documented valuation policy and a consistently applied valuation process, and in consultation with our Adviser, the valuation committee of the Board and, in some cases, independent valuation firms. 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 our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.
With respect to investments for which market quotations are not readily available, the Board undertakes a multi-step valuation process each quarter, as described below:
· | Our quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of the Adviser responsible for the portfolio investment; |
· | Preliminary valuation conclusions are then documented and discussed with our Adviser’s Investment Committee; |
· | Independent valuation firms engaged by the valuation committee of the Board will prepare valuations on a selected portion of our investment portfolio on a quarterly basis (and each portfolio position on at least an annual basis) and submit reports to the Board; |
· | The valuation committee of the Board then reviews these preliminary valuations; and |
· | The Board then discusses valuations and approves the fair value of each investment in our portfolio in good faith, based the input of Adviser, the independent valuation firms and the valuation committee. |
As part of our valuation procedures, we risk rate all of our investments. Our investment rating system uses a scale of 1 to 5. Our internal rating is not an exact system, but it is used internally to estimate the probability, among other things, of: (i) default on our investments and (ii) loss of our principal. In general, our internal rating system may also assist the Board in its determination of the fair value of our investments. Our internal risk rating system generally encompasses both qualitative and quantitative aspects of our portfolio companies.
Rating Definition
1 | The investment has an acceptable level of risk and the company is generally performing. All investments in new investments and certain restructured investments are initially assessed a grade of 1. |
2 | The investment is performing with risk factors being neutral to slightly unfavorable since the time of underwriting. |
3 | The investment is performing below expectations. With respect to debt investments, the company is generally out of compliance with certain covenants, current or future interest payments could be impacted. With respect to equity investments, dividend payments or return of capital could be impacted. |
4 | The investment is performing materially below expectations. With respect to debt investments, debt covenants are out of compliance and interest payments are, or expected to be, delinquent and the principal amount of the debt investment is not expected to be repaid in full. With respect to equity investments, dividend payments are not expected to be paid and the principal amount of the equity investment is not expected to be returned. |
5 | The investment is performing substantially below expectations. With respect to debt investments, interest payments are not being made and the investment is on non-accrual. With respect to equity investments, dividend payments are not being paid or accrued and principal amount of the equity investment is not expected to be returned. |
Our internal performance ratings do not constitute any rating of investments by a nationally recognized statistical rating organization or represent or reflect any third-party assessment of any of our investments. A review of each investment is made regularly and any changes will be made to the internal performance ratings accordingly. In connection with our valuation process, the Board, along with its valuation committee will review these internal performance ratings on a quarterly basis.
Rating Summary – June 30, 2019
(dollars in thousands)
Risk Rating | Cost | % of Cost | FMV | % of FMV | ||||||||||||
1 | $ | 103,035 | 43.0 | % | $ | 103,905 | 47.4 | % | ||||||||
2 | 65,529 | 27.3 | % | 65,463 | 29.9 | % | ||||||||||
3 | 27,790 | 11.6 | % | 22,998 | 10.5 | % | ||||||||||
4 | 37,554 | 15.7 | % | 26,841 | 12.2 | % | ||||||||||
5 | 5,696 | 2.4 | % | 0 | 0.0 | % | ||||||||||
$ | 239,604 | 100.0 | % | $ | 219,207 | 100.0 | % |
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Recent Developments
Subsequent to June 30, 2019, the following activity occurred:
On July 3, 2019, we paid a quarterly dividend of $0.18 per share and a special dividend of $0.15 per share to stockholders of record as of June 28, 2019.
On August 5, 2019, the Board approved the 2019 third quarter dividend of $0.18 per share for stockholders of record as of September 26, 2019, payable on October 3, 2019.
Quantitative and Qualitative Disclosures About Market Risk
We are subject to financial market risks, including changes in interest rates. For the six months ended June 30, 2019, 21 of our loans, or 93.0% of the fair value of our debt portfolio bore interest at floating rates. A majority of these floating rate loans have interest rate floors, which have all been exceeded in the current interest rate environment. Assuming that the Statement of Assets and Liabilities as of June 30, 2019 were to remain constant and no actions were taken to alter the existing interest rate sensitivity, a hypothetical one or two percent increase in LIBOR would have less than a 2% effect on our portfolio. Although we believe that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size and composition of the assets on the balance sheet and other business developments that could affect net increase in net assets resulting from operations, or net income. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by this estimate. We may hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to our portfolio of investments. We have not engaged in any hedging activities to date.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company’s management, under the supervision and with the participation of various members of management, including its Chief Executive Officer (“CEO”) and its Chief Financial Officer (“CFO”), has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report.
(b) Changes in Internal Control Over Financial Reporting
Management did not identify any change in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Neither the Company, its subsidiaries, nor the Adviser is currently subject to any material legal proceedings, nor, to the Company and the Adviser’s knowledge, is any material legal proceeding threatened against them. From time to time, the Company, its subsidiaries and/or the Adviser may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of their rights under contracts with portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, the Company does not expect that these proceedings will have a material effect upon its financial condition or results of operations.
In addition to the other information set forth in this report, you should carefully consider the risk factors discussed below and the risk factors described in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and in Part II, “Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, which could materially affect our business, financial condition and/or operating results. The risks described in our filings with the SEC are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities (1)
Information relating to the Company’s purchases of its common stock during the six months ended June 30, 2019 is as follows:
Period | Total Number of Shares Purchased (2) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(3) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Share Repurchase Program (4) | ||||||||||||
January 1 – January 31, 2019 | 207,220 | $ | 6.36 | 207,220 | $ | 5,895,760 | ||||||||||
February 1 – February 28, 2019 | 22,509 | $ | 7.00 | 22,509 | $ | 5,738,265 | ||||||||||
March 1 – June 30, 2019 | - | $ | - | - | $ | 5,738,265 |
(1) On November 5, 2018, the Board authorized a $10.0 million discretionary open-market share repurchase program under which we may repurchase shares of our common stock in the open market until the approved dollar amount has been used to repurchase shares. The timing and number of shares to be repurchased will depend on a number of factors, including market conditions and alternative investment opportunities. Pursuant to the Board authorization, we adopted a trading plan on December 10, 2018, for the purpose of repurchasing shares of its common stock in the open market (the “Plan”). Under the Plan, we may repurchase up to the lesser of (1) 5.0% of the amount of shares of our common stock outstanding as of the date of the Plan, December 10, 2018 and (2) $10.0 million in aggregate amount of our common stock. During the six months ended June 30, 2019, we repurchased 229,729 shares of our common stock for $1,476,415 under the Plan inclusive of commissions.
(2) Includes purchases of our common stock made on the open market by or on behalf of any “affiliated purchaser,” as defined in Exchange Act Rule 10b-18(a)(3), of the Company.
(3) Subsequent to period-end, through August 7, 2019, there were no additional repurchases.
(4) As of August 7, 2019, considering repurchases of our common stock subsequent to period-end, the dollar value of shares that may yet be purchased by us under the $10.0 million share repurchase program is approximately $5.7 million.
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Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
None.
The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:
* Filed herewith.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: August 7, 2019
By: | /s/ Suhail A. Shaikh | |
Name: Suhail A. Shaikh | ||
Title: Chief Executive Officer | ||
By: | /s/ Ellida McMillan | |
Name: Ellida McMillan | ||
Title: Chief Financial Officer, Chief Operating Officer, Treasurer, and Secretary |
45 |
Exhibit 31.1
Certification of Chief Executive Officer
of Alcentra Capital Corporation
pursuant to Rule 13a-14(a) under the Exchange Act,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Suhail A. Shaikh, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Alcentra 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 registrant’s other certifying officer(s) 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 registrant’s 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 registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s 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 registrant’s 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 registrant’s internal control over financial reporting. |
Date: August 7, 2019 | By: | /s/ Suhail A. Shaikh |
Suhail A. Shaikh Chief Executive Officer |
Exhibit 31.2
Certification of Chief Financial Officer
of Alcentra Capital Corporation
pursuant to Rule 13a-14(a) under the Exchange Act,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Ellida McMillan, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Alcentra 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 registrant’s other certifying officer(s) 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 registrant’s 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 registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s 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 registrant’s 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 registrant’s internal control over financial reporting. |
Date: August 7, 2019 | By: | /s/ Ellida McMillan |
Ellida McMillan Chief Financial Officer |
Exhibit 32.1
Certification of Chief Executive
Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
In connection with this Quarterly Report of Alcentra Capital Corporation (the “Registrant”) on Form 10-Q for the period ended June 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Suhail A. Shaikh, the Chief Executive Officer of the Registrant, hereby certify, to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 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, as amended; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
/s/ Suhail A. Shaikh | |
Name: Suhail A. Shaikh | |
Date: August 7, 2019 |
Exhibit 32.2
Certification of Chief Financial
Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
In connection with this Quarterly Report of Alcentra Capital Corporation (the “Registrant”) on Form 10-Q for the period ended June 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ellida McMillan, the Chief Financial Officer of the Registrant, hereby certify, to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 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, as amended; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
/s/ Ellida McMillan | |
Name: Ellida McMillan | |
Date: August 7, 2019 |