UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number
(Exact Name of Registrant as Specified in its Charter)
( State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
N/A |
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N/A |
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N/A |
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.
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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☐ |
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Accelerated filer |
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☐ |
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☒ |
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Smaller reporting company |
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Emerging growth company |
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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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of August 14, 2024, the registrant had
Table of Contents
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Page |
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PART I. |
2 |
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Item 1. |
2 |
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2 |
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Consolidated Statements of Operations for the three and six months ended June 30, 2024 (Unaudited) |
3 |
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4 |
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Consolidated Statement of Cash Flows for the six months ended June 30, 2024 (Unaudited) |
5 |
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Consolidated Schedule of Investments as of June 30, 2024 (Unaudited) |
6 |
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9 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
23 |
Item 3. |
28 |
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Item 4. |
30 |
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PART II. |
31 |
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Item 1. |
31 |
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Item 1A. |
31 |
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Item 2. |
31 |
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Item 3. |
31 |
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Item 4. |
31 |
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Item 5. |
31 |
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Item 6. |
32 |
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33 |
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i
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
Overland Advantage
Consolidated Statements of Assets and Liabilities
(amounts in thousands, except share and per share data)
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June 30, 2024 |
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(Unaudited) |
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December 31, 2023 |
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Assets |
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Non-controlled/non-affiliated investments, at fair value (amortized cost of $ |
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$ |
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$ |
— |
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Cash and cash equivalents |
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Deferred offering costs |
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Deferred financing costs |
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— |
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Interest receivable on investments |
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— |
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Other assets |
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Prepaid insurance |
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— |
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Receivable for paydowns of investments |
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— |
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Total Assets |
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$ |
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$ |
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Liabilities |
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Payable for unsettled purchases |
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$ |
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$ |
— |
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Payable to affiliates |
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Interest payable |
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— |
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Management fee payable |
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— |
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Total Liabilities |
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$ |
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$ |
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(Note 8) |
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Net Assets |
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Common shares of beneficial interest, $ |
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— |
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(1) |
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Paid-in-capital in excess of par value |
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Distributable earnings (loss) |
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( |
) |
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— |
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Total Net Assets |
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$ |
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$ |
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Total Liabilities and Net Assets |
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$ |
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$ |
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Net asset value per share |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
2
Overland Advantage
Consolidated Statements of Operations (Unaudited)
(amounts in thousands, except share and per share data)
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For the three |
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For the six months ended |
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June 30, 2024 |
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June 30, 2024 |
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Investment income |
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From non-controlled/non-affiliated investments: |
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Interest income |
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$ |
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$ |
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Total investment income |
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Expenses |
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Interest and debt financing costs |
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Amortization of offering costs |
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Management fees |
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Organizational expenses |
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— |
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Other general and administrative expenses |
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Professional fees |
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Trustees' fees |
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Total expenses |
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Less advisor expense support (Note 4) |
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( |
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( |
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Net expenses |
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Net investment income (loss) |
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Realized and unrealized gain (loss): |
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Net realized gains (losses): |
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Non-controlled/non-affiliated investments |
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— |
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— |
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Net realized gains (losses) |
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— |
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— |
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Net change in unrealized appreciation (depreciation): |
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Non-controlled/non-affiliated investments |
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( |
) |
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( |
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Net change in unrealized appreciation (depreciation) |
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( |
) |
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( |
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Net realized and unrealized gain (loss) |
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( |
) |
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( |
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Net increase (decrease) in net assets from operations |
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$ |
( |
) |
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$ |
( |
) |
The accompanying notes are an integral part of these consolidated financial statements.
3
Overland Advantage
Consolidated Statements of Changes in Net Assets (Unaudited)
(amounts in thousands, except share and per share data)
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For the three |
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For the six months ended |
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June 30, 2024 |
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June 30, 2024 |
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Net assets at beginning of period |
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$ |
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$ |
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Operations: |
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Net investment income (loss) |
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Net realized gains (losses) |
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— |
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— |
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Net change in unrealized appreciation (depreciation) |
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( |
) |
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( |
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Net increase (decrease) in net assets from operations |
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( |
) |
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( |
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Distributions to shareholders: |
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Distributions from distributable earnings |
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— |
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— |
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Net increase (decrease) resulting from shareholder distributions |
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— |
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— |
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Capital share transactions: |
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Issuance of common shares |
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Net increase (decrease) in net assets from capital transactions |
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Net increase (decrease) in net assets for the period |
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Net assets at end of period |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
4
Overland Advantage
Consolidated Statement of Cash Flows (Unaudited)
(amounts in thousands, except share and per share data)
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For the six months ended |
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June 30, 2024 |
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Cash flows from operating activities: |
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Net increase (decrease) in net assets from operations |
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$ |
( |
) |
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities: |
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Purchase of investments |
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( |
) |
Proceeds from sales of investments and principal repayments |
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Net change in unrealized (appreciation) depreciation |
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Amortization of debt issuance costs |
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Amortization of deferred financing costs |
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Changes in operating assets and liabilities: |
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(Increase) decrease in prepaid insurance |
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( |
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(Increase) decrease in other assets |
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( |
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(Increase) decrease in interest receivable on investments |
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( |
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(Increase) decrease in receivable for paydowns of investments |
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( |
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Increase (decrease) in management fees payable |
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Increase (decrease) in payable to affiliates (1) |
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Increase (decrease) in payable for unsettled purchases |
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Increase (decrease) in interest payable |
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Net cash provided by (used in) operating activities |
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( |
) |
Cash flows from financing activities: |
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Proceeds from issuance of common shares |
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Deferred financing costs |
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( |
) |
Net cash provided by (used in) financing activities |
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Net increase (decrease) in cash and cash equivalents |
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Cash and cash equivalents, beginning of period |
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Cash and cash equivalents, end of period |
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$ |
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Supplemental and Non-Cash Financing Activities |
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Accrued but unpaid deferred financing costs |
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$ |
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Accrued but unpaid deferred offering costs |
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$ |
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(1)
The accompanying notes are an integral part of these consolidated financial statements.
5
Overland Advantage
Consolidated Schedule of Investments (Unaudited)
As of June 30, 2024
(amounts in thousands)
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Percentage |
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Interest |
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Maturity |
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Principal/ |
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Amortized |
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of Net |
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Company(1) |
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Investment |
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Rate |
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Date |
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Par Amount |
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Cost(2) |
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Fair Value(3) |
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Assets |
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Investments |
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Non-controlled/non-affiliated senior secured debt |
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Debt investments(4)(5) |
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Automobile Components |
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LS Group OpCo Acquistion LLC(7) |
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First lien senior secured term loan |
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SOFR + |
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$ |
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$ |
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$ |
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% |
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Realtruck Group Inc(7) |
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First lien senior secured term loan |
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SOFR + |
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% |
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% |
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Building Products |
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Chariot Buyer LLC(7) |
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First lien senior secured term loan |
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SOFR + |
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% |
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Chemicals |
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Lummus Technology Holdings V LLC(7) |
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First lien senior secured term loan |
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SOFR + |
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% |
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Commercial Services & Supplies |
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Asurion LLC(7) |
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First lien senior secured term loan |
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SOFR + |
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% |
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CoreLogic Inc(7) |
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First lien senior secured term loan |
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SOFR + |
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% |
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% |
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Construction & Engineering |
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Oscar Acquisitionco LLC(8) |
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First lien senior secured term loan |
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SOFR + |
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% |
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Construction Material |
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Quikrete Holdings Inc(7) |
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First lien senior secured term loan |
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SOFR + |
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% |
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Summit Materials LLC(8)(12) |
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First lien senior secured term loan |
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SOFR + |
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% |
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% |
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Diversified Consumer Services |
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Wand NewCo 3 Inc(7) |
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First lien senior secured term loan |
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SOFR + |
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% |
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Diversified Financial Services |
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Boost Newco Borrower LLC(8) |
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First lien senior secured term loan |
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SOFR + |
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% |
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Electrical Utilities |
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Wec US Holdings Ltd(7) |
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First lien senior secured term loan |
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SOFR + |
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% |
|||||
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Electronic Equipment |
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Emrld Borrower LP(7) |
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First lien senior secured term loan |
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SOFR + |
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% |
|||||
Madison IAQ LLC(7) |
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First lien senior secured term loan |
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SOFR + |
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% |
|||||
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% |
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Health Care Equipment & Supplies |
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Medline Borrower LP(7) |
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First lien senior secured term loan |
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SOFR + |
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% |
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6
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Percentage |
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Interest |
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Maturity |
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Principal/ |
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Amortized |
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of Net |
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|||||
Company(1) |
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Investment |
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Rate |
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Date |
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Par Amount |
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Cost(2) |
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Fair Value(3) |
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Assets |
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Health Care Providers & Services |
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Electron Bidco Inc(7) |
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First lien senior secured term loan |
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SOFR + |
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% |
|||||
Heartland Dental LLC(7) |
|
First lien senior secured term loan |
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
Select Medical Corp(7)(12) |
|
First lien senior secured term loan |
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
Triwest Healthcare Alliance Corp(6)(7) |
|
First lien senior secured term loan |
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
Triwest Healthcare Alliance Corp(6)(9)(10)(11) |
|
First lien senior secured delayed draw term loan |
|
SOFR + |
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
)% |
||
Zelis Payments Buyer Inc(7) |
|
First lien senior secured term loan |
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
||||
Health Care Technology |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
AthenaHealth Group Inc(7) |
|
First lien senior secured term loan |
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
Ensemble RCM LLC(8) |
|
First lien senior secured term loan |
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
Waystar Technologies Inc(7)(12) |
|
First lien senior secured term loan |
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
||||
Hotels, Restaurants & Leisure |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Alterra Mountain Co(7) |
|
First lien senior secured term loan |
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
Caesars Entertainment Inc(8)(12) |
|
First lien senior secured term loan |
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
Fertitta Entertainment LLC/NV(7) |
|
First lien senior secured term loan |
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
Light & Wonder International Inc(7)(12) |
|
First lien senior secured term loan |
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
||||
Household Durables |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
RH(7)(12) |
|
First lien senior secured term loan |
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Household Products |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
VC GB Holdings I Corp(8) |
|
First lien senior secured term loan |
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
IT Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Go Daddy Operating Co LLC(7)(12) |
|
First lien senior secured term loan |
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Machinery |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Engineered Machinery Holdings Inc(8) |
|
First lien senior secured term loan |
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Oil, Gas & Consumable Fuels |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
CQP Holdco LP(8)(12) |
|
First lien senior secured term loan |
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
Oryx Midstream Services Permian Basin LLC(7) |
|
First lien senior secured term loan |
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
||||
Professional Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
OMNIA Partners LLC(8) |
|
First lien senior secured term loan |
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Semiconductors & Semiconductor Equipment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
MKS Instruments Inc(8)(12) |
|
First lien senior secured term loan |
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
||||
|
|
|
|
Interest |
|
Maturity |
|
Principal/ |
|
|
Amortized |
|
|
|
|
|
of Net |
|
|||||
Company(1) |
|
Investment |
|
Rate |
|
Date |
|
Par Amount |
|
|
Cost(2) |
|
|
Fair Value(3) |
|
|
Assets |
|
|||||
Software |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Boxer Parent Co Inc(7) |
|
First lien senior secured term loan |
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
Cloud Software Group Inc(8) |
|
First lien senior secured term loan |
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
Genesys Cloud Services Holdings II LLC(7) |
|
First lien senior secured term loan |
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
McAfee Corp(8) |
|
First lien senior secured term loan |
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
Project Alpha Intermediate Holding Inc(8) |
|
First lien senior secured term loan |
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
Skopima Consilio Parent LLC(7) |
|
First lien senior secured term loan |
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
UKG Inc(7) |
|
First lien senior secured term loan |
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
||||
Specialty Retail |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Great Outdoors Group LLC(7) |
|
First lien senior secured term loan |
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
PetSmart LLC(7) |
|
First lien senior secured term loan |
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
||||
Textiles, Apparel & Luxury Goods |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
ABG Intermediate Holdings 2 LLC(7) |
|
First lien senior secured term loan |
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Transportation Infrastructure |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Brown Group Holding LLC(7) |
|
First lien senior secured term loan |
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total Investments |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
|
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash Equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
BlackRock Liquidity FedFund - Institutional |
|
– |
|
– |
|
– |
|
|
– |
|
|
$ |
|
|
$ |
|
|
|
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total Investments and Cash Equivalents |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
|
% |
||||
The accompanying notes are an integral part of these consolidated financial statements.
8
Overland Advantage
Notes to Consolidated Financial Statements (Unaudited)
(amounts in thousands, except share and per share data, unless otherwise indicated)
Overland Advantage, a Delaware statutory trust (the “Company”), was formed on February 10, 2023 to lend to U.S. middle market companies. The Company’s investment objective is to generate attractive risk-adjusted returns, predominantly in the form of current income, with select investments exhibiting the ability to capture long-term capital appreciation. The Company’s investment strategy is primarily focused on newly-originated, privately-negotiated senior secured term loans in middle market non-sponsor companies, which are companies that are not backed by a private equity firm or other professional equity investor, and sponsor-owned companies, which are companies backed by such a firm or person.
The Company is structured as an externally managed, non-diversified closed-end management investment company. The Company has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company also has elected to be treated as a Regulated Investment Company (“RIC”) for U.S. federal income tax purposes under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).
The Company is externally managed by Overland Advisors, LLC (the “Advisor”), an investment adviser registered with the U.S. Securities and Exchange Commission (the “SEC”) under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), pursuant to an investment advisory agreement between the Company and the Advisor (“Investment Advisory Agreement”). The Advisor is a controlled affiliate of Centerbridge Partners, L.P., a Delaware limited partnership (together with its affiliates, as applicable, “Centerbridge”), that is registered as an investment adviser with the SEC under the Advisers Act. The Advisor has entered into an arrangement with a subsidiary of Wells Fargo & Company (together with its subsidiaries, “Wells Fargo”) pursuant to which Wells Fargo refers investment opportunities in middle market corporate loans to the Advisor that meet the Company’s designated investment criteria in accordance with the terms of the sourcing arrangement (the “Wells Fargo Sourcing Arrangement”). The Advisor is managed by Overland Advisors Holdings, LLC, a Delaware limited liability company, which is a controlled affiliate of Centerbridge and in which Wells Fargo has a significant, non-controlling minority equity investment.
Centerbridge Services Group, LLC (the “Administrator”), a wholly-owned subsidiary of Centerbridge Partners, L.P., serves as the Company’s administrator pursuant to an administration agreement (the “Administration Agreement”). SEI Global Services, Inc. (the “Sub-Administrator”) will provide certain day-to-day administration activities for the Company.
The Company has formed two wholly-owned financing subsidiaries, which are structured as Delaware limited liability companies.
On December 20, 2023, an affiliate of the Advisor contributed $
Basis of Financial Statement Presentation
The accompanying unaudited interim consolidated financial statements of the Company and the related financial information have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. In the opinion of management, the unaudited financial results included herein contain all adjustments, consisting solely of normal accruals, considered necessary for the fair statement of financial statements for the interim period included. The Company is an investment company following the accounting and reporting guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 946, “Financial Services – Investment Companies.” For the period February 10, 2023 through June 30, 2023, the Company incurred organizational expenses, which were subsequently subject to the Expense Support and Conditional Reimbursement Agreement (the “Expense Support Agreement”) discussed in Note 4.
Basis of Consolidation
As provided under ASC 946, the Company will not consolidate its investment in a company other than an investment company subsidiary or controlled company whose business consists of providing services to the Company.
9
The Company consolidates the results of its wholly-owned financing subsidiaries, Overland Financing MS, LLC and Overland Financing DB, LLC. There were no transactions by Overland Financing DB, LLC through June 30, 2024. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates and such differences could be material.
Interest Income
Interest income is recorded on an accrual basis and includes the accretion of discounts and amortizations of premiums. Discounts from and premiums to par value on debt investments purchased are accreted/amortized into interest income over the life of the respective security using the effective interest method. The amortized cost of debt investments represents the original cost, including loan origination fees and upfront fees received that are deemed to be an adjustment to yield, adjusted for the accretion of discounts and amortization of premiums, if any. Upon prepayment or partial prepayment of a loan or debt security, any prepayment premiums, unamortized upfront loan origination fees and unamortized discounts associated with the amount prepaid are recorded as interest income in the current period.
PIK Income
The Company may have loans in its portfolio that contain payment-in-kind ("PIK") provisions. PIK represents interest that is accrued and recorded as interest income at the contractual rates, increases the loan principal on the respective capitalization dates, and is generally due at maturity. Such income is included in interest income in the Company’s statement of operations. If at any point the Company believes PIK is not expected to be realized, the investment generating PIK will be placed on non-accrual status. When a PIK investment is placed on non-accrual status, the accrued, uncapitalized interest is generally reversed through interest income. To maintain the Company’s status as a RIC, this non-cash source of income must be paid out to Shareholders in the form of dividends, even though the Company has not yet collected cash.
Non-Accrual Loans
Loans are generally placed on non-accrual status when there is reasonable doubt that principal or interest will be collected in full. Accrued interest is generally reversed when a loan is placed on non-accrual status. Additionally, any original issue discount and market discount are no longer accreted to interest income as of the date the loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid current and, in management’s judgment, are likely to remain current. Management may make exceptions to this treatment and determine to not place a loan on non-accrual status if the loan has sufficient collateral value and is in the process of collection. There were
Dividend Income
Dividend income on preferred equity securities is recorded on the accrual basis to the extent that such amounts are payable by the portfolio company and are expected to be collected. Dividend income on common equity securities is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly-traded portfolio companies.
Other Income
Other income may include income such as consent, waiver, amendment, unused, syndication and prepayment fees associated with the Company’s investment activities as well as any fees for managerial assistance services rendered by the Company to the portfolio companies. Such fees are recognized as income when earned or the services are rendered. The Company may receive fees for guaranteeing the outstanding debt of a portfolio company. Such fees are amortized into other income over the life of the guarantee.
Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation
Investment transactions will be recorded on the trade date. The Company will measure net realized gains or losses using the specific identification method as the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees
10
and prepayment penalties. Net change in unrealized appreciation or depreciation will reflect the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation and depreciation, when gains or losses are realized.
Offering and Organizational Expenses
Organizational expenses are charged as incurred and include, without limitation, the cost of formation, including legal fees related to the creation and organization of the Company and its subsidiaries, their related documents of organization and the Company’s election to be regulated as a BDC. During the three and six months ended June 30, 2024, organizational expenses incurred amounted to $
Offering expenses include, without limitation, legal, printing and other offering and marketing costs, including the fees of professional advisors, those associated with the preparation of the Company’s registration statement on Form 10 as well as the expenses of Centerbridge and Wells Fargo in negotiating and documenting other arrangements with the initial investors of the Company. Offering expenses of the Company are capitalized as a deferred charge and amortized to expense on a straight-line basis over
The Company’s organizational and offering costs are the responsibility of the Company and have preliminarily been paid by an affiliate of the Advisor on the Company’s behalf. However, as discussed in Note 4, a portion of the Company’s expenses incurred through June 30, 2024 included on the Company’s consolidated statements of operations, including its organizational costs, have been assumed by the Advisor pursuant to the Expense Support Agreement.
Deferred Financing Costs
Deferred financing costs represent fees and other direct incremental costs incurred in connection with the Company’s borrowings. These expenses are deferred and amortized into interest expense over the period of time during which additional funding remains available under the related debt instrument using the straight-line method. Deferred financing costs related to revolving credit facilities are presented separately as an asset on the Company’s consolidated statements of assets and liabilities.
Professional Fees
Professional fees are expensed as incurred and include the legal expenses of Centerbridge and Wells Fargo in negotiating and documenting the Wells Fargo Sourcing Arrangement, legal expenses on borrowing facilities where the likelihood of a deal is remote, as well as consulting fees. Professional fees incurred by the Advisor and its affiliates on behalf of the Company have been subject to reimbursement by the Advisor pursuant to the Expense Support Agreement. Refer to Note 4 for more information on the Expense Support Agreement.
Other Assets
Other assets represent legal fees and other direct costs incurred in connection with the Company’s expected future borrowings. In addition, it includes the unamortized portion of other general and administrative costs.
Cash and Cash Equivalents
Cash and cash equivalents generally consist of demand deposits and highly liquid investments with original maturities of three months or less. Cash and cash equivalents are carried at cost, which approximates fair value. The Company deposits its cash and cash equivalents with financial institutions and at times, these deposits may exceed the Federal Deposit Insurance Corporation insured limit.
Income Taxes
The Company has elected to be treated as a RIC. So long as the Company maintains its status as a RIC, it generally will not be subject to any corporate-level U.S. federal income taxes on any ordinary income or capital gains that is distributed at least annually to its shareholders. Any tax liability related to income earned and distributed by the Company represents obligations of the Company’s investors and will not be reflected in the consolidated financial statements of the Company.
To qualify and be subject to tax as a RIC for U.S. federal income tax purposes, the Company is required to ensure that (among other things) it satisfies certain sources of income and asset diversification requirements and distributes to its shareholders annually an
11
amount equal to at least
The Company evaluates tax positions taken or expected to be taken in the course of preparing its consolidated financial statements to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax positions not deemed to meet the “more-likely-than-not” threshold are reserved and recorded as a tax benefit or expense in the current year. All penalties and interest associated with income taxes are included in income tax expense. Conclusions regarding tax positions are subject to review and may be adjusted at a later date based on factors including, but not limited to, on-going analyses of tax laws, regulations and interpretations thereof. During the six months ended June 30, 2024,
In accordance with the authoritative guidance on fair value measurements and disclosures under GAAP, the Company discloses the fair value of its investments in a hierarchy that prioritizes the inputs to valuation techniques used to measure the fair value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 investments) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 investments). The guidance establishes three levels of the fair value hierarchy as follows:
Level 1 Financial assets and liabilities whose values reflect unadjusted quoted prices that are available in active markets for identical investments as of the reporting date.
Level 2 Financial assets and liabilities whose values are based upon pricing inputs, including certain broker dealer quotes that are generally those other than exchange quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies.
Level 3 Financial assets and liabilities whose values are based on pricing inputs that are unobservable for the investment and include situations where i) there is minimal, if any, market activity for the investment, or ii) the inputs used in the determination of fair value require significant management judgment or estimation.
On December 14, 2023, the board of trustees of the Company (the “Board”) appointed the Advisor as the Company's valuation designee in accordance with Rule 2a-5 under the 1940 Act. As the valuation designee, the Advisor determines fair values of the Company's investments pursuant to a valuation policy approved by the Board and pursuant to a consistently applied valuation process. Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. Inputs may include price information, volatility statistics, specific and broad credit data, liquidity statistics and other factors. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant, individually or in the aggregate, to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by the Advisor. The Advisor considers observable data to be that market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. The categorization of a financial instrument within the hierarchy is based upon the pricing transparency of the instrument and does not necessarily correspond to the Advisor’s perceived risk of that instrument.
The valuation of investments classified within Level 3 of the fair value hierarchy is prepared on a quarterly basis and is subject to oversight and review. Each valuation is reviewed and approved by the Valuation & Allocation Committee which consists of senior members of the Advisor, including investment professionals and representatives from legal, compliance and finance. In connection with this process, valuation models are updated by the valuation team based on historical and projected financial information, observable market data, market liquidity and other factors and reviewed by the investment professionals. Valuation results are assessed in light of industry trends, general economic and market conditions and factors specific to each investment. The Advisor’s valuation team intends to engage third-party valuation firms to perform independent valuation reviews of certain modeled Level 3 valuations where there is significant management judgment or estimation. These reviews are generally performed twice annually, including one review at year end. The Advisor’s Valuation & Allocation Committee is ultimately responsible for coordinating and implementing the Company’s valuation policies, guidelines and processes on behalf of the Company.
12
Investment Advisory Agreement
The Company is managed by the Advisor pursuant to an Investment Advisory Agreement between the Company and the Advisor. Subject to the overall supervision of the Board, the Advisor is responsible for the overall management and affairs of the Company and has full discretion to invest the assets of the Company in a manner consistent with the Company’s investment objectives.
Under the Investment Advisory Agreement, the Company pays the Advisor (i) a quarterly asset-based fee (the “Management Fee”) for management services and (ii) an Incentive Fee (as defined below) as compensation for the investment advisory and management services it provides to the Company thereunder. The fees that are payable under the Investment Advisory Agreement for any partial period will be appropriately prorated.
Management Fee
As of June 30, 2024 and December 31, 2023, $
Incentive Fee
Investment Income Incentive Fee
The investment income incentive fee will be calculated and payable on a quarterly basis, in arrears, and is earned on pre-incentive fee net investment income of the Company. For purposes of computing the initial installment of the investment income incentive fee, if the inception does not fall on the first day of a calendar quarter, then the initial payment of the investment income incentive fee shall be payable for the period that commences on the date of inception through the last day of the first complete calendar quarter immediately following the incentive commencement date and, thereafter, at the end of each subsequent calendar quarter as described below.
Pre-incentive fee net investment income shall be compared to a “Hurdle Rate” of
For the three and six months ended June 30, 2024, there was
13
Capital Gains Incentive Fee
The Company shall pay the Advisor a capital gains incentive fee calculated and payable in arrears in cash as of the end of each calendar year or upon the termination of the Investment Advisory Agreement in an amount equal to
The Company will accrue, but will not pay, a capital gains incentive fee with respect to unrealized appreciation because a capital gains incentive fee would be owed to the Advisor if the Company were to sell the relevant investment and realize a capital gain.
For the three and six months ended June 30, 2024, there were
Administration Agreement
The Company has entered into the Administration Agreement pursuant to which the Administrator has agreed to provide the administrative services necessary for the Company to operate. The Company utilizes the Administrator’s office facilities, personnel, equipment and recordkeeping services. Pursuant to the Administration Agreement, the Administrator oversees the Company’s public reporting requirements and tax reporting and monitors the Company’s expenses and the performance of professional services rendered to the Company by others. The Administrator has hired the Sub-Administrator to assist in the provision of certain administrative services. There is
Expense Support and Conditional Reimbursement Agreement
The Company has entered into the Expense Support Agreement with the Advisor, pursuant to which the Advisor has contractually agreed to pay Other Operating Expenses (as defined below) of the Company on the Company’s behalf (each such payment, a “Required Expense Payment”) such that Other Operating Expenses of the Company do not exceed
At such times as the Advisor determines, the Advisor may elect to pay certain additional expenses of the Company on the Company’s behalf (each such payment, a “Voluntary Expense Payment” and together with a Required Expense Payment, the “Expense Payments”). In making a Voluntary Expense Payment, the Advisor will designate, as it deems necessary or advisable, what type of expense it is paying (including, whether it is paying organizational or offering expenses); provided that no portion of a Voluntary Expense Payment will be used to pay any interest expense of the Company.
14
Under the Expense Support Agreement, following any calendar quarter in which the Company’s Available Operating Funds (as defined below) exceed the cumulative distributions accrued to the Company’s shareholders based on distributions declared with respect to record dates occurring in such calendar quarter (the amount of such excess referred to herein as “Excess Operating Funds”), the Company will pay such Excess Operating Funds, or a portion thereof, to the Advisor until such time as all Expense Payments made by the Advisor to the Company within
The amount of the Reimbursement Payment for any calendar quarter will equal the lesser of (i) the Excess Operating Funds in such quarter and (ii) the aggregate amount of all Expense Payments made by the Advisor to the Company within
No Reimbursement Payment for any calendar quarter shall be made if: (i) the Effective Rate of Distributions Per Share (as defined below) declared by the Company at the time of such Reimbursement Payment is less than the Effective Rate of Distributions Per Share (as defined below) at the time the Expense Payment was made to which such Reimbursement Payment relates, (ii) the Company’s Operating Expense Ratio at the time of such Reimbursement Payment is greater than the Operating Expense Ratio at the time the Expense Payment was made to which such Reimbursement Payment relate, or (iii) the Company’s Other Operating Expenses at the time of such Reimbursement Payment exceeds
Either the Company or the Advisor may terminate the Expense Support Agreement at any time, with or without notice, without the payment of any penalty, provided that any Expense Payments that have not been reimbursed by the Company to the Advisor will remain the obligation of the Company following any such termination, subject to the terms of the Expense Support Agreement.
Investments at fair value and amortized cost consisted of the below as of the following period:
|
June 30, 2024 |
|
||||||
($ in thousands) |
|
Amortized Cost |
|
Fair Value |
|
|||
First lien senior secured debt investments |
|
$ |
|
|
$ |
|
||
Total Investments |
|
$ |
|
|
$ |
|
||
15
The industry composition of investments based on fair value consisted of the below as of the following period:
|
|
June 30, 2024 |
|||
Automobile Components |
|
|
|
% |
|
Building Products |
|
|
|
|
|
Chemicals |
|
|
|
|
|
Commercial Services & Supplies |
|
|
|
|
|
Construction & Engineering |
|
|
|
|
|
Construction Materials |
|
|
|
|
|
Diversified Consumer Services |
|
|
|
|
|
Diversified Financial Services |
|
|
|
|
|
Electric Utilities |
|
|
|
|
|
Electrical Equipment |
|
|
|
|
|
Health Care Equipment & Supplies |
|
|
|
|
|
Health Care Providers & Services |
|
|
|
|
|
Health Care Technology |
|
|
|
|
|
Hotels, Restaurants & Leisure |
|
|
|
|
|
Household Durables |
|
|
|
|
|
Household Products |
|
|
|
|
|
IT Services |
|
|
|
|
|
Machinery |
|
|
|
|
|
Oil, Gas & Consumable Fuels |
|
|
|
|
|
Professional Services |
|
|
|
|
|
Semiconductors & Semiconductor Equipment |
|
|
|
|
|
Software |
|
|
|
|
|
Specialty Retail |
|
|
|
|
|
Textiles, Apparel & Luxury Goods |
|
|
|
|
|
Transportation Infrastructure |
|
|
|
|
|
Total |
|
|
|
% |
|
The geographic composition of investments at cost and on fair value consisted of the below as of the following period:
June 30, 2024 |
|
|
||||||||||||||||
($ in thousands) |
|
Amortized Cost |
|
|
Fair Value |
|
|
% of Total Investments at Fair Value |
|
|
|
Fair Value as % of Net Assets |
|
|
||||
North America |
|
$ |
|
|
$ |
|
|
|
|
% |
|
|
|
% |
||||
Total |
|
$ |
|
|
$ |
|
|
|
|
% |
|
|
|
% |
||||
The following table presents the fair value hierarchy of cash equivalents and investments as of the following period:
|
|
Fair Value Hierarchy as of June 30, 2024 |
|
|||||||||||||||||
($ in thousands) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||||||
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
First lien senior secured debt investments |
|
$ |
|
— |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|||
Cash equivalents |
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
||
Total investments at fair value |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
||||
16
The following tables present changes in the fair value of investments for which Level 3 inputs were used to determine the fair value as of and for the following periods:
|
For the Three Months Ended June 30, 2024 |
|
||||||
($ in thousands) |
|
First lien |
|
|
Total |
|
||
Fair value, beginning of period |
|
$ |
— |
|
|
$ |
— |
|
Purchases of investments, net |
|
|
|
|
|
|
||
Payment-in-kind |
|
|
— |
|
|
|
— |
|
Proceeds from investments, net |
|
|
— |
|
|
|
— |
|
Net change in unrealized appreciation (depreciation) |
|
|
( |
) |
|
|
( |
) |
Net realized gains (losses) |
|
|
— |
|
|
|
— |
|
Net amortization/accretion of premium/discount on |
|
|
|
|
|
|
||
Transfers between investment types |
|
|
— |
|
|
|
— |
|
Transfers into (out of) Level 3(1) |
|
|
— |
|
|
|
— |
|
Fair value, end of period |
|
$ |
|
|
$ |
|
||
Net change in unrealized appreciation (depreciation) still |
|
|
( |
) |
|
|
( |
) |
|
For the Six Months Ended June 30, 2024 |
|
|||||||
($ in thousands) |
|
First lien |
|
|
|
Total |
|
||
Fair value, beginning of period |
|
$ |
— |
|
|
|
$ |
— |
|
Purchases of investments, net |
|
|
|
|
|
|
|
||
Payment-in-kind |
|
|
— |
|
|
|
|
— |
|
Proceeds from investments, net |
|
|
— |
|
|
|
|
— |
|
Net change in unrealized appreciation (depreciation) |
|
|
( |
) |
|
|
|
( |
) |
Net realized gains (losses) |
|
|
— |
|
|
|
|
— |
|
Net amortization/accretion of premium/discount on |
|
|
|
|
|
|
|
||
Transfers between investment types |
|
|
— |
|
|
|
|
— |
|
Transfers into (out of) Level 3(1) |
|
|
— |
|
|
|
|
— |
|
Fair value, end of period |
|
$ |
|
|
|
$ |
|
||
Net change in unrealized appreciation (depreciation) still |
|
|
( |
) |
|
|
|
( |
) |
17
The following table presents quantitative information about the significant unobservable inputs of the Company’s Level 3 assets as of the following period. The table is not intended to be all-inclusive but instead capture the significant unobservable inputs relevant to the Company’s determination of fair value.
|
|
As of June 30, 2024 |
||||||||||
($ in thousands) |
|
Fair Value |
|
|
Valuation |
|
Unobservable |
|
Range |
|
Impact to |
|
First lien senior secured debt investments |
|
$ |
|
|
Recent Transaction |
|
Transaction Price |
|
N/A |
|
N/A |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
In accordance with the 1940 Act, with certain limitations, the Company is allowed to borrow amounts such that its asset coverage, as defined in the 1940 Act, is at least
The Company's outstanding debt obligations as of June 30, 2024 were as follows:
|
June 30, 2024 |
|
||||||||||||||
($ in thousands) |
|
Aggregate |
|
|
Outstanding |
|
|
Net Carrying |
|
|
Unused |
|
||||
|
|
Committed |
|
|
Principal |
|
|
Value |
|
|
Portion(1) |
|
||||
MS Revolving Credit Facility |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||
The components of interest expense for the three and six months ended June 30, 2024 were as follows:
($ in thousands) |
|
For the Three Months Ended June 30, 2024 |
|
|
|
For the Six Months Ended June 30, 2024 |
|
|
||
Stated interest expense |
|
$ |
— |
|
|
|
$ |
— |
|
|
Unused/undrawn fees |
|
|
|
|
|
|
|
|
||
Amortization of debt issuance costs |
|
|
|
|
|
|
|
|
||
Administration fees |
|
|
|
|
|
|
|
|
||
Total Interest Expense |
|
$ |
|
|
|
$ |
|
|
||
Average interest rate |
|
|
|
% |
|
|
|
% |
||
Average daily borrowings |
|
$ |
— |
|
|
|
$ |
— |
|
|
MS Revolving Credit Facility
On February 22, 2024, Overland Financing MS, LLC, a wholly-owned financing subsidiary of the Company, entered into a senior secured revolving credit facility (the “MS Revolving Credit Facility”) with Morgan Stanley Senior Funding Inc. (“MS”). MS serves as the administrative agent, Wilmington Trust, National Association, serves as collateral agent, account bank and collateral custodian and the Company serves as a servicer under the MS Revolving Credit Facility. On June 6, 2024, certain terms, including the applicable margins, in the MS Revolving Credit Facility were amended. Such amendment is filed as Exhibit 10.1 to this quarterly report on Form 10-Q.
Under the MS Revolving Credit Facility, MS has agreed to make available to Overland Financing MS, LLC, a revolving loan facility in the maximum principal amount of up to $
The initial commitment amount under the MS Revolving Credit Facility will remain undrawn until the earlier of (i) the day following the date that the investors in the Company have fully funded the first capital call made by the Company and (ii) April 1, 2024. As of June 30, 2024,
18
The period during which Overland Financing MS, LLC may make borrowings under the MS Revolving Credit Facility expires on
As of June 30, 2024, the Company had recorded $
In the normal course of business, the Company may enter into contracts that provide a variety of general indemnifications. Any exposure to the Company under these arrangements could involve future claims that may be made against the Company. Currently, no such claims exist or are expected to arise, and accordingly, the Company has
The Company and the Advisor have entered into an Expense Support Agreement. For the period February 10, 2023 through June 30, 2024, in addition to the amounts included in payable to affiliates on the consolidated statements of assets and liabilities, $
The Company’s investment portfolio may contain debt investments that are in the form of revolving 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. Unfunded portfolio company commitments and funded debt investments are presented on the consolidated schedule of investments at fair value. Unrealized appreciation or depreciation, if any, is included in the consolidated statements of assets and liabilities and the change in unrealized appreciation or depreciation, if any, is included in net change in unrealized appreciation (depreciation) in the consolidated statements of operations.
The Company had the following outstanding commitments to investments as of the following period:
($ in thousands) |
|
Commitment Type |
|
Commitment |
|
Unfunded |
|
|
Fair Value as of |
|
||
Triwest Healthcare Alliance Corp |
|
Delayed Draw Term Loan |
|
|
$ |
|
|
$ |
( |
) |
||
Total Unfunded Portfolio Company |
|
|
|
|
$ |
|
|
$ |
( |
) |
||
The Company is offering Common Shares on a continuous basis (the “Private Offering”) pursuant to the terms set forth in subscription agreements that it expects to enter into with investors in connection with the Private Offering (each, a “Subscription Agreement”). Although the Common Shares in the Private Offering are being sold under the exemption provided by Section 4(a)(2) of the Securities Act of 1933 (the “Securities Act”) only to investors that are “accredited investors” in accordance with Rule 506 of Regulation D promulgated under the Securities Act, and other exemptions of similar import in the laws of the states and jurisdictions where the offering will be made, there can be no assurance that it will not need to suspend the continuous offering for various reasons, including but not limited to regulatory review from the SEC and various state regulators, to the extent applicable.
19
Each investor in the Private Offering will make a capital commitment (a “Capital Commitment”) to purchase Common Shares pursuant to a Subscription Agreement. During the Commitment Period, investors in the Private Offering will be required to fund drawdowns to purchase Common Shares up to the amount of their respective Capital Commitment on an as-needed basis each time the Company delivers a drawdown notice to its investors. The Commitment Period will continue until the five-year anniversary of the date on which holders of the Common Shares are required to fund their initial drawdown (the “Commencement Date”). The Commencement Date occurred during the second quarter of 2024.
The Company is authorized to issue an unlimited number of Common Shares. As of June 30, 2024, the Company had issued
The following table summarizes the total shares issued and aggregate offering proceeds related to the Company's capital drawdowns delivered pursuant to the Subscription Agreement as of June 30, 2024.
($ in thousands, except shares) |
|
Number of |
|
|
Aggregate |
|
||
Share Issuance Date |
|
Shares Issued |
|
|
Offering Proceeds |
|
||
31-Dec-23 |
|
|
|
|
$ |
|
||
7-May-24 |
|
|
|
|
|
|
||
Total |
|
|
|
|
$ |
|
||
The following table sets forth the computation of basic and diluted earnings per share during the three and six months ended June 30, 2024:
($ in thousands, except shares and per share data) |
|
For the Three Months Ended June 30, 2024 |
|
|
For the Six Months Ended |
|
||
Net increase (decrease) in net assets from operations |
|
$ |
( |
) |
|
$ |
( |
) |
Weighted average shares outstanding |
|
|
|
|
|
|
||
Earnings per share |
|
$ |
( |
) |
|
$ |
( |
) |
20
The following are the financial highlights for the six months ended June 30, 2024:
($ in thousands, except share and per share data) |
|
For the Six Months Ended June 30, |
|
|
|
|
|
2024 |
|
|
|
Per Share Data: |
|
|
|
||
Net assets, beginning of period |
|
$ |
|
|
|
Net investment income (1) |
|
|
|
|
|
Net realized gains (losses) and change in unrealized appreciation (depreciation) (2) |
|
|
( |
) |
|
Net increase (decrease) in net assets from operations |
|
|
( |
) |
|
Distributions declared from net investment income (3) |
|
|
— |
|
|
Issuance of shares in connection with our DRP program |
|
|
— |
|
|
Total increase (decrease) in net assets |
|
|
— |
|
|
Net assets, end of period |
|
$ |
|
|
|
Shares outstanding, end of period |
|
|
|
|
|
Total return based on NAV (4) |
|
|
( |
) |
% |
|
|
|
|
|
|
Ratios: |
|
|
|
|
|
Expenses before expense support to average net assets (5)(6) |
|
|
|
% |
|
Expenses after expense support to average net assets (5)(6) |
|
|
10.08 |
|
% |
Net investment income to average net assets (6) |
|
|
|
% |
|
Portfolio turnover rate (7) |
|
|
|
% |
|
|
|
|
|
|
|
Supplemental Data: |
|
|
|
|
|
Net assets, end of period |
|
$ |
|
|
|
Total capital commitments, end of period |
|
$ |
|
|
|
Ratios of total contributed capital to total committed capital, |
|
|
|
% |
|
Average debt outstanding |
|
$ |
— |
|
|
Asset coverage ratio (8) |
|
N/A |
|
|
|
There have been no subsequent events that occurred during such period that would require disclosure in, or would be required to be recognized in, the consolidated financial statements as of June 30, 2024, except as discussed below.
21
Pursuant to a capital drawdown notice, the Company issued and sold approximately
On July 10, 2024, the Company entered into a Revolving Credit Agreement (together with the exhibits and schedules thereto, the “SMTB Credit Agreement”) among the Company, as the initial borrower, Overland Advantage Feeder Fund, L.P., as the guarantor (the “Guarantor”), Overland Advantage Feeder Fund GP Ltd., as the general partner of the Guarantor, Sumitomo Mitsui Trust Bank, Limited, New York Branch (“SMTB”), as administrative agent, arranger and a lender, and NatWest Markets PLC, as a lender, which is structured as a revolving credit facility secured by a first-priority interest in the capital commitments of the Company’s shareholders (including the Guarantor) and the Guarantor’s shareholders, and certain related assets (the “SMTB Credit Facility”), which is filed as Exhibit 10.2 to this quarterly report on Form 10-Q. Under the SMTB Credit Facility, the Company may borrow up to a maximum of $
Subsequent to the end of the quarter, the Company used the MS Facility to fund purchases of investments and had $
22
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The information contained in this section should be read in conjunction with “Item 1. Financial Statements.” This discussion contains forward-looking statements, which relate to future events, our future performance or financial condition and involves numerous risks, uncertainties and other factors outside of our control including, but not limited to, those set forth herein under “Forward-Looking Statements” and under “Risk Factors” in Item 1A of the Registration Statement (as defined below). Actual results could differ materially from those implied or expressed in any forward-looking statements.
Overview
Overland Advantage (the “Company,” “we,” “our,” or “us”) is a Delaware statutory trust structured as an externally managed, non-diversified closed-end management investment company. The Company has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company also has elected to be treated as a Regulated Investment Company (“RIC”) for U.S. federal income tax purposes under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).
The Company’s investment objective is to generate attractive risk-adjusted returns, predominantly in the form of current income, with select investments exhibiting the ability to capture long-term capital appreciation. The Company’s investment strategy is primarily focused on newly-originated, privately-negotiated senior secured term loans in middle market non-sponsor companies, which are companies that are not backed by a private equity firm or other professional equity investor, and sponsor-owned companies, which are companies backed by such firm or person. Though no assurance can be given that the Company’s investment objective will be achieved, and investment results may vary substantially on a monthly, quarterly and annual basis, the Company believes that the Company’s investment objective can be achieved by primarily investing in newly-originated, privately-negotiated senior secured term loans in middle market non-sponsor and sponsor-owned companies with the potential of also investing in unsecured loans, subordinated loans, mezzanine loans and equity-related securities including warrants, preferred stock and similar forms of senior equity, which may or may not be convertible into a portfolio company’s common equity.
In furtherance of its investment objective, the Company may also make investments in syndicated loans and other liquid credit opportunities, including in publicly traded debt instruments and other instruments that are not directly originated. The Company may invest without limit in originated or syndicated debt. The Company will target the following investment assets: (i) middle market corporate non-sponsor and sponsor owned companies; (ii) asset-based lending; and (iii) bespoke solutions.
The Company expects that it will generally invest in floating rate instruments. The instruments in which the Company invests are not typically rated by any rating agency, but if these instruments were rated, they would likely receive a rating of below investment grade (that is, below BBB-or Baa3), which is an indication of having predominantly speculative characteristics with respect to the borrower’s ability to pay interest and repay principal. Such below investment grade securities are often referred to as “junk.”
The Company generally expects to invest in “middle market” companies with annual earnings before interest expense, income tax expense, depreciation and amortization, or “EBITDA,” ranging from $25 million to $100+ million, a substantial portion of which is expected to be non-sponsor owned. Notwithstanding the foregoing, the Advisor may determine whether companies qualify as “middle market” in its sole discretion, primarily based on analysis of the EBITDA of such companies, although other factors may be considered, and the Company may from time to time invest in larger or smaller companies if an attractive opportunity presents itself, especially when there are dislocations in the capital markets, including the high yield and syndicated loan markets. The investment size will vary with the size of the Company’s capital base. The Company may invest without limit in originated or syndicated debt.
23
Investments
Our level of investment activity may vary substantially from period to period depending on many factors, including the amount of debt and equity capital available to middle-market companies, the level of investment and capital expenditures of such companies, the level of merger and acquisition activity for such companies, the general economic environment, the amount of capital we have available to us and the competitive environment for the type of investments we make.
As a BDC, we may not acquire any assets other than “qualifying assets” specified in the 1940 Act, unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in “eligible portfolio companies.” Pursuant to rules adopted by the U.S. Securities and Exchange Commission (the “SEC”), “eligible portfolio companies” include certain companies that do not have any securities listed on a national securities exchange and public companies whose securities are listed on a national securities exchange but whose market capitalization is less than $250 million.
As a BDC, we may also invest up to 30% of our portfolio opportunistically in “non-qualifying” portfolio investments, such as investments in non-U.S. companies.
In addition, we may invest in securities that are rated below investment grade by rating agencies or that would be rated below investment grade if they were rated. Below investment grade securities, which are often referred to as “junk” have predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. Such investments may also be difficult to value and are illiquid.
Revenues
We expect to generate revenues primarily through receipt of interest income from the investments we will hold. In addition, we expect to generate income from various loan origination and other fees, dividends and capital appreciation on either direct equity investments or equity interests obtained in connection with originating loans, such as options, warrants or conversion rights, and capital gains on the sales of investments. The companies in which we invest use our capital for a variety of reasons, including to support organic growth, to fund changes of control, to fund acquisitions, to make capital investments and for refinancing and recapitalizations. Leverage will be utilized to help the Company meet its investment objective. Any such leverage would be expected to increase the total capital available for investment by the Company.
Expenses
The Company will bear expenses relating to the organization of the Company and the private offering of Common Shares (the “Private Offering”) and any subsequent offering of common share of beneficial interest, par value $0.001 per share, (the “Common Shares”). Organizational expenses include, without limitation, the cost of formation, including legal fees related to the creation and organization of the Company and its subsidiaries, its and their related documents of organization and the Company’s election to be regulated as a BDC. Offering expenses include, without limitation, legal, printing and other offering and marketing costs, including the fees of professional advisors, those associated with the preparation of the Company’s registration statement on Form 10, as well as the preparation of a registration statement in connection with any subsequent offering of Common Shares, as well as the expenses of Centerbridge Partners, L.P., a Delaware limited partnership (together with its affiliates, as applicable, “Centerbridge”) and a subsidiary of Wells Fargo & Company (together with its subsidiaries, “Wells Fargo”) in negotiating and documenting other arrangements with the initial investors of the Company.
The Company will reimburse Centerbridge Services Group, LLC (the “Administrator”), a wholly-owned subsidiary of Centerbridge Partners, L.P., for its costs and expenses, which may include an allocable portion of overhead incurred by the Administrator in performing its obligations under the administration agreement (the “Administration Agreement”), including but not limited to rent, the fees and expenses associated with performing compliance functions, and the Company's allocable portion of the costs of its Chief Financial Officer, Chief Compliance Officer, any of their respective staff who provide services to the Company, operations staff who provide services to the Company, and any internal audit staff, to the extent internal audit performs a role in the Company's internal control assessment. The reimbursement shall be an amount equal to the Administrator's actual cost; and provided, further, that such costs are reasonably allocated to the Company on the basis of assets, revenues, estimates, time records or other method conforming with generally accepted accounting principles. Any sub-administrator will separately be compensated for performing sub-administrative services under the sub-administration agreement and the cost of such compensation, and any other costs or expenses under such agreement, will be in addition to the cost of any other services borne by the Company under the Administration Agreement.
The Company’s primary operating expenses include the payment of fees to Overland Advisors, LLC (the “Advisor”) under the investment advisory agreement (“Investment Advisory Agreement”), the Company’s allocable portion of overhead expenses under the Administration Agreement, and all other costs and expenses relating to the Company’s operations and transactions, including: operational and organizational costs; the cost of calculating the Company’s net asset value, including the cost and expenses of
24
third-party valuation services; fees and expenses payable to third parties relating to evaluating, making and disposing of investments, including the Advisor’s or its affiliates’ travel expenses, research costs and out-of-pocket fees and expenses associated with performing due diligence and reviews of prospective investments, monitoring investments and, if necessary, enforcing the Company’s rights; the expenses of Centerbridge and Wells Fargo in negotiating and documenting the Wells Fargo Sourcing Arrangement; the fees and expenses relating to the development, licensing, implementation, installation, servicing and maintenance of, and consulting with respect to computer software, technology and information technology systems used in connection with the management of the Company’s investments including, without limitation, costs and expenses of technology service providers and related software, hardware and subscription-based services utilized in connection with the Company’s investment and operational activities, including but not limited to, the origination and monitoring of investments; expenses related to the maintenance of registered offices and corporate licensing; corporate licensing and other professional fees (including, without limitation, expenses of consultants (including, but not limited to, consulting fees for, and other amounts payable to, senior or special advisors, certain other advisors, operating partners and other similar professionals incurred by a client for the benefit of such client or such client’s investments or portfolio companies) and other experts); bank service fees; withholding and transfer fees; loan administration costs; costs incurred in connection with trademarks or other intellectual property; interest payable on debt and other borrowing costs, if any, incurred to finance the Company’s investments; costs of effecting sales and repurchases of the Company’s Common Shares and other securities; the management fee and any incentive fee payable under the Investment Advisory Agreement; distributions on the Company’s Common Shares; transfer agent and custody fees and expenses; the allocated costs incurred by the Administrator in providing managerial assistance to those portfolio companies that request it; other expenses incurred by the Administrator; brokerage fees and commissions; sourcing or finder’s fees; costs and expenses of distributing and placing interests in the Common Shares; federal, state and foreign registration fees (which can arise, for example, if a local jurisdiction requires a license or other registration to do business); U.S. federal, state and local taxes; independent trustees’ fees and expenses; costs associated with the Company’s reporting, legal, regulatory and compliance obligations, including, without limitation, under the 1940 Act and applicable U.S. federal, state, local, or other laws and regulations; costs of any reports, proxy statements or other notices or communications to Shareholders, including, without limitation, printing costs, costs of technology licensing and maintenance of the website for the benefit of Shareholders and any Shareholder portal (including any database or other forum hosted on a website designated by the Company) or due diligence platform; costs and expenses in connection with monitoring (including with respect to ESG, cyber security, anti-corruption and similar functions), complying with and performing any provisions in agreement with investors; anti-money laundering and sanctions monitoring expenses; costs of holding Shareholder meetings and meetings of the Company’s board of trustees, including, without limitation, legal, travel, lodging and meal expenses; board fees of the Company’s board of trustees; the Company’s fidelity bond; trustees and officers’ errors and omissions and other liability insurance, and any other insurance expenses; costs associated with obtaining an order for SEC co-investment exemptive relief; litigation, indemnification and other non-recurring or extraordinary expenses (whether actual, pending or threatened) or any costs arising therefrom, and any judgments, fines, remediations or settlements paid in connection therewith; fees, costs and expenses related to any governmental inquiry, investigation or proceeding directly or indirectly involving or otherwise applicable to the Company, Advisor or any of their respective affiliates in connection with the activities of the Company or any investment; direct and indirect costs and expenses of administration and operation, including printing, mailing, reporting, publishing, long distance telephone, staff, accounting, audit, compliance, tax and legal costs; accounting, audit and tax advice and preparation expenses (including preparation costs of financial statements, tax returns and reports to investors); fees and expenses associated with marketing efforts (including, but not limited to, reasonable out-of-pocket expenses incurred by the Advisor and its affiliates in attending meetings with Shareholders and/or prospective Shareholders); dues, fees and charges of any trade association of which the Company is a member; the costs of any private or public offerings of the Common Shares and other securities, including registration and listing fees, if any, and any other filing and registration fees; other expenses related to the purchase, monitoring, syndication of co-investments, sale, settlement, custody or transmittal of the Company’s assets (directly or through financing alternative investment subsidiaries and/or trading subsidiaries which the Company may from time to time establish); windup and liquidation expenses and all other expenses reasonably incurred by the Company or the Administrator in connection with administering the Company’s business (including payments made to third-party providers of goods or services) and not required to be borne by the Advisor or another service provider pursuant to any agreement with the Company.
We have entered into an Expense Support and Conditional Reimbursement Agreement (the “Expense Support Agreement”) with the Advisor, under which the Advisor has contractually agreed to pay certain operating expenses of the Company on the Company’s behalf, such that these expenses do not exceed 0.375% (1.50% on an annualized basis) of the Company’s applicable quarter-end net asset value as described in “Item 1. Financial Statements—Notes to Consolidated Financial Statements—Note 4. Agreements and Related Party Transactions.”
25
Recent Developments
Pursuant to a capital drawdown notice, the Company issued and sold approximately 411,547 Common Shares on July 1, 2024 for an aggregate offering price of approximately $10.3 million. After the drawdown, the Company had approximately $1.9 billion in unfunded Capital Commitments.
On July 10, 2024, the Company, entered into a Revolving Credit Agreement (together with the exhibits and schedules thereto, (the “SMTB Credit Agreement”) among the Company, as the initial borrower, Overland Advantage Feeder Fund, L.P., as the guarantor (the “Guarantor”), Overland Advantage Feeder Fund GP Ltd., as the general partner of the Guarantor, Sumitomo Mitsui Trust Bank, Limited, New York Branch, as administrative agent, arranger and a lender, and NatWest Markets PLC, as a lender, which is structured as a revolving credit facility secured by a first-priority interest in the capital commitments of the Company’s shareholders (including the Guarantor) and the Guarantor’s shareholders, and certain related assets (the “SMTB Credit Facility”), which is filed as Exhibit 10.2 to this quarterly report on Form 10-Q. Under the SMTB Credit Facility, may borrow up to a maximum of $100 million.
As previously disclosed, the Company is seeking an order from the United States Securities and Exchange Commission (“SEC”) in order to co-invest alongside other funds/vehicles managed by the Advisor or its affiliates, or alongside the Advisor or its affiliates in a principal capacity, in a manner consistent with the Company’s investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors. On July 25, 2024, the SEC issued a notice of the application providing that an order granting the exemptive relief described in the Company’s application will be granted unless the SEC orders a hearing on or prior to August 19, 2024. Although a notice for the order has been issued, there can be no assurance when or if the SEC will grant the new order in response to our application, particularly in the event a public hearing is requested or required at the SEC prior to any formal action on our application
Portfolio and Investment Activity
Our portfolio and investment activity during the three months ended June 30, 2024:
($ in thousands) |
|
Three Months Ended |
|
|
Investments made in portfolio companies |
|
$ |
349,843 |
|
Investments sold |
|
|
— |
|
Net activity before investment repayments |
|
|
349,843 |
|
Investment repayments |
|
|
(3,002 |
) |
Net investment activity |
|
$ |
346,841 |
|
|
|
|
|
|
Portfolio companies at beginning of period |
|
|
— |
|
Number of new portfolio companies |
|
46 |
|
|
Number of exited portfolio companies |
|
|
— |
|
Portfolio companies at end of period |
|
|
46 |
|
Our portfolio composition and weighted average yields as of June 30, 2024 was as follows:
($ in thousands) |
|
June 30, 2024 |
|
|
Portfolio composition, at fair value: |
|
|
|
|
First lien senior secured debt(1) |
|
$ |
344,676 |
|
Total Portfolio |
|
$ |
344,676 |
|
Weighted average yields, at amortized cost: |
|
|
|
|
First lien senior secured debt |
|
|
8.94 |
% |
Total Portfolio |
|
|
8.94 |
% |
Results of Operations
The Company commenced investment operations on May 7, 2024.
26
($ in thousands) |
|
Three Months Ended |
|
|
Total investment income |
|
$ |
3,393 |
|
Net expenses |
|
|
1,806 |
|
Net investment income |
|
|
1,587 |
|
Net realized gain (loss) |
|
|
— |
|
Net unrealized appreciation (depreciation) |
|
|
(2,165 |
) |
Net increase (decrease) in net assets resulting from operations |
|
$ |
(578 |
) |
Net increase (decrease) in net assets resulting from operations can vary from period to period as a result of various factors, including acquisitions, the level of new investment commitments, the recognition of realized gains and losses and changes in unrealized appreciation and depreciation on the investment portfolio. As a result, comparisons may not be meaningful.
Investment Income
Investment income for the three months ended June 30, 2024
($ in thousands) |
|
Three Months Ended |
|
|
Investment Income |
|
|
|
|
Interest income |
|
$ |
3,393 |
|
Total Investment Income |
|
$ |
3,393 |
|
For the three months ended June 30, 2024, total investment income was $3.4 million, driven by our initial deployment of capital. The size of our investment portfolio at fair value was $344.7 million at June 30, 2024 and the weighted average yield on the debt and income producing portfolio at amortized cost was 8.94%.
Expenses
Expenses for the three months ended June 30, 2024 were as follows:
($ in thousands) |
|
Three Months Ended |
|
|
Interest and debt financing costs |
|
$ |
779 |
|
Amortization of offering costs |
|
|
713 |
|
Management fee |
|
|
345 |
|
Organizational expense |
|
|
— |
|
Other general and administrative expenses |
|
|
2,707 |
|
Professional fees |
|
|
404 |
|
Trustees' fees |
|
|
163 |
|
Total expenses |
|
$ |
5,111 |
|
Advisor expense support |
|
|
(3,305 |
) |
Net Expenses |
|
$ |
1,806 |
|
For the three months ended June 30, 2024, net expenses were $1.8 million, primarily attributable to interest and other debt expenses due to expenses covered by the Advisor under the Expense Support Agreement. Interest and other debt expenses were driven by unused and administrative fees and amortization of deferred debt costs at an annual cost of debt of 1.03%. Furthermore, the Company received $3.3 million in expense support from the Advisor. Such expenses may be subject to reimbursement from the Company in the future.
Financial Condition, Liquidity and Capital Resources
The Company intends to generate cash from (i) future offerings of the Company’s Common Shares or preferred shares, (ii) cash flows from operations and (iii) borrowings from banks or other lenders, including under the revolving credit facility (the “MS Revolving Credit Facility”) with Morgan Stanley Senior Funding Inc. (“MS”), as described in “Item 1. Financial Statements—Notes to Consolidated Financial Statements—Note 7. Borrowings.” The Company will seek to enter into bank debt, credit facility or other financing arrangements on at least customary market terms; however, the Company cannot commit to do so.
27
The Company’s primary use of cash will be for (i) investments in portfolio companies and other investments to comply with certain portfolio diversification requirements, (ii) the cost of operations (including paying the Advisor), (iii) debt service of any borrowings and (iv) cash distributions to the holders of the Company’s shares.
Equity Activity
On December 20, 2023, an affiliate of the Advisor contributed $10,000 ($25 per share) of capital to the Company in exchange for 400 shares of the Common Shares. In addition, as of June 30, 2024, the Company had executed subscription agreements for approximately $2.1 billion of Capital Commitments (as of which $1,9 billion remains unfunded as of June 30, 2024. On May 7, 2024, the Company had its initial closing and received capital contributions of approximately $194.0 million.
Contractual Obligations
We have entered into the Advisory Agreement with the Advisor to provide us with investment advisory services and the Administration Agreement with the Administrator to provide us with administrative services. We have also entered into the Expense Support Agreement with the Advisor to provide us with support with respect to certain expenses and subject to reimbursement. Payments for investment advisory services under the Investment Advisory Agreements, reimbursements under the Administration Agreement and support and reimbursements under the Expense Support Agreement are described in “Item 1. Financial Statements—Notes to Consolidated Financial Statements—Note 4. Agreements and Related Party Transactions.”
On February 22, 2024, the Company, through its wholly-owned financing subsidiary Overland Financing MS, LLC, entered into the MS Revolving Credit Facility. Under the MS Revolving Credit Facility, MS has agreed to make available to Overland Financing MS, LLC a revolving loan facility in the maximum principal amount of up to $300 million. On June 6, 2024, certain terms, including the applicable margins, in the MS Revolving Credit Facility were amended. As of June 30, 2024, no amounts had been drawn under the MS Revolving Credit Facility. See also “Item 1. Financial Statements—Notes to Consolidated Financial Statements—Note 7. Borrowings.”
From time to time in the future, we may establish one or more additional credit facilities or enter into other financing arrangements to facilitate investments and the timely payment of our expenses. It is anticipated that any such credit facilities will bear interest at floating rates at to-be-determined spreads over the Secured Overnight Financing Rate (“SOFR”), or an alternative reference rate. We cannot assure Shareholders that we will be able to enter into a credit facility on favorable terms or at all. In connection with a credit facility or other borrowings, lenders may require us to pledge assets, commitments and/or drawdowns (and the ability to enforce the payment thereof) and may ask to comply with positive or negative covenants that could have an effect on our operations.
Off-Balance Sheet Arrangements
Our investment portfolio contains and is expected to continue to contain debt investments in the form of delayed draw commitments, which require us to provide funding when requested by portfolio companies in accordance with underlying loan agreements. As of June 30, 2024, we held one unfunded delayed draw term loan with a principal amount of $50 million.
Critical Accounting Policies
There have been no material changes to our critical accounting policies discussed in the Amendment No. 2 to the Company’s registration statement on Form 10, as filed with the SEC on April 19, 2024 (the “Registration Statement”). Our critical accounting policies should be read in connection with our risk factors as described in the Registration Statement.
The preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets, and any other parameters used in determining such estimates could cause actual results to differ. Our critical accounting policies should be read in connection with our risk factors as described in “Item 1A. – Risk Factors” of the Registration Statement.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Valuation Risk
We primarily invest in illiquid debt and equity securities of private companies. Most of our investments will not have a readily available market price, and therefore, the Advisor, as the Company’s valuation designee appointed in accordance with Rule 2a-5 under the 1940 Act, will value these investments at fair value as determined in good faith based on, among other things, the input of the
28
Advisor’s valuation committee and independent third-party valuation firm(s), and in accordance with our valuation policy. There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we may realize amounts that are different from the amounts presented and such differences could be material.
Interest Rate Risk
We will be subject to financial market risks, including changes in interest rates. In addition, the MS Revolving Credit Facility is subject to floating interest rates. See “Item 1. Financial Statements—Notes to Consolidated Financial Statements—Note 4. Borrowings.” A rise in the general level of interest rates can be expected to lead to (i) higher interest income from our floating rate debt investments, (ii) value declines for fixed interest rate investments we may hold and (iii) higher interest expense in connection with our credit facilities. Since the majority of our investments consist of floating rating investments, an increase in interest rates could also make it more difficult for borrowers to repay their loans, and a rise in interest rates may also make it easier for the Advisor to meet or exceed the quarterly threshold for Income-Based Fee as described in “Item 1. Financial Statements—Notes to Consolidated Financial Statements—Note 4. Agreements and Related Party Transactions.”
The Federal Reserve commenced raising interest rates in March 2022. In a high interest rate environment, our cost of funds increases, which could reduce our net investment income if there is not a corresponding increase in interest income generated by our investment portfolio. The Federal Reserve left its benchmark rates steady in the first and second quarters of 2024, and it has indicated that any cuts to benchmark rates in the future will depend on better inflation reports. It is possible that the Federal Reserve’s tightening cycle could result the United States moving into a recession, which would likely decrease interest rates. A prolonged reduction in interest rates will reduce our gross investment income and could result in a decrease in our net investment income if such decreases in base rates, such as SOFR and other alternate rates, are not offset by corresponding increases in the spread over such base rate that we earn on any portfolio investments, a decrease in our operating expenses, or a decrease in the interest rate associated with our borrowings.
As of June 30, 2024, 100% of our debt portfolio investments bore interest at variable rates, which are generally SOFR and typically have durations of one to six months after which they reset to current market interest rates, and many of which are subject to interest rate floors. Further, our MS Revolving Credit Facility bear interest at SOFR rates with no interest rate floors.
The following table shows the estimated annual impact on net investment income of base rate changes in interest rates to our loan portfolio and outstanding debt as of June 30, 2024, assuming no changes in our investment and borrowing structure.
($ in thousands) |
|
Increase (Decrease) in |
|
|
Increase (Decrease) in |
|
|
Increase (Decrease) in |
|
|||
Basis Point Change |
|
Interest Income |
|
|
Interest expense |
|
|
Net Investment Income |
|
|||
Up 200 basis points |
|
$ |
6,940 |
|
|
$ |
— |
|
|
$ |
6,940 |
|
Up 100 basis points |
|
$ |
3,470 |
|
|
$ |
— |
|
|
$ |
3,470 |
|
Up 50 basis points |
|
$ |
1,735 |
|
|
$ |
— |
|
|
$ |
1,735 |
|
Down 50 basis points |
|
$ |
(1,735 |
) |
|
$ |
— |
|
|
$ |
(1,735 |
) |
Down 100 basis points |
|
$ |
(3,470 |
) |
|
$ |
— |
|
|
$ |
(3,470 |
) |
Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in the credit market, credit quality, size and composition of the assets on the consolidated statements of assets and liabilities and other business developments that could affect net increase in net assets resulting from operations, or net investment income. Accordingly, no assurances can be given that actual results would not differ materially from those shown above.
Because we borrow money to make investments, our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds as well as our level of leverage. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income or net assets.
We may hedge against interest rate and foreign currency fluctuations by using standard hedging instruments such as futures, options and forward contracts or our MS Revolving Credit Facility subject to the requirements of the 1940 Act and applicable commodities laws. While hedging activities may insulate us against adverse changes in interest rates and foreign currencies, they may also limit our ability to participate in the benefits of lower interest rates or higher exchange rates with respect to our portfolio of investments with fixed interest rates or investments denominated in foreign currencies. During the periods covered by this Quarterly Report on Form 10-Q, we did not engage in interest rate hedging activities or foreign currency derivatives hedging activities.
29
Item 4. Controls and Procedures.
As of June 30, 2024 (the end of the period covered by this report), in accordance with Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) and determined that our disclosure controls and procedures are effective as of the end of the period covered by the Quarterly Report on Form 10-Q and provide reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost- benefit relationship of such possible controls and procedures.
There have been no changes in our internal control over financial reporting that occurred during our fiscal quarter ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
30
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
We are not currently subject to any material pending legal proceedings. From time to time, we may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. Our business is also subject to extensive regulation, which may result in regulatory proceedings against us.
Item 1A. Risk Factors.
For information regarding factors that could affect our results of operations, financial condition and liquidity, see the risk factors discussed under the heading “Risk Factors” in the Registration Statement, as may be amended and supplemented from time to time. There have been no material changes to the risk factors previously disclosed in the Registration Statement. Additional risks and uncertainties are not currently known to us or that we currently deem to be immaterial also may adversely affect our business, financial condition and/or operating results. During the fiscal quarter ended June 30, 2024 there were no material changes from the risk factors set forth in our Registration Statement.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Except as previously reported by the Company on its current reports on Form 8-K, The Company did not sell any securities during the period covered by this Quarterly Report on Form 10-Q that were not registered under the Securities Act.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
Rule 10b5-1 Trading Plans
During the fiscal quarter ended June 30, 2024, none of our trustees or executive officers
31
Item 6. Exhibits.
The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the six months ended June 30, 2024 (and are numbered in accordance with Item 601 of Regulation S-K under the Securities Act).
Exhibit Number |
|
Description |
3.1 |
|
|
3.2 |
|
|
3.3 |
|
|
10.1* |
|
|
10.2 |
|
|
31.1* |
|
|
31.2* |
|
|
32.1* |
|
|
32.2* |
|
|
101.INS |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
101.SCH |
|
Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents |
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document)
|
* Filed herewith.
32
SIGNATURES
Pursuant to the requirements 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.
|
Overland Advantage |
|
|
|
|
Date: August 14, 2024 |
By: |
/s/ Gavin R. Baiera |
|
|
Name: Gavin R. Baiera |
|
|
Title: Chief Executive Officer |
|
|
|
|
|
|
|
|
|
Date: August 14, 2024 |
By: |
/s/ Kimberly A. Terjanian |
|
|
Name: Kimberly A. Terjanian |
|
|
Title: Chief Financial Officer and Treasurer |
33