BlackRock Capital Investment Corp - FORM 10-Q

Attached files

file	filename
EX-32 - CERTIFICATION OF CEO AND CFO PURSUANT TO SECTION 906 - BlackRock Capital Investment Corp	dex32.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C SECTION 1350 - BlackRock Capital Investment Corp	dex311.htm
EX-10.1 - UNDERWRITING AGREEMENT - BlackRock Capital Investment Corp	dex101.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C SECTION 1350 - BlackRock Capital Investment Corp	dex312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2010

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from to

Commission file number 001-33559

BLACKROCK KELSO CAPITAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)


Delaware		20-2725151
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

40 East 52^nd Street, New York, NY		10022
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code: 212-810-5800

Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report.

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer þ Non-Accelerated filer ¨ (Do not check if a smaller reporting company)

Smaller reporting company ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ¨ No þ

The number of shares of the Registrant’s common stock, $.001 par value per share, outstanding at November 3, 2010 was 71,669,638.

BLACKROCK KELSO CAPITAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2010

Table of Contents


	INDEX	PAGE NO.

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Statements of Assets and Liabilities as of September 30, 2010 and December 31, 2009 (unaudited)		4

	Statements of Operations for the three and nine months ended September 30, 2010 and 2009 (unaudited)		5

	Statements of Changes in Net Assets for the nine months ended September 30, 2010 and 2009 (unaudited)		6

	Statements of Cash Flows for the nine months ended September 30, 2010 and 2009 (unaudited)		7

	Schedules of Investments as of September 30, 2010 and December 31, 2009 (unaudited)		8

	Notes to Financial Statements (unaudited)		22

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		35

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		43

Item 4.	Controls and Procedures		44

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings		44

Item 1A.	Risk Factors		44

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		44

Item 3.	Defaults Upon Senior Securities		44

Item 4.	[Reserved]		44

Item 5.	Other Information		44

Item 6.	Exhibits		45

SIGNATURES			46

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report, and other statements that we may make, may contain forward-looking statements with respect to future financial or business performance, strategies or expectations. Forward-looking statements are typically identified by words or phrases such as “trend,” “opportunity,” “pipeline,” “believe,” “comfortable,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “potential,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve” and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may” or similar expressions.

Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made, and we assume no duty to and do not undertake to update forward-looking statements. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance.

In addition to factors previously identified elsewhere in the reports BlackRock Kelso Capital Corporation has filed with the Securities and Exchange Commission (the “SEC”), the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance:

•

our future operating results;

•

our business prospects and the prospects of our portfolio companies;

•

the impact of investments that we expect to make;

•

our contractual arrangements and relationships with third parties;

•

the dependence of our future success on the general economy and its impact on the industries in which we invest;

•

the ability of our portfolio companies to achieve their objectives;

•

our expected financings and investments;

•

the adequacy of our cash resources and working capital, including our ability to obtain continued financing on favorable terms;

•

the timing of cash flows, if any, from the operations of our portfolio companies;

•

the impact of increased competition;

•

the ability of BlackRock Kelso Capital Advisors LLC, our investment advisor (the “Advisor”), to locate suitable investments for us and to monitor and administer our investments;

•

potential conflicts of interest in the allocation of opportunities between us and other investment funds managed by the Advisor or its affiliates;

•

the ability of the Advisor to attract and retain highly talented professionals;

•

fluctuations in foreign currency exchange rates; and

•

the impact of changes to tax legislation and, generally, our tax position.

PART 1. FINANCIAL INFORMATION

In this Quarterly Report, “Company”, “we”, “us” and “our” refer to BlackRock Kelso Capital Corporation unless the context states otherwise.

Item 1.

Financial Statements

BlackRock Kelso Capital Corporation

Statements of Assets and Liabilities (Unaudited)


	September 30, 2010			December 31, 2009
Assets:
Investments at fair value:
Non-controlled, non-affiliated investments (amortized cost of $851,812,860 and $963,463,604)	$	711,657,715		$	810,035,780
Non-controlled, affiliated investments (amortized cost of $63,895,434 and $63,942,195)		59,357,161			26,793,989
Controlled investments (amortized cost of $51,118,995 and $27,414,204)		62,732,218			9,912,276

Total investments at fair value (amortized cost of $966,827,289 and $1,054,820,003)		833,747,094			846,742,045
Cash and cash equivalents		53,254,453			5,048,136
Cash denominated in foreign currency (cost of $1,282,106 and $759,760)		1,296,782			759,765
Unrealized appreciation on forward foreign currency contracts		—			203,998
Interest receivable		12,016,427			18,441,527
Dividends receivable		9,102,321			6,620,903
Prepaid expenses and other assets		8,056,971			1,710,105

Total Assets	$	917,474,048		$	879,526,479

Liabilities:
Payable for investments purchased	$	45,590,000		$	557,483
Unrealized depreciation on forward foreign currency contracts		434,560			—
Credit facility payable		205,500,000			296,000,000
Interest payable on credit facility		148,962			959,458
Dividend distributions payable		20,963,513			18,072,063
Base management fees payable		4,049,347			4,547,129
Incentive management fees payable		—			16,818,602
Accrued administrative services		204,630			201,728
Other accrued expenses and payables		1,505,342			2,807,254

Total Liabilities		278,396,354			339,963,717

Net Assets:
Common stock, par value $.001 per share, 200,000,000 and 100,000,000 common shares authorized, 66,472,657 and 57,436,875 issued and 65,510,978 and 56,475,196 outstanding		66,473			57,437
Paid-in capital in excess of par		914,223,076			826,617,395
Undistributed net investment income		19,727,731			19,463,949
Accumulated net realized loss		(156,017,825	)		(93,279,572	)
Net unrealized depreciation		(133,495,861	)		(207,870,547	)
Treasury stock at cost, 961,679 and 961,679 shares held		(5,425,900	)		(5,425,900	)

Total Net Assets		639,077,694			539,562,762

Total Liabilities and Net Assets	$	917,474,048		$	879,526,479

Net Asset Value Per Share	$	9.76		$	9.55

The accompanying notes are an integral part of these financial statements.

BlackRock Kelso Capital Corporation

Statements of Operations (Unaudited)


	Three months ended September 30, 2010			Three months ended September 30, 2009			Nine months ended September 30, 2010			Nine months ended September 30, 2009
Investment Income:
From non-controlled, non-affiliated investments:
Interest	$	21,756,798		$	27,636,401		$	72,077,951		$	90,126,212
Dividends		543,026			451,908			1,588,281			1,322,664
Other income		—			—			37,500			—
From non-controlled, affiliated investments:
Interest		1,637,598			753,690			4,722,438			1,668,208
Dividends		327,156			279,079			943,730			820,493
From controlled investments:
Interest		553,592			238,408			1,458,324			672,837

Total investment income		24,818,170			29,359,486			80,828,224			94,610,414


Expenses:
Base management fees		4,049,347			4,555,811			12,522,832			13,951,061
Incentive management fees		—			—			493,951			—
Interest and credit facility fees		1,748,712			1,456,369			4,570,476			5,004,980
Amortization of debt issuance costs		713,305			172,031			1,469,481			511,520
Investment advisor expenses		394,306			341,872			1,178,267			1,028,939
Professional fees		394,589			342,878			790,820			949,444
Administrative services		203,182			174,490			681,892			605,525
Insurance		123,409			152,181			458,020			413,406
Director fees		93,500			84,083			281,169			268,238
Other		286,568			298,190			884,162			808,935

Net expenses		8,006,918			7,577,905			23,331,070			23,542,048

Net Investment Income		16,811,252			21,781,581			57,497,154			71,068,366

Realized and Unrealized Gain (Loss):
Net realized gain (loss):
Non-controlled, non-affiliated investments		400,317			(55,331,272	)		(26,685,901	)		(62,394,229	)
Non-controlled, affiliated investments		—			—			(36,221,865	)		12,240
Controlled investments		—			—			2,515			—
Foreign currency		875,621			(981,390	)		166,998			(2,468,431	)

Net realized gain (loss)		1,275,938			(56,312,662	)		(62,738,253	)		(64,850,420	)

Net change in unrealized appreciation or depreciation on:
Non-controlled, non-affiliated investments		(9,861,152	)		82,569,638			9,255,775			71,526,349
Non-controlled, affiliated investments		259,096			(13,462,326	)		36,626,837			(22,434,442	)
Controlled investments		9,594,214			(1,969,822	)		29,115,151			(4,320,733	)
Foreign currency translation		(1,763,644	)		(1,460,443	)		(623,077	)		(88,524	)

Net change in unrealized appreciation or depreciation		(1,771,486	)		65,677,047			74,374,686			44,682,650

Net realized and unrealized gain (loss)		(495,548	)		9,364,385			11,636,433			(20,167,770	)

Net Increase in Net Assets Resulting from Operations	$	16,315,704		$	31,145,966		$	69,133,587		$	50,900,596

Net Investment Income Per Share	$	0.26		$	0.39		$	0.96		$	1.28

Earnings Per Share	$	0.25		$	0.55		$	1.15		$	0.91

Basic and Diluted Weighted-Average Shares Outstanding		65,509,414			56,338,835			59,898,128			55,738,396
Dividends Declared Per Share	$	0.32		$	0.16		$	0.96		$	0.48

The accompanying notes are an integral part of these financial statements.

BlackRock Kelso Capital Corporation

Statements of Changes in Net Assets (Unaudited)


	Nine months ended September 30, 2010			Nine months ended September 30, 2009
Net Increase in Net Assets Resulting from Operations:
Net investment income	$	57,497,154		$	71,068,366
Net realized gain (loss)		(62,738,253	)		(64,850,420	)
Net change in unrealized appreciation or depreciation		74,374,686			44,682,650

Net increase in net assets resulting from operations		69,133,587			50,900,596

Dividend Distributions to Stockholders from:
Net investment income		(57,233,372	)		(26,749,354	)

Capital Share Transactions:
Proceeds from shares sold		88,406,250			—
Less offering costs		(4,514,243	)		—
Reinvestment of dividends		3,722,710			8,164,444
Purchases of treasury stock		—			(2,234,892	)

Net increase in net assets resulting from capital share transactions		87,614,717			5,929,552

Total Increase in Net Assets		99,514,932			30,080,794
Net assets at beginning of period		539,562,762			510,295,501

Net assets at end of period	$	639,077,694		$	540,376,295

Capital Share Activity:
Shares issued from subscriptions		8,625,000			—
Shares issued from reinvestment of dividends		410,782			1,637,585
Purchases of treasury stock		—			(583,572	)

Total increase in shares		9,035,782			1,054,013

Undistributed net investment income at end of period	$	19,727,731		$	48,174,028

The accompanying notes are an integral part of these financial statements.

BlackRock Kelso Capital Corporation

Statements of Cash Flows (Unaudited)


	Nine months ended September 30, 2010			Nine months ended September 30, 2009
Operating Activities:
Net increase in net assets resulting from operations	$	69,133,587		$	50,900,596
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities:
Proceeds from dispositions of short-term investments—net		358,276			—
Purchases of investments		(321,716,307	)		(38,173,072	)
Purchases of foreign currency—net		171,325			(3,989,829	)
Proceeds from sales/repayments of investments		354,230,907			72,248,410
Net change in unrealized appreciation or depreciation on investments		(74,997,763	)		(44,771,174	)
Net change in unrealized appreciation or depreciation on foreign currency translation		623,077			88,524
Net realized loss (gain) on investments		62,905,251			62,381,989
Net realized loss (gain) on foreign currency		(166,998	)		2,468,431
Amortization of premium/discount—net		(7,788,930	)		(4,023,105	)
Amortization of debt issuance costs		1,469,481			511,520
Decrease (increase) in interest receivable		6,425,100			(196,192	)
Increase in dividends receivable		(2,481,418	)		(2,012,815	)
Increase in prepaid expenses and other assets		(14,949	)		(92,086	)
Increase in payable for investments purchased		45,032,517			845,137
Decrease in interest payable on credit facility		(810,496	)		(561,814	)
Decrease in base management fees payable		(497,782	)		(1,169,218	)
Decrease in incentive management fees payable		(16,818,602	)		—
Increase in accrued administrative services payable		2,902			19,512
Increase (decrease) in other accrued expenses and payables		(1,301,912	)		9,080

Net cash provided by operating activities		113,757,266			94,483,894

Financing Activities:
Net proceeds from issuance of common stock		83,892,007			—
Dividend distributions paid		(50,619,212	)		(29,032,636	)
Borrowings under credit facility		229,600,000			42,200,000
Repayments under credit facility		(320,100,000	)		(120,700,000	)
Increase in deferred debt issuance costs		(7,801,398	)		—
Purchases of treasury stock		—			(2,234,892	)

Net cash used in financing activities		(65,028,603	)		(109,767,528	)

Effect of exchange rate changes on cash and cash equivalents		14,671			10,046

Net increase (decrease) in cash		48,743,334			(15,273,588	)
Cash and cash equivalents, beginning of period		5,807,901			15,786,271

Cash and cash equivalents, end of period	$	54,551,235		$	512,683

Supplemental disclosure of cash flow information and non-cash financing activities:
Cash paid during period for:
Interest	$	4,490,212		$	5,340,869
Taxes	$	1,110,381		$	500,051
Dividend distributions reinvested	$	3,722,710		$	8,164,444

The accompanying notes are an integral part of these financial statements.

BlackRock Kelso Capital Corporation

Schedules of Investments (Unaudited)

September 30, 2010


Portfolio Company	Industry	Principal Amount or Number of Shares/Units		Cost(a)		Fair Value(b)
Senior Secured Notes—13.5%
AGY Holding Corp., Second Lien, 11.00%, 11/15/14	Glass Yarns/Fibers	$	23,500,000	$	23,175,641	$	20,116,000
American Residential Services L.L.C. et al., Second Lien, 12.00%, 4/15/15, acquired 4/9/10(c)	HVAC/ Plumbing Services		40,000,000		39,829,485		40,000,000
TriMark USA, Inc., Second Lien, 11.50% (LIBOR + 1.75% cash, 2.00% PIK), 11/30/13	Food Service Equipment		31,818,047		31,818,047		26,377,161

Total Senior Secured Notes					94,823,173		86,493,161

Unsecured Debt—0.7%
Big Dumpster Acquisition, Inc., 13.50% PIK, 7/5/15	Waste Management Equipment		47,431,581		44,806,169		2,229,284
Marsico Parent Holdco, LLC et al., 12.50% PIK, 7/15/16, acquired 11/28/07(c)	Financial Services		12,370,625		11,776,838		1,645,293
Marsico Parent Superholdco, LLC et al., 14.50% PIK, 1/15/18, acquired 11/28/07(c)	Financial Services		8,669,585		7,847,363		580,862

Total Unsecured Debt					64,430,370		4,455,439

Subordinated Debt—33.9%
A & A Manufacturing Co., Inc., 19.00% (12.00% cash, 7.00% PIK), 4/2/14	Protective Enclosures		21,225,382		21,225,382		18,996,717
Aspen Marketing Holdings, Inc., 13.00%, 8/12/16	Marketing Services		50,000,000		50,000,000		50,000,000
Conney Safety Products, LLC, 16.00%, 10/1/14(d)	Safety Products		30,582,734		29,302,905		29,359,425
Mattress Giant Corporation, 11.00% PIK, 12/31/12(d)	Bedding —Retail		6,233,052		3,582,093		1,564,496
MediMedia USA, Inc., 11.38%, 11/15/14, acquired multiple dates(c)	Information Services		8,000,000		8,051,061		7,504,000
MedQuist Inc. et al., 13.00%, 10/15/16	Medical Transcription		43,000,000		43,000,000		43,000,000
The Pay-O-Matic Corp., 14.00% (12.00% cash, 2.00% PIK), 1/15/15	Financial Services		15,366,867		15,366,867		15,612,737
PGA Holdings, Inc., 12.50%, 3/12/16	Healthcare Services		5,000,000		4,932,294		5,150,000
Sarnova HC, LLC et al., 14.00% (12.00% cash, 2.00% PIK), 4/6/16	Healthcare Products		25,246,437		25,246,437		25,246,437
Sentry Security Systems, LLC, 16.00% (14.00% cash, 2.00% PIK), 8/7/12	Security Services		10,999,832		10,999,832		10,823,835
U.S. Security Holdings, Inc., 13.00% (11.00% cash, 2.00% PIK), 5/8/14, acquired 5/10/06(c)	Security Services		7,000,000		7,000,000		7,000,000
Wastequip, Inc., 12.50% (10.00% cash, 2.50% PIK), 2/5/15	Waste Management Equipment		8,237,300		8,074,960		2,306,444

Total Subordinated Debt					226,781,831		216,564,091

The accompanying notes are an integral part of these financial statements.

BlackRock Kelso Capital Corporation

Schedules of Investments (Unaudited)—(Continued)

September 30, 2010


Portfolio Company	Industry	Principal Amount or Number of Shares/Units			Cost(a)		Fair Value(b)
Senior Secured Loans—66.9%(e)
Alpha Media Group Inc., First Lien, 12.00% PIK, 7/15/13	Publishing	$	4,335,997		$	3,171,759	$	1,685,551
Al Solutions, Inc., First Lien, 10.00%, 6/28/13(f)	Metals		125,000			125,000		125,000
American Safety Razor Company, LLC, Second Lien, 10.50% (Base Rate + 7.25%), 1/30/14(g)	Consumer Products		10,000,000			10,000,000		2,000,000
American SportWorks LLC, Second Lien, 13.00%, 6/16/15(f)	Utility Vehicles		8,000,000			8,000,000		6,560,000
AmQuip Crane Rental LLC, Second Lien, 6.04% (LIBOR + 5.75%), 6/29/14	Construction Equipment		24,089,541			22,570,774		20,476,110
Arclin US Holdings Inc., Second Lien, 7.76% (LIBOR + 6.00%), 1/15/15(h)	Chemicals		3,568,163			2,794,099		3,421,869
Ashton Woods USA L.L.C., Second Lien, 11.75%, 7/6/15	Homebuilding		37,500,000			37,500,000		37,500,000
Bankruptcy Management Solutions, Inc., Term Loan A, First Lien, 7.50% (LIBOR + 6.00%), 8/20/14	Financial Services		4,000,000			4,000,000		4,000,000
Bankruptcy Management Solutions, Inc., Second Lien, 6.64% (LIBOR + 6.25%), 7/31/13	Financial Services		43,216,385			29,563,710		26,621,293
The Bargain! Shop Holdings Inc., Term Loan A, First Lien, 16.00%, 6/29/12(h)	Discount Stores		12,475,941	(i)		12,161,980		12,161,564
The Bargain! Shop Holdings Inc., Term Loan B, First Lien, 16.00%, 7/1/12(h)	Discount Stores		17,149,059	(i)		16,085,559		16,716,927
Berlin Packaging L.L.C., Second Lien, 6.82% (LIBOR + 6.50%), 8/17/15	Rigid Packaging		24,000,000			23,560,247		24,000,000
Electrical Components International, Inc., Tranche B, First Lien, 9.50% (LIBOR + 6.50%), 5/14/15(f)	Electronics		1,645,843			1,645,843		1,645,843
Event Rentals, Inc., Acquisition Loan, First Lien, 7.75% (LIBOR + 4.25% cash, 2.00% PIK), 12/19/13	Party Rentals		3,147,237			3,147,237		2,549,262
Facet Technologies, LLC, Second Lien, 17.50% PIK, 7/26/12	Medical Devices		39,080,685			36,668,340		7,897,000
Facet Technologies, LLC, Guaranty(j)	Medical Devices		—			—		(175,000	)
Fitness Together Franchise Corporation, First Lien, 11.50% (9.50% cash, 2.00% PIK), 11/10/13(f)	Personal Fitness		7,129,607			7,129,607		6,159,981
Heartland Automotive Services II, Inc. et al., Term Loan A, First Lien, 7.25% (Base Rate + 4.00%), 1/30/14	Automobile Repair		3,284,001			3,282,857		3,080,392
Heartland Automotive Services II, Inc. et al., Term Loan B, First Lien, 9.25% (Base Rate + 4.00% cash, 2.00% PIK), 1/30/14	Automobile Repair		2,293,349			2,293,204		2,050,254

The accompanying notes are an integral part of these financial statements.

BlackRock Kelso Capital Corporation

Schedules of Investments (Unaudited)—(Continued)

September 30, 2010


Portfolio Company	Industry	Principal Amount or Number of Shares/Units		Cost(a)		Fair Value(b)
Hoffmaster Group, Inc., First Lien, 7.00% (LIBOR + 5.00%), 6/2/16	Consumer Products	$	4,821,886	$	4,821,886	$	4,821,886
Hoffmaster Group, Inc., Second Lien, 13.50%, 6/2/17	Consumer Products		33,000,000		33,000,000		33,000,000
InterMedia Outdoors, Inc., Second Lien, 7.04% (LIBOR + 6.75%), 1/31/14	Printing/ Publishing		10,000,000		10,000,000		8,350,000
LJVH Holdings Inc., Second Lien, 5.79% (LIBOR + 5.50%), 1/19/15(h)	Specialty Coffee		25,000,000		25,000,000		25,000,000
MCCI Group Holdings, LLC, Second Lien, 8.00% (LIBOR + 7.25%), 6/21/13	Healthcare Services		29,000,000		28,969,644		28,855,000
Navilyst Medical, Inc., Second Lien, 13.00%, 8/14/15	Healthcare Services		15,000,000		14,829,164		14,850,000
Physiotherapy Associates, Inc. et al., Second Lien, 12.00% (Base Rate + 8.75%), 12/31/13	Rehabilitation Centers		17,000,000		17,000,000		17,000,000
Premier Yachts, Inc. et al., Term A, First Lien, 4.01% (LIBOR + 3.75%), 8/22/12	Entertainment Cruises		5,083,162		5,075,150		5,083,162
Premier Yachts, Inc. et al., Term B, First Lien, 7.26% (LIBOR + 7.00%), 8/22/13	Entertainment Cruises		687,342		685,923		687,342
Total Safety U.S., Inc., Second Lien, 6.78% (LIBOR + 6.50%), 12/8/13	Industrial Safety Equipment		9,000,000		9,000,000		8,730,000
United Subcontractors, Inc., First Lien, 1.79% (LIBOR + 1.50%), 6/30/15(d)	Building and Construction		1,626,814		1,618,914		1,376,285
Volume Services America, Inc. et al., Term Loan B, First Lien, 10.75% (LIBOR + 8.50%), 9/16/16	Concession Services		45,000,000		45,000,000		45,000,000
Water Pik, Inc., Second Lien, 5.76% (LIBOR + 5.50%), 6/15/14	Consumer Products		30,000,000		30,000,000		30,000,000
WBS Group LLC et al., Second Lien, 10.50% (LIBOR + 9.00%), 6/7/13	Software		20,000,000		20,000,000		18,400,000
Wembley, Inc., Second Lien, 8.50% (Base Rate + 5.25%), 8/22/12(g)	Gaming		1,000,000		1,000,000		23,750
Westward Dough Operating Company, LLC, Term Loan A, First Lien, 4.29% (LIBOR + 4.00%), 3/30/11	Restaurants		6,850,000		6,850,000		3,144,150
Westward Dough Operating Company, LLC, Term Loan B, First Lien, 7.29% (LIBOR + 7.00%), 3/30/11(g)	Restaurants		8,334,656		8,334,656		4,778,156

Total Senior Secured Loans					484,885,553		427,575,777

Preferred Stock—0.8%
Alpha Media Group Holdings Inc., Series A-2(k)	Publishing		5,000		—		—
Facet Holdings Corp., Class A, 12.00% PIK(g)	Medical Devices		900		900,000		—

The accompanying notes are an integral part of these financial statements.

BlackRock Kelso Capital Corporation

Schedules of Investments (Unaudited)—(Continued)

September 30, 2010


Portfolio Company	Industry	Principal Amount or Number of Shares/Units		Cost(a)		Fair Value(b)
Fitness Together Holdings, Inc., Series A(f)(k)	Personal Fitness		187,500	$	173,326	$	—
Fitness Together Holdings, Inc., Series A-1(f)(k)	Personal Fitness		49,056		49,056		—
Fitness Together Holdings, Inc., Series B Convertible(f)(k)	Personal Fitness		13,263,524		7,600,000		238,000
M & M Tradition Holdings Corp., Series A Convertible, 16.00% PIK(d)	Sheet Metal Fabrication		4,968		4,968,000		5,117,040

Total Preferred Stock					13,690,382		5,355,040

Common Stock—11.2%(k)
Alpha Media Group Holdings Inc., Class B	Publishing		12,500		—		—
Arclin Cayman Holdings Ltd.(h)	Chemicals		450,532		9,722,203		5,410,000
BKC ARS Blocker, Inc. (American Residential)(l)	HVAC/ Plumbing Services		1,000		20,798		962,000
BKC ASW Blocker, Inc. (American SportWorks)(f)(m)	Utility Vehicles		1,000		7,428,827		523,394
BKC CSP Blocker, Inc. (Conney Safety)(d)(n)	Safety Products		100		888,910		1,004,468
BKC DVSH Blocker, Inc. (DynaVox Systems and Sunrise Medical)(o)	Augmentative Communication Products		100		758,068		1,297,342
BKC MTCH Blocker, Inc. (Marquette Transportation)(p)	Transportation		1,000		5,000,000		3,095,963
ECI Holdco, Inc., Class A-1(f)	Electronics		18,848,836		18,848,836		47,480,000
Facet Holdings Corp.	Medical Devices		10,000		100,000		—
Fitness Together Holdings, Inc.(f)	Personal Fitness		173,547		118,500		—
M & M Tradition Holdings Corp.(d)	Sheet Metal Fabrication		500,000		5,000,000		5,000,000
MGHC Holding Corporation (Mattress Giant)(d)	Bedding—Retail		2,285,815		2,285,815		—
USI Senior Holdings, Inc. (United Subcontractors)(d)	Building and Construction		88,330		7,198,797		6,885,447

Total Common Stock					57,370,754		71,658,614

Limited Partnership/Limited Liability Company Interests—3.7%
Big Dumpster Coinvestment, LLC(k)	Waste Management Equipment		—		5,333,333		—
Marsico Parent Superholdco, LLC, 16.75% PIK, acquired 11/28/07(c)(g)	Financial Services		1,750		1,650,005		—
Penton Business Media Holdings LLC(d)(k)	Information Services		—		9,050,000		9,050,000

The accompanying notes are an integral part of these financial statements.

BlackRock Kelso Capital Corporation

Schedules of Investments (Unaudited)—(Continued)

September 30, 2010


Portfolio Company	Industry	Principal Amount or Number of Shares/Units		Cost(a)			Fair Value(b)
PG Holdco, LLC (Press Ganey), 15.00% PIK	Healthcare Services		333	$	333,333		$	352,751
PG Holdco, LLC (Press Ganey), Class A(k)	Healthcare Services		16,667		166,667			200,000
Sentry Security Systems Holdings, LLC(k)	Security Services		147,271		147,271			2,843
Sentry Security Systems Holdings, LLC, 8.00% PIK	Security Services		602,729		602,729			602,729
VSS-AHC Holdings LLC (Advanstar)(k)	Printing/ Publishing		352,941		4,199,161			6,440,104
WBS Group Holdings, LLC, Class B, 16.00% PIK	Software		8,000		8,000,000			7,066,720

Total Limited Partnership/Limited Liability Company Interests					29,482,499			23,715,147

Equity Warrants/Options—0.8%(k)
Arclin Cayman Holdings Ltd., Tranche 1, expire 1/15/14(h)	Chemicals		230,159		403,815			996,305
Arclin Cayman Holdings Ltd., Tranche 2, expire 1/15/15(h)	Chemicals		230,159		323,052			1,144,162
Arclin Cayman Holdings Ltd., Tranche 3, expire 1/15/14(h)	Chemicals		230,159		484,578			828,490
Arclin Cayman Holdings Ltd., Tranche 4, expire 1/15/15(h)	Chemicals		230,159		403,815			986,094
Kaz, Inc., expire 12/8/16	Consumer Products		49		512,000			1,007,503
Kaz, Inc., expire 12/8/16	Consumer Products		16		64,000			161,112
Kaz, Inc., expire 12/8/16	Consumer Products		16		24,000			75,892
Kaz, Inc., expire 12/8/16	Consumer Products		16		9,000			36,250
Marsico Superholdco SPV, LLC, expire 12/14/19, acquired 11/28/07(c)	Financial Services		455		444,450			—

Total Equity Warrants/Options					2,668,710			5,235,808

TOTAL INVESTMENTS INCLUDING UNEARNED INCOME					974,133,272			841,053,077
UNEARNED INCOME—(1.1)%					(7,305,983	)		(7,305,983	)

TOTAL INVESTMENTS—130.5%				$	966,827,289			833,747,094

OTHER ASSETS & LIABILITIES (NET)—(30.5)%								(194,669,400	)

NET ASSETS—100.0%							$	639,077,694

(a)	Represents amortized cost for fixed income securities and unearned income and cost for preferred and common stock, limited partnership/limited liability company interests and equity warrants/options.

(b)	Fair value is determined by or under the direction of the Company’s Board of Directors (see Note 2).

(c)

These securities are exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. In the aggregate, these securities represent 8.9% of net assets at September 30, 2010.

(d)	“Non-controlled, affiliated” investments under the Investment Company Act of 1940, whereby the Company owns 5% or more (but not more than 25%) of the portfolio company’s outstanding voting securities, are as follows:

The accompanying notes are an integral part of these financial statements.


Non-controlled, Affiliated Investments	Fair Value at December 31, 2009		Gross Additions (Cost)*		Gross Reductions (Cost)**			Net Unrealized Gain (Loss)			Fair Value at September 30, 2010			Net Realized Gain (Loss)***			Interest Income***			Dividend Income***
BKC CSP Blocker, Inc.
Common Stock	$	—	$	888,910	$	—		$	115,558		$	1,004,468		$	—		$	—		$	—
Conney Safety Products, LLC
Subordinated Debt		—		25,286,001		—			4,073,424			29,359,425			—			3,662,237			—
M&M Tradition Holdings Corp.:
Preferred Stock		5,117,040		—		—			—			5,117,040			—			—			943,730
Common Stock		5,000,000		—		—			—			5,000,000			—			—			—
Mattress Giant Corporation
Subordinated Debt		3,521,162		1,060,891		—			(3,017,557	)		1,564,496			—			1,061,040			—
MGHC Holding Corporation
Common Stock		—		—		—			—			—			—			—			—
Penton Business Media Holdings LLC
Limited Liability Co. Interest		515,870		9,050,000		(14,943,201	)		14,427,331			9,050,000			(14,426,995	)		—			—
Penton Media, Inc.
Senior Secured Loan		4,290,000		14,571		(25,694,870	)		21,390,299			—	†		(21,794,870	)		(25,073	)		—
United Subcontractors, Inc.
Senior Secured Loan		1,447,864		1,244		—			(72,823	)		1,376,285			—			24,234			—
USI Senior Holdings, Inc.
Common Stock		6,902,053		272,789		—			(289,395	)		6,885,447			—			—			—

Totals	$	26,793,989	$	36,574,406	$	(40,638,071	)	$	36,626,837		$	59,357,161		$	(36,221,865	)	$	4,722,438		$	943,730

Gross additions include increases in the cost basis of investments resulting from new portfolio investments, payment-in-kind interest or dividends, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.

Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category.

***	For the nine months ended September 30, 2010.

†	Investment no longer held at September 30, 2010.

The aggregate fair value of non-controlled, affiliated investments (net of unearned income) at September 30, 2010 represents 9.3% of net assets.

(e)

Approximately 68% of the senior secured loans to the Company’s portfolio companies bear interest at a floating rate that may be determined by reference to the London Interbank Offered Rate (LIBOR) or other base rate (commonly the Federal Funds Rate or the Prime Rate), at the borrower’s option. In addition, approximately 24% of such senior secured loans have floors of 1.50% to 3.25% on the LIBOR base rate. The borrower under a senior secured loan generally has the option to select from interest reset periods of one, two, three or six months and may alter that selection at the end of any reset period. The stated interest rate represents the weighted average interest rate at September 30, 2010 of all contracts within the specified loan facility.

(f)	“Controlled” investments under the Investment Company Act of 1940, whereby the Company owns more than 25% of the portfolio company’s outstanding voting securities, are as follows:

The accompanying notes are an integral part of these financial statements.


Controlled Investments	Fair Value at December 31, 2009			Gross Additions (Cost)*			Gross Reductions (Cost)**			Net Unrealized Gain (Loss)			Fair Value at September 30, 2010		Net Realized Gain (Loss)***		Interest Income***
Al Solutions, Inc.
Senior Secured Loan	$	150,000		$	221		$	(22,638	)	$	(2,583	)	$	125,000	$	2,362	$	11,016
American SportWorks LLC
Senior Secured Loan		3,262,261			2,000,000			(7,178,673	)		8,476,412			6,560,000		153		334,440
BKC ASW Blocker, Inc.
Common Stock		163,289			7,353,826			(175,000	)		(6,818,721	)		523,394		—		—
Electrical Components International, Inc.:
Senior Secured Loan		—			1,649,968			(4,125	)		—			1,645,843		—		60,956
Senior Secured Loan		—			12,000,000			(12,000,000	)		—	†		—		—		218,183
Senior Secured Loan		—			12,000,000			(12,000,000	)		—	†		—		—		218,168
ECI Holdco, Inc.
Common Stock		—			18,848,836			—			28,631,164			47,480,000		—		—
Fitness Together Franchise Corporation
Senior Secured Loan		5,807,656			107,048			—			245,277			6,159,981		—		615,561
Fitness Together Holdings, Inc.:
Preferred Stock Series A		—			—			—			—			—		—		—
Preferred Stock Series A-1		—			—			—			—			—		—		—
Preferred Stock Series B Convertible		779,000			1,100,000			—			(1,641,000	)		238,000		—		—
Common Stock		—			—			—			—			—		—		—
Less: Unearned Income		(249,930	)		(332,948	)		358,276			224,602			—		—		—

Totals	$	9,912,276		$	54,726,951		$	(31,022,160	)	$	29,115,151		$	62,732,218	$	2,515	$	1,458,324

***	For the nine months ended September 30, 2010. There was no dividend income from these securities during the period.

†	Investment no longer held at September 30, 2010.

The aggregate fair value of controlled investments (net of unearned income) at September 30, 2010 represents 9.8% of net assets.

(g)	Non-accrual status (in default) at September 30, 2010 and therefore non-income producing. At September 30, 2010, the aggregate fair value and amortized cost of debt investments on non-accrual status represents 0.9% and 2.2% of total debt investments at fair value and amortized cost, respectively.

(h)	Non-U.S. company or principal place of business outside the U.S.

(i)	Principal amount is denominated in Canadian dollars.

(j)	Guaranty by the Company on behalf of portfolio company Facet Technologies, LLC. Expires December 31, 2011. Maximum potential future payments under this guaranty are $6,000,000 at September 30, 2010.

(k)	Non-income producing equity securities at September 30, 2010.

(l)	The Company is the sole stockholder of BKC ARS Blocker, Inc., which is the beneficiary of less than 5% of the voting securities of American Residential Services L.L.C.

(m)	The Company is the sole stockholder of BKC ASW Blocker, Inc., which is the beneficiary of more than 25% of the voting securities of American SportWorks LLC.

(n)	The Company is the sole stockholder of BKC CSP Blocker, Inc., which is the beneficiary of more than 5% (but less than 25%) of the voting securities of Conney Prime Holdings, LLC.

(o)	The Company is the sole stockholder of BKC DVSH Blocker, Inc., which is the beneficiary of less than 5% of the voting securities of each of DynaVox Systems LLC and Sunrise Medical Investors LLC.

(p)	The Company is the sole stockholder of BKC MTCH Blocker, Inc., which is the beneficiary of less than 5% of the voting securities of Marquette Transportation Company Holdings, LLC.

PIK	Payment-in-kind.

The accompanying notes are an integral part of these financial statements.

BlackRock Kelso Capital Corporation

Schedules of Investments

December 31, 2009


Portfolio Company	Industry(a)	Principal Amount or Number of Shares/Units		Cost(b)		Fair Value(c)
Senior Secured Notes—9.0%
AGY Holding Corp., Second Lien, 11.00%, 11/15/14	Glass Yarns/ Fibers	$	23,500,000	$	23,131,937	$	19,740,000
TriMark Acquisition Corp., Second Lien, 11.50% (9.50% cash, 2.00% PIK), 11/30/13	Food Service Equipment		31,503,017		31,503,017		28,667,746

Total Senior Secured Notes					54,634,954		48,407,746


Unsecured Debt—23.5%
ASM Intermediate Holdings Corp. II, 12.00% PIK, 12/27/13	Marketing Services		57,401,749		57,401,749		56,138,911
Big Dumpster Acquisition, Inc., 13.50% PIK, 7/5/15	Waste Management Equipment		42,889,344		42,889,344		14,024,815
Marquette Transportation Company Holdings, LLC, 14.75% PIK, 3/21/14	Transportation		52,253,576		52,253,576		51,365,265
Marsico Parent Holdco, LLC et al., 12.50% PIK, 7/15/16, acquired 11/28/07(d)	Financial Services		11,279,758		11,279,758		3,508,005
Marsico Parent Superholdco, LLC et al., 14.50% PIK, 1/15/18, acquired 11/28/07(d)	Financial Services		7,791,207		7,483,674		1,947,802

Total Unsecured Debt					171,308,101		126,984,798


Subordinated Debt—24.7%
A & A Manufacturing Co., Inc., 16.00% (14.00% cash, 2.00% PIK), 4/2/14	Protective Enclosures		19,542,243		19,542,243		14,871,647
Conney Safety Products, LLC, 18.00% (16.00% cash, 2.00% PIK), 10/1/14	Safety Products		30,300,750		30,300,750		25,452,630
DynaVox Systems LLC, 15.00%, 6/23/15	Augmentative Communication Products		25,000,000		25,000,000		25,950,000
Mattress Giant Corporation, 11.00% PIK, 12/31/12(e)	Bedding —Retail		5,744,147		2,521,202		3,521,162
MediMedia USA, Inc., 11.38%, 11/15/14, acquired multiple dates(d)	Information Services		8,000,000		8,058,173		6,728,000
The Pay-O-Matic Corp., 14.00% (12.00% cash, 2.00% PIK), 1/15/15	Financial Services		15,366,867		15,366,867		15,643,470
PGA Holdings, Inc., 12.50%, 3/12/16	Healthcare Services		5,000,000		4,923,000		5,100,000
Sentry Security Systems, LLC, 16.00% (14.00% cash, 2.00% PIK), 8/7/12	Security Services		10,834,674		10,834,674		10,607,146
Tri-anim Health Services, Inc. et al., 14.00% (12.00% cash, 2.00% PIK), 6/4/15	Healthcare Products		15,021,667		15,021,667		15,322,100
U.S. Security Holdings, Inc., 13.00% (11.00% cash, 2.00% PIK), 5/8/14, acquired 5/10/06(d)	Security Services		7,000,000		7,000,000		7,000,000
Wastequip, Inc., 12.50% (10.00% cash, 2.50% PIK), 2/5/15	Waste Management Equipment		7,947,596		7,947,596		3,035,981

Total Subordinated Debt					146,516,172		133,232,136

The accompanying notes are an integral part of these financial statements.

BlackRock Kelso Capital Corporation

Schedules of Investments—(Continued)

December 31, 2009


Portfolio Company	Industry(a)	Principal Amount or Number of Shares/Units			Cost(b)		Fair Value(c)
Senior Secured Loans—93.3%(f)
Alpha Media Group Inc., First Lien, 12.00% PIK, 7/15/13	Publishing	$	3,964,202		$	2,669,800	$	2,055,532
Al Solutions, Inc., First Lien, 10.00%, 6/28/13(g)	Metals		150,000			147,418		150,000
American Residential Services L.L.C., Second Lien, 12.00% (10.00% cash, 2.00% PIK), 4/17/15	HVAC/ Plumbing Services		41,215,100			41,215,100		40,102,293
American Safety Razor Company, LLC, Second Lien, 6.51% (LIBOR + 6.25%), 1/30/14	Consumer Products		10,000,000			10,000,000		9,090,000
American SportWorks LLC, Second Lien, 20.00%, 6/27/14(g)(h)	Utility Vehicles		13,403,274			13,403,274		3,262,261
AmQuip Crane Rental LLC, Second Lien, 6.01% (LIBOR + 5.75%), 6/29/14	Construction Equipment		24,089,541			22,267,464		22,403,273
Applied Tech Products Corp. et al., Tranche A, First Lien, 7.75% (Base Rate + 4.50%), 10/24/10(h)	Plastic Packaging		731,669			730,747		275,359
Arclin US Holdings Inc., First Lien, 7.00% (Base Rate + 3.75%), 7/10/14(h)	Chemicals		6,423,655			3,357,410		5,607,851
Arclin US Holdings Inc., Second Lien, 10.75% (Base Rate + 7.50%), 7/10/15(h)	Chemicals		14,500,000			14,500,000		3,335,290
Bankruptcy Management Solutions, Inc., Second Lien, 6.48% (LIBOR + 6.25%), 7/31/13	Financial Services		24,187,500			24,187,500		17,802,000
The Bargain! Shop Holdings Inc., Term Loan A, First Lien, 14.50% (13.50% cash, 1.00% PIK), 6/29/12(i)	Discount Stores		13,602,460	(j)		13,211,257		12,975,113
The Bargain! Shop Holdings Inc., Term Loan B, First Lien, 14.50% (13.50% cash, 1.00% PIK), 7/1/12(i)	Discount Stores		18,697,540	(j)		17,511,078		17,835,208
Berlin Packaging L.L.C., Second Lien, 6.76% (LIBOR + 6.50%), 8/17/15	Rigid Packaging		24,000,000			23,492,840		22,680,000
Champion Energy Corporation et al., First Lien, 14.50%, 5/22/11	Heating and Oil Services		30,000,000			30,000,000		30,210,000
Custom Direct, Inc. et al., Second Lien, 6.31% (LIBOR + 6.00%), 12/31/14	Printing		10,000,000			10,000,000		7,990,000
Deluxe Entertainment Services Group Inc., Second Lien, 11.00% (LIBOR + 9.00%), 11/11/13	Entertainment		12,000,000			12,000,000		11,148,000
Electrical Components International, Inc., First Lien, 9.25% (Base Rate + 6.00%), 5/1/14	Electronics		2,974,210			2,052,126		2,562,460
Electrical Components International, Inc., Second Lien, 11.50% (Base Rate + 8.25%), 5/1/14(h)	Electronics		26,000,000			22,891,103		8,874,840
Event Rentals, Inc., Acquisition Loan, First Lien, 7.75% (LIBOR + 4.25% cash, 2.00% PIK), 12/19/13	Party Rentals		3,217,840			3,217,840		2,622,540
Facet Technologies, LLC, Second Lien, 17.50% PIK, 7/26/12	Medical Devices		34,321,490			34,321,490		10,000,012
Facet Technologies, LLC, Guaranty(k)	Medical Devices		—			—		(225,000	)

The accompanying notes are an integral part of these financial statements.

BlackRock Kelso Capital Corporation

Schedules of Investments—(Continued)

December 31, 2009


Portfolio Company	Industry(a)	Principal Amount or Number of Shares/Units		Cost(b)		Fair Value(c)
Fitness Together Franchise Corporation, First Lien, 11.50% (9.50% cash, 2.00% PIK), 11/10/13(g)	Personal Fitness	$	7,022,559	$	7,022,559	$	5,807,656
Heartland Automotive Services II, Inc. et al., Term Loan A, First Lien, 7.25% (Base Rate + 4.00%), 1/30/14	Automobile Repair		3,325,862		3,324,445		3,026,535
Heartland Automotive Services II, Inc. et al., Term Loan B, First Lien, 9.25% (Base Rate + 4.00% cash, 2.00% PIK), 1/30/14	Automobile Repair		2,258,858		2,258,680		1,951,653
HIT Entertainment, Inc., Second Lien, 5.78% (LIBOR + 5.50%), 2/26/13	Entertainment		1,000,000		1,000,000		550,000
InterMedia Outdoors, Inc., Second Lien, 7.00% (LIBOR + 6.75%), 1/31/14	Printing/ Publishing		10,000,000		10,000,000		8,520,000
Isola USA Corp., First Lien, 13.00% (Base Rate + 9.75%), 12/18/12	Electronics		10,901,316		10,002,294		10,138,224
Isola USA Corp., Second Lien, 17.75% (Base Rate + 14.50%), 12/18/13	Electronics		25,000,000		25,000,000		22,050,000
LJVH Holdings Inc., Second Lien, 5.75% (LIBOR + 5.50%), 1/19/15(i)	Specialty Coffee		25,000,000		25,000,000		22,700,000
MCCI Group Holdings, LLC, Second Lien, 7.51% (LIBOR + 7.25%), 6/21/13	Healthcare Services		29,000,000		28,961,307		28,710,000
Navilyst Medical, Inc., Second Lien, 12.25%, 8/14/15	Healthcare Services		15,000,000		14,802,935		14,700,000
New Enterprise Stone & Lime Co., Inc., Second Lien, 12.50%, 7/11/14	Mining/ Construction		35,000,000		34,752,695		35,000,000
Oriental Trading Company, Inc., Second Lien, 6.24% (LIBOR + 6.00%), 1/31/14	Party Supplies and Novelties		3,000,000		3,000,000		802,500
Penton Media, Inc. et al., Second Lien, 5.28% (LIBOR + 5.00%), 2/1/14(e)	Information Services		26,000,000		25,680,299		4,290,000
Physiotherapy Associates, Inc. et al., Second Lien, 12.00% (Base Rate + 8.75%), 12/31/13	Rehabilitation Centers		17,000,000		17,000,000		15,759,000
PQ Corporation, Second Lien, 6.74% (LIBOR + 6.50%), 7/30/15	Specialty Chemicals		10,000,000		8,970,517		8,520,000
Premier Yachts, Inc. et al., Term A, First Lien, 3.98% (LIBOR + 3.75%), 8/22/12	Entertainment Cruises		5,973,418		5,960,283		5,973,418
Premier Yachts, Inc. et al., Term B, First Lien, 7.23% (LIBOR + 7.00%), 8/22/13	Entertainment Cruises		1,265,983		1,263,002		1,265,983
Sunrise Medical LTC LLC et al., Second Lien, 6.74% (LIBOR + 6.50%), 12/28/13	Healthcare Equipment		14,400,000		14,400,000		14,097,600
Total Safety U.S., Inc., Second Lien, 6.74% (LIBOR + 6.50%), 12/8/13	Industrial Safety Equipment		9,000,000		9,000,000		8,514,000
United Subcontractors, Inc., First Lien, 1.76% (LIBOR + 1.50%), 6/30/15(e)	Building and Construction		1,626,814		1,617,669		1,447,864
Water Pik, Inc., Second Lien, 5.73% (LIBOR + 5.50%), 6/15/14	Consumer Products		30,000,000		30,000,000		30,000,000
WBS Group LLC et al., Second Lien, 6.54% (LIBOR + 6.25%), 6/7/13	Software		20,000,000		20,000,000		17,000,000

The accompanying notes are an integral part of these financial statements.

BlackRock Kelso Capital Corporation

Schedules of Investments—(Continued)

December 31, 2009


Portfolio Company	Industry(a)	Principal Amount or Number of Shares/Units		Cost(b)		Fair Value(c)
Wembley, Inc., Second Lien, 8.50% (Base Rate + 5.25%), 8/22/12(h)	Gaming	$	1,000,000	$	1,000,000	$	67,500
Westward Dough Operating Company, LLC, Term Loan A, First Lien, 4.25% (LIBOR + 4.00%), 3/30/11	Restaurants		6,850,000		6,850,000		4,719,650
Westward Dough Operating Company, LLC, Term Loan B, First Lien, 7.25% (LIBOR + 7.00%), 3/30/11(h)	Restaurants		8,334,656		8,334,656		6,784,379

Total Senior Secured Loans					616,377,788		503,152,994

Preferred Stock—1.1%
Alpha Media Group Holdings Inc., Series A-2(l)	Publishing		5,000		—		—
Facet Holdings Corp., Class A, 12.00% PIK(h)	Medical Devices		900		900,000		—
Fitness Together Holdings, Inc., Series A(g)(l)	Personal Fitness		187,500		173,326		—
Fitness Together Holdings, Inc., Series A-1(g)(l)	Personal Fitness		49,056		49,056		—
Fitness Together Holdings, Inc., Series B Convertible(g)(l)	Personal Fitness		11,343,804		6,500,000		779,000
M & M Tradition Holdings Corp., Series A Convertible, 16.00% PIK(e)	Sheet Metal Fabrication		4,968		4,968,000		5,117,040

Total Preferred Stock					12,590,382		5,896,040

Common Stock—3.5%(l)
Alpha Media Group Holdings Inc., Class B	Publishing		12,500		—		—
BKC ARS Blocker, Inc. (American Residential)(m)	HVAC/ Plumbing Services		1,000		192,418		1,610,000
BKC ASW Blocker, Inc. (American SportWorks)(g)(n)	Utility Vehicles		1,000		250,001		163,289
BKC DVSH Blocker, Inc. (DynaVox Systems)(o)	Augmentative Communication Products		100		1,000,000		2,560,000
BKC MTCH Blocker, Inc. (Marquette Transportation)(p)	Transportation		1,000		5,000,000		2,635,000
Facet Holdings Corp.	Medical Devices		10,000		100,000		—
Fitness Together Holdings, Inc.(g)	Personal Fitness		173,547		118,500		—
M & M Tradition Holdings Corp.(e)	Sheet Metal Fabrication		500,000		5,000,000		5,000,000
MGHC Holding Corporation (Mattress Giant)(e)	Bedding—Retail		2,285,815		2,285,815		—
USI Senior Holdings, Inc. (United Subcontractors)(e)	Building and Construction		79,237		6,926,008		6,902,053

Total Common Stock					20,872,742		18,870,342

The accompanying notes are an integral part of these financial statements.

BlackRock Kelso Capital Corporation

Schedules of Investments—(Continued)

December 31, 2009


Portfolio Company	Industry(a)	Principal Amount or Number of Shares/Units		Cost(b)			Fair Value(c)
Limited Partnership/Limited Liability Company Interests—2.4%
Big Dumpster Coinvestment, LLC(l)	Waste Management Equipment		—	$	5,333,333		$	—
Marsico Parent Superholdco, LLC, 16.75% PIK, acquired 11/28/07(d)(h)	Financial Services		1,750		1,650,005			—
PG Holdco, LLC (Press Ganey), 15.00% PIK	Healthcare Services		333		333,333			346,654
PG Holdco, LLC (Press Ganey), Class A(l)	Healthcare Services		16,667		166,667			250,000
Prism Business Media Holdings LLC (Penton Media)(e)(l)	Information Services		68		14,943,201			515,870
Sentry Security Systems Holdings, LLC(l)	Security Services		147,271		147,271			479
Sentry Security Systems Holdings, LLC, 8.00% PIK	Security Services		602,729		602,729			602,729
VSS-AHC Holdings LLC (Advanstar)(l)	Printing/ Publishing		352,941		4,199,161			4,198,939
WBS Group Holdings, LLC, Class B, 16.00% PIK	Software		8,000		8,000,000			7,167,857

Total Limited Partnership/Limited Liability Company Interests					35,375,700			13,082,528

Equity Warrants/Options—0.2%(l)
Kaz, Inc., expire 12/8/16	Consumer Products		49		512,000			770,160
Kaz, Inc., expire 12/8/16	Consumer Products		16		64,000			136,373
Kaz, Inc., expire 12/8/16	Consumer Products		16		24,000			75,141
Kaz, Inc., expire 12/8/16	Consumer Products		16		9,000			43,073
Marsico Superholdco SPV, LLC, expire 12/14/19, acquired 11/28/07(d)	Financial Services		455		444,450			—

Total Equity Warrants/Options					1,053,450			1,024,747

TOTAL INVESTMENTS INCLUDING UNEARNED INCOME					1,058,729,289			850,651,331
UNEARNED INCOME—(0.7)%					(3,909,286	)		(3,909,286	)

TOTAL INVESTMENTS—156.9%				$	1,054,820,003			846,742,045

OTHER ASSETS & LIABILITIES (NET)—(56.9)%								(307,179,283	)

NET ASSETS—100.0%							$	539,562,762

(a)	Unaudited.

(b)	Represents amortized cost for fixed income securities and unearned income and cost for preferred and common stock, limited partnership/limited liability company interests and equity warrants/options.

(c)	Fair value is determined by or under the direction of the Company’s Board of Directors (see Note 2).

(d)

(e)	“Non-controlled, affiliated” investments under the Investment Company Act of 1940, whereby the Company owns 5% or more (but not more than 25%) of the portfolio company’s outstanding voting securities, are as follows:

The accompanying notes are an integral part of these financial statements.


Non-controlled, Affiliated Investments	Fair Value at December 31, 2008			Gross Additions (Cost)*		Gross Reductions (Cost)**			Net Unrealized Gain (Loss)			Fair Value at December 31, 2009			Net Realized Gain (Loss) ***		Interest Income***		Dividend Income***
American SportWorks LLC
Senior Secured Loan	$	5,716,023		$	—	$	(3,572,448	)	$	(2,143,575	)	$	—	†	$	—	$	27,617	$	—
BKC ASW Blocker, Inc.
Common Stock		16,399			—		(5,883	)		(10,516	)		—	†		—		—		—
M&M Tradition Holdings Corp.:
Preferred Stock		5,537,280			—		(408,000	)		(12,240	)		5,117,040			12,240		—		1,110,885
Common Stock		6,095,000			—		—			(1,095,000	)		5,000,000			—		—		—
Mattress Giant Corporation
Subordinated Debt		—			2,521,202		—			999,960			3,521,162			—		773,581		—
MGHC Holding Corporation
Common Stock		—			2,285,815		—			(2,285,815	)		—			—		—		—
Penton Media, Inc.
Senior Secured Loan		18,226,000			78,211		—			(14,014,211	)		4,290,000			—		1,437,763		—
Prism Business Media Holdings LLC
Limited Liability Co. Interest		4,730,000			—		—			(4,214,130	)		515,870			—		—		—
United Subcontractors, Inc.
Senior Secured Loan		—			1,617,669		—			(169,805	)		1,447,864			—		16,210		—
USI Senior Holdings, Inc.
Common Stock		—			6,926,008		—			(23,955	)		6,902,053			—		—		—
Less: Unearned Income		(305,622	)		305,622		—			—			—			—		—		—

Totals	$	40,015,080		$	13,734,527	$	(3,986,331	)	$	(22,969,287	)	$	26,793,989		$	12,240	$	2,255,171	$	1,110,885

***	For the year ended December 31, 2009.

†	Investment moved out of the non-controlled, affiliated category into the controlled category during the year.

The aggregate fair value of non-controlled, affiliated investments (net of unearned income) at December 31, 2009 represents 5.0% of net assets.

(f)

Approximately 66% of the senior secured loans to the Company’s portfolio companies bear interest at a floating rate that may be determined by reference to the London Interbank Offered Rate (LIBOR) or other base rate (commonly the Federal Funds Rate or the Prime Rate), at the borrower’s option. In addition, approximately 9% of such senior secured loans have floors of 1.50% to 3.25% on the LIBOR base rate. The borrower under a senior secured loan generally has the option to select from interest reset periods of one, two, three or six months and may alter that selection at the end of any reset period. The stated interest rate represents the weighted average interest rate at December 31, 2009 of all contracts within the specified loan facility.

(g)	“Controlled” investments under the Investment Company Act of 1940, whereby the Company owns more than 25% of the portfolio company’s outstanding voting securities, are as follows:

The accompanying notes are an integral part of these financial statements.


Controlled Investments	Fair Value at December 31, 2008		Gross Additions (Cost)*			Net Unrealized Gain (Loss)			Fair Value at December 31, 2009			Net Realized Loss**			Interest/Other Income**
Al Solutions, Inc.:
Senior Secured Loan	$	—	$	147,418		$	2,582		$	150,000		$	—		$	5,821
Subordinated Debt		—		71,373			(71,373	)		—			(13,395,134	)		71,373
American SportWorks LLC
Senior Secured Loan		—		3,572,448			(310,187	)		3,262,261			—			78,075
BKC ASW Blocker, Inc.
Common Stock		—		5,883			157,406			163,289			—			—
Fitness Together Franchise Corporation
Senior Secured Loan		6,496,555		140,615			(829,514	)		5,807,656			—			808,583
Fitness Together Holdings, Inc.:
Preferred Stock Series A		—		—			—			—			—			—
Preferred Stock Series A-1		—		—			—			—			—			—
Preferred Stock Series B Convertible		4,700,000		—			(3,921,000	)		779,000			—			—
Common Stock		—		—			—			—			—			—
Tygem Holdings, Inc.:
Preferred Stock		—		—			—			—			(10,826,867	)		—
Preferred Stock Series B Convertible		—		—			—			—			(14,725,535	)		—
Common Stock		—		—			—			—			(3,608,956	)		—
Less: Unearned Income		—		(249,930	)		—			(249,930	)		—			—

Totals	$	11,196,555	$	3,687,807		$	(4,972,086	)	$	9,912,276		$	(42,556,492	)	$	963,852

**	For the year ended December 31, 2009. There was no dividend income from these securities during the year.

The aggregate fair value of controlled investments (net of unearned income) at December 31, 2009 represents 1.8% of net assets.

(h)	Non-accrual status (in default) at December 31, 2009 and therefore non-income producing. At December 31, 2009, the aggregate fair value and amortized cost of debt investments on non-accrual status represents 3.5% and 6.5% of total debt investments at fair value and amortized cost, respectively.

(i)	Non-U.S. company or principal place of business outside the U.S.

(j)	Principal amount is denominated in Canadian dollars.

(k)	Guaranty by the Company on behalf of portfolio company Facet Technologies, LLC. Expires December 31, 2011. Maximum potential future payments under this guaranty are $6,000,000 at December 31, 2009.

(l)	Non-income producing equity securities at December 31, 2009.

(m)	The Company is the sole stockholder of BKC ARS Blocker, Inc., which is the beneficiary of less than 5% of the voting securities of American Residential Services L.L.C.

(n)	The Company is the sole stockholder of BKC ASW Blocker, Inc., which is the beneficiary of more than 25% of the voting securities of American SportWorks LLC.

(o)	The Company is the sole stockholder of BKC DVSH Blocker, Inc., which is the beneficiary of less than 5% of the voting securities of DynaVox Systems LLC.

(p)	The Company is the sole stockholder of BKC MTCH Blocker, Inc., which is the beneficiary of less than 5% of the voting securities of Marquette Transportation Company Holdings, LLC.

PIK	Payment-in-kind.

The accompanying notes are an integral part of these financial statements.

BlackRock Kelso Capital Corporation

Notes to Financial Statements (Unaudited)

1. Organization

BlackRock Kelso Capital Corporation (the “Company”) was organized as a Delaware corporation on April 13, 2005 and was initially funded on July 25, 2005. The Company has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). In addition, for tax purposes the Company has qualified and has elected to be treated as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986 (the “Code”). The Company’s investment objective is to generate both current income and capital appreciation through debt and equity investments. The Company invests primarily in middle-market companies in the form of senior and junior secured and unsecured debt securities and loans, each of which may include an equity component, and by making direct preferred, common and other equity investments in such companies.

On July 25, 2005, the Company completed a private placement of 35,366,589 shares of its common stock at a price of $15.00 per share receiving net proceeds of approximately $529 million. On July 2, 2007, the Company completed an initial public offering through which it sold an additional 10,000,000 shares of its common stock at a price of $16.00 per share and listed its shares on The NASDAQ Global Select Market. The Company received net proceeds of approximately $150 million from this offering.

On June 22, 2010, the Company closed an add-on public offering through which it sold 7,500,000 shares of its common stock at a price of $10.25 per share receiving net proceeds of approximately $73 million. On June 28, 2010, the underwriters of the add-on offering exercised their over-allotment option under the underwriting agreement and elected to purchase an additional 1,125,000 shares of common stock at a price of $10.25 per share resulting in net proceeds of approximately $11 million.

The accompanying financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the interim periods, have been included. The results of operations for interim periods are not indicative of results to be expected for the full year. Certain prior year amounts have been reclassified to conform to the current year presentation.

Certain financial information that is normally included in annual financial statements, including certain financial statement footnotes, prepared in accordance with GAAP, is not required for interim reporting purposes and has been condensed or omitted herein. These financial statements should be read in conjunction with the Company’s financial statements and notes related thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, which was filed with the Securities and Exchange Commission (“SEC”) on March 12, 2010.

2. Significant accounting policies

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reported period. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ and such differences could be material.

The significant accounting policies consistently followed by the Company are:

(a)

Investments for which market quotations are readily available are valued at such market quotations unless they are deemed not to represent fair value. The Company obtains market quotations, when available, from an independent pricing service or one or more broker-dealers or market makers and utilizes the average of the range of bid and ask quotations as a practical expedient for fair value. However, debt investments with remaining maturities within 60 days are valued at amortized cost, which approximates fair value. Debt and equity securities for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued at fair value as determined in good faith by or under the direction of the Company’s Board of Directors. Because the Company expects that there will not be a readily available market value for substantially all of the investments in its portfolio, the Company expects to value substantially all of its portfolio investments at fair value as determined in good faith by or under the direction of the Board of Directors using a consistently applied valuation process in accordance with a documented valuation policy that has been reviewed and approved by the Board of Directors. Due to the inherent uncertainty and subjectivity of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may differ significantly from the values that would have been used had a readily available market value existed for such investments and may differ materially from the values that the Company may ultimately realize. In addition,

changes in the market environment and other events may have differing impacts on the market quotations used to value some of the Company’s investments than on the fair values of the Company’s investments for which market quotations are not readily available. Market quotations may be deemed not to represent fair value in certain circumstances where BlackRock Kelso Capital Advisors LLC, the Company’s investment advisor (the “Advisor”), believes that facts and circumstances applicable to an issuer, a seller or purchaser or the market for a particular security cause current market quotations to not reflect the fair value of the security. Examples of these events could include cases where a security trades infrequently causing a quoted purchase or sale price to become stale, where there is a “forced” sale by a distressed seller, where market quotations vary substantially among market makers, or where there is a wide bid-ask spread or significant increase in the bid-ask spread.

With respect to the Company’s investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value, the Board of Directors undertakes a multi-step valuation process each quarter, as described below:

(i)

The quarterly valuation process begins with each portfolio company or investment being initially evaluated and rated by the investment professionals of the Advisor responsible for the portfolio investment;

(ii)

The investment professionals provide recent portfolio company financial statements and other reporting materials to independent valuation firms engaged by the Board of Directors, such firms conduct independent appraisals each quarter and their preliminary valuation conclusions are documented and discussed with senior management of the Advisor;

(iii)

The audit committee of the Board of Directors reviews the preliminary valuations of the independent valuation firms; and

(iv)

The Board of Directors discusses valuations and determines the fair value of each investment in the portfolio in good faith based on the input of the Advisor, the respective independent valuation firms and the audit committee.

Those investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that the Company may take into account in determining the fair value of its investments include, as relevant and among other factors: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, the Company’s principal market (as the reporting entity) and enterprise values.

Until the end of the second calendar quarter following its acquisition, each unquoted investment in a new portfolio company generally is valued at cost, which the Advisor believes approximates fair value under the circumstances. As of that date, an independent valuation firm conducts an initial independent appraisal of the investment.

Accounting Standards Codification (“ASC”) 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”), issued by the Financial Accounting Standards Board (“FASB”), defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. ASC 820-10 defines fair value as the price that the Company would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment. ASC 820-10 emphasizes that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances.

ASC 820-10 establishes a hierarchy that classifies these inputs into the three broad levels listed below:

Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

Level 2 – Valuations based on unadjusted quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The inputs into the determination of fair value may require significant management judgment or estimation. Even if observable market data is available, such information may be the result of consensus pricing information or broker quotes which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimer would result in classification as Level 3 information, assuming no additional corroborating evidence.

Transfers between levels, if any, represent the value as of the beginning of the period of any investment where a change in the pricing level occurred from the beginning to the end of the period.

The Company’s valuation policy and fair value disclosures are consistent with ASC 820-10. The Company evaluates the source of inputs, including any markets in which its investments are trading, in determining fair value and categorizes each investment within the fair value hierarchy pursuant to ASC 820-10.

(b)	Security transactions are accounted for on the trade date unless there are substantial conditions to the purchase.

(c)	Gains or losses on the disposition of investments are calculated using the specific identification method.

(d)

Interest income, adjusted for amortization of premium and accretion of discount, and dividend income are recorded on an accrual basis to the extent that the Company expects to collect such amounts. For loans and securities with payment-in-kind (“PIK”) income, which represents contractual interest or dividends accrued and added to the principal balance and generally due at maturity, PIK income is accrued only to the extent that the portfolio company valuation indicates that the PIK income is likely to be collected. Origination, structuring, closing, commitment and other upfront fees and discounts and premiums on investments purchased are accreted/amortized over the life of the respective investment. Unamortized origination, structuring, closing, commitment and other upfront fees are recorded as unearned income. Upon the prepayment of a loan or debt security, any prepayment penalties and unamortized loan origination, structuring, closing, commitment and other upfront fees are recorded as interest income. Expenses are recorded on an accrual basis.

(e)	The Company has elected to be taxed as a RIC under Subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs.

In order to qualify for favorable tax treatment as a RIC, the Company is required to distribute annually to its stockholders at least 90% of its investment company taxable income, as defined by the Code. To avoid federal excise taxes, the Company must distribute annually at least 98% of its income (both ordinary income and net capital gains). The Company, at its discretion, may carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. If the Company chooses to do so, all other things being equal, this would increase expenses and reduce the amount available to be distributed to stockholders. The Company will accrue excise tax on estimated excess taxable income as required.

The Company holds 100% of the common stock of certain companies as indicated in the accompanying schedules of investments. These wholly owned companies are recorded at fair value in the statements of assets and liabilities, net of any applicable income tax liabilities. An income tax provision has been provided at the wholly owned company level on all income of such companies, including realized and unrealized gains. Such wholly owned companies are held in connection with the Company’s election to be taxed as a RIC. In general, these wholly owned companies earn income that, if earned directly by the Company, would not be qualifying income for purposes of the Company qualifying as a RIC. Dividends from these wholly owned companies and gains from the sale of their stock are qualifying income for this purpose. The Company makes investments in securities in accordance with its investment policies through these wholly owned companies.

(f)

Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount to be paid out as a dividend is determined by the Board of Directors. Net realized capital gains, if any, generally are distributed at least annually, although the Company may decide to retain such capital gains for investment.

(g)

Loans or debt securities are placed on non-accrual status, as a general matter, when principal or interest payments are past due 30 days or more or when there is reasonable doubt that principal or interest will be collected. Accrued interest generally is reversed when a loan or debt security is placed on non-accrual status. Interest payments received on non-accrual loans or debt securities may be recognized as income or applied to principal depending upon management’s judgment. Non-accrual loans and debt securities are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current. The Company may make exceptions to this treatment if the loan or debt security has sufficient collateral value and is in the process of collection.

(h)	Recently Issued Accounting Pronouncements:

In January 2010, the FASB issued Accounting Standards Update 2010-06, Fair Value Measurements and Disclosures (“ASU 2010-06”). ASU 2010-06 amends ASC 820-10 to require new disclosures with regard to transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements within the Level 3 fair value rollforward. ASU 2010-06 also clarifies existing fair value disclosures about the appropriate level of disaggregation and about inputs and valuation techniques for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales and settlements in the rollforward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption on January 1, 2010 of the applicable additional disclosure requirements of ASU 2010-06 did not materially impact the Company’s financial statements. The adoption of the additional disclosure requirements, which will be effective in 2011, is not expected to materially impact the Company’s financial statement disclosures.

3. Agreements and related party transactions

The Company has entered into an Investment Management Agreement (the “Management Agreement”) with the Advisor, under which the Advisor, subject to the overall supervision of the Company’s Board of Directors, manages the day-to-day operations of, and provides investment advisory services to, the Company. For providing these services, the Advisor receives a base management fee (the “Management Fee”) from the Company quarterly in arrears at an annual rate of 2.0% of the Company’s total assets, including any assets acquired with the proceeds of leverage.

For the three and nine months ended September 30, 2010, the Advisor earned $4,049,347 and $12,522,832, respectively, in base management fees from the Company. For the three and nine months ended September 30, 2009, the Advisor earned $4,555,811 and $13,951,061, respectively, in such fees from the Company.

The Management Agreement provides that the Advisor or its affiliates may be entitled to an incentive management fee (the “Incentive Fee”) under certain circumstances. The determination of the Incentive Fee, as described in more detail below, will result in the Advisor or its affiliates receiving no Incentive Fee payments if returns to Company stockholders do not meet an 8.0% annualized rate of return during the applicable fee measurement period and will result in the Advisor or its affiliates receiving less than the full amount of the Incentive Fee percentage until returns to stockholders exceed an approximate 13.3% annualized rate of return during such period. Annualized rate of return in this context is computed by reference to the Company’s net asset value and does not take into account changes in the market price of the Company’s common stock.

The Advisor will be entitled to receive the Incentive Fee if the Company’s performance exceeds a “hurdle rate” during different measurement periods: trailing four quarters’ periods (which applies only to the portion of the Incentive Fee based on income) and annual periods (which applies only to the portion of the Incentive Fee based on capital gains). The “trailing four quarters’ periods” for purposes of determining the income portion of the Incentive Fee payable for the three months ended September 30, 2010 and 2009 was determined by reference to the four quarter periods ended on September 30, 2010 and 2009, respectively. The term “annual period” means the period beginning on July 1 of each calendar year and ending on June 30 of the next calendar year.

The hurdle rate for each measurement period is 2.0% multiplied by the Company’s net asset values at the beginning of each calendar quarter during the measurement period, calculated after giving effect to any distributions that occurred during the measurement period. A portion of the Incentive Fee is based on the Company’s income and a portion is based on capital gains. Each portion of the Incentive Fee is described below.

Quarterly Incentive Fee Based on Income. For each trailing four quarters’ period, the Company pays the Advisor an Incentive Fee based on the amount by which (A) aggregate distributions and amounts distributable out of taxable net income (excluding any capital gain and loss) during the period less the amount, if any, by which net unrealized capital depreciation exceeds net realized capital gains during the period exceeds (B) the hurdle rate for the period. The amount of the excess of (A) over (B) described in this paragraph for each period is referred to as the excess income amount.

The portion of the Incentive Fee based on income for each period will equal 50% of the period’s excess income amount, until the cumulative Incentive Fee payments for the period equal 20% of the period’s income amount distributed or distributable to stockholders as described in clause (A) of the preceding paragraph. Thereafter, the portion of the Incentive Fee based on income for the period will equal 20% of the period’s remaining excess income amount.

Periodic Incentive Fee Based on Capital Gains. The portion of the Incentive Fee based on capital gains is calculated on an annual basis. For each annual period, the Company pays the Advisor an Incentive Fee based on the

amount by which (A) net realized capital gains, if any, to the extent they exceed gross unrealized capital depreciation, if any, occurring during the period exceeds (B) the amount, if any, by which the period’s hurdle rate exceeds the amount of income used in the determination of the Incentive Fee based on income for the period. The amount of the excess of (A) over (B) described in this paragraph is referred to as the excess gain amount.

The portion of the Incentive Fee based on capital gains for each period will equal 50% of the period’s excess gain amount, until such payments equal 20% of the period’s capital gain amount distributed or distributable to stockholders. Thereafter, the portion of the Incentive Fee based on capital gains for the period equals an amount such that the portion of the Incentive Fee payments to the Advisor based on capital gains for the period equals 20% of the period’s remaining excess gain amount. The result of this formula is that, if the portion of the Incentive Fee based on income for the period exceeds the period’s hurdle, then the portion of the Incentive Fee based on capital gains will be capped at 20% of the capital gain amount.

In calculating whether the portion of the Incentive Fee based on capital gains is payable with respect to any period, the Company accounts for its assets on a security-by-security basis. In addition, the Company uses the “period-to-period” method pursuant to which the portion of the Incentive Fee based on capital gains for any period is based on realized capital gains for the period reduced by realized capital losses and gross unrealized capital depreciation for the period. Based on current interpretations of Section 205(b)(3) of the Investment Advisers Act of 1940 by the SEC and its staff, the calculation of unrealized depreciation for each portfolio security over a period is based on the fair value of the security at the end of the period compared to the fair value at the beginning of the period. Incentive Fees earned in any of the periods described above are not subject to modification or repayment based upon performance in a subsequent period.

For the three and nine months ended September 30, 2010, the Advisor earned zero and $493,951, respectively, in Incentive Fees from the Company. For the three and nine months ended September 30, 2009, the Advisor earned no incentive fees from the Company.

The Management Agreement provides that the Company will reimburse the Advisor for costs and expenses incurred by the Advisor for office space rental, office equipment and utilities allocable to the Advisor under the Management Agreement, as well as any costs and expenses incurred by the Advisor relating to any non-investment advisory, administrative or operating services provided by the Advisor to the Company. For the three and nine months ended September 30, 2010, the Company incurred $394,306 and $1,178,267, respectively, for costs and expenses reimbursable to the Advisor under the Management Agreement. Reimbursements to the Advisor for the three and nine months ended September 30, 2009 were $341,842 and $1,028,939, respectively.

From time to time, the Advisor may pay amounts owed by the Company to third party providers of goods or services. The Company will subsequently reimburse the Advisor for such amounts paid on its behalf. Reimbursements to the Advisor for the three and nine months ended September 30, 2010 were $377,773 and $2,092,971, respectively. Reimbursements to the Advisor for the three and nine months ended September 30, 2009 were $322,201 and $996,768, respectively.

No person who is an officer, director or employee of the Advisor and who serves as a director of the Company receives any compensation from the Company for such services. Directors who are not affiliated with the Advisor receive compensation for their services and reimbursement of expenses incurred to attend meetings.

The Company also has entered into an administration agreement with BlackRock Financial Management, Inc. (the “Administrator”) under which the Administrator provides administrative services to the Company. For providing these services, facilities and personnel, the Company reimburses the Administrator for the Company’s allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the administration agreement, including rent and the Company’s allocable portion of the cost of certain of the Company’s officers and their respective staffs. For the three and nine months ended September 30, 2010, the Company incurred $161,284 and $552,651, respectively, for administrative services expenses payable to the Administrator under the administration agreement. For the three and nine months ended September 30, 2009, the Company incurred $148,941 and $482,916, respectively, in such expenses.

The PNC Financial Services Group, Inc. (“PNC”) is a significant stockholder of the ultimate parent of the Administrator. BNY Mellon Investment Servicing Inc. (“BMIS”), formerly PNC Global Investment Servicing Inc. and until recently a subsidiary of PNC, provides administrative and accounting services to the Company pursuant to a Sub-Administration and Accounting Services Agreement. PFPC Trust Company, until recently another subsidiary of PNC, provides custodian services to the Company pursuant to a Custodian Services Agreement. Also, BMIS provides transfer agency and compliance support services to the Company pursuant to a Transfer Agency Agreement and a Compliance Support Services Agreement, respectively. Effective July 1, 2010, BMIS and PFPC Trust Company were acquired by subsidiaries of The Bank of New York Mellon Corporation and are no longer considered related parties of the Company as of and after that date.

For the services provided to the Company by BMIS and its affiliates, BMIS is entitled to an annual fee of 0.02% of the Company’s average net assets plus reimbursement of reasonable expenses, and a base fee, payable monthly. PFPC Trust Company may charge the Company additional fees for cash overdraft balances or for sweeping excess cash balances. For the six months ended June 30, 2010, the Company incurred $109,755 for administrative, accounting, custodian and transfer agency services fees payable to BMIS and its affiliates under the related agreements. For the three and nine months ended September 30, 2009, the Company incurred $35,749 and $146,178, respectively, for such fees payable to BMIS and its affiliates.

In November 2007, the Company’s Board of Directors authorized the purchase by the Advisor from time to time in the open market of an indeterminate number of shares of the Company’s common stock, in the Advisor’s discretion, subject to compliance with the Company’s and the Advisor’s applicable policies and requirements of law. Pursuant to this authorization, during the nine months ended September 30, 2009, the Advisor purchased 80,867 shares of the Company’s common stock in the open market for $312,322, including brokerage commissions. There were no such purchases during the nine months ended September 30, 2010.

At September 30, 2010 and December 31, 2009, the Advisor owned directly approximately 471,000 and 555,000 shares, respectively, of the Company’s common stock, representing approximately 0.7% and 1.0% of the total shares outstanding. At September 30, 2010 and December 31, 2009, other entities affiliated with the Administrator beneficially owned indirectly approximately 1,762,000 and 2,611,000 shares, respectively, of the Company’s common stock, representing approximately 2.7% and 4.6% of the total shares outstanding. An entity affiliated with the Administrator has ownership and financial interests in the Advisor.

4. Earnings per share

The following information sets forth the computation of basic and diluted net increase in net assets from operations per share (earnings per share) for the three and nine months ended September 30, 2010 and 2009.


	Three months ended September 30, 2010		Three months ended September 30, 2009		Nine months ended September 30, 2010		Nine months ended September 30, 2009
Numerator for basic and diluted net increase in net assets per share	$	16,315,704	$	31,145,966	$	69,133,587	$	50,900,596
Denominator for basic and diluted weighted average shares		65,509,414		56,338,835		59,898,128		55,738,396
Basic/diluted net increase in net assets per share from operations	$	0.25	$	0.55	$	1.15	$	0.91

Diluted net increase in net assets per share from operations equals basic net increase in net assets per share from operations for each period because there were no common stock equivalents outstanding during the above periods.

5. Investments

Purchases of investments for the three months ended September 30, 2010 and 2009 totaled $177,428,077 and $10,983,186, respectively, and for the nine months ended September 30, 2010 and 2009 totaled $321,716,307 and $38,173,072, respectively. Proceeds from sales, repayments and other exits of investments for the three months ended September 30, 2010 and 2009 totaled $100,205,621 and $28,339,844, respectively, and for the nine months ended September 30, 2010 and 2009 totaled $354,230,907 and $72,248,410, respectively.

Under the 1940 Act, the Company is required to separately identify non-controlled investments where it owns 5% or more of a portfolio company’s outstanding voting securities as investments in “affiliated” companies. In addition, under the 1940 Act, the Company is required to separately identify investments where it owns more than 25% of a portfolio company’s outstanding voting securities as investments in “controlled” companies. Detailed information with respect to the Company’s non-controlled affiliated and controlled investments is contained in the accompanying schedules of investments and other financial statements. The information in the tables below is presented on an aggregate portfolio basis, without segregating the non-controlled non-affiliated, non-controlled affiliated and controlled investment categories.

At September 30, 2010, investments consisted of the following:


	Cost			Fair Value
Senior secured notes	$	94,823,173		$	86,493,161
Unsecured debt		64,430,370			4,455,439
Subordinated debt		226,781,831			216,564,091
Senior secured loans:
First lien		125,429,575			115,065,755
Second/other priority lien		359,455,978			312,510,022

Total senior secured loans		484,885,553			427,575,777

Preferred stock		13,690,382			5,355,040
Common stock		57,370,754			71,658,614
Limited partnership/limited liability company interests		29,482,499			23,715,147
Equity warrants/options		2,668,710			5,235,808

Total investments including unearned income		974,133,272			841,053,077
Unearned income		(7,305,983	)		(7,305,983	)

Total investments	$	966,827,289		$	833,747,094

At December 31, 2009, investments consisted of the following:


	Cost			Fair Value
Senior secured notes	$	54,634,954		$	48,407,746
Unsecured debt		171,308,101			126,984,798
Subordinated debt		146,516,172			133,232,136
Senior secured loans:
First lien		119,531,264			115,409,425
Second/other priority lien		496,846,524			387,743,569

Total senior secured loans		616,377,788			503,152,994

Preferred stock		12,590,382			5,896,040
Common stock		20,872,742			18,870,342
Limited partnership/limited liability company interests		35,375,700			13,082,528
Equity warrants/options		1,053,450			1,024,747

Total investments including unearned income		1,058,729,289			850,651,331
Unearned income		(3,909,286	)		(3,909,286	)

Total investments	$	1,054,820,003		$	846,742,045

The industry composition of the portfolio at fair value at September 30, 2010 and December 31, 2009 was as follows:


Industry	September 30, 2010			December 31, 2009
Personal and Other Services		14.4	%		9.4	%
Business Services		11.4			12.6
Consumer Products		9.4			6.0
Printing, Publishing and Media		9.0			3.2
Healthcare		8.8			10.0
Distribution		6.6			4.8
Manufacturing		6.4			7.6
Electronics		6.0			8.5
Financial Services		5.8			4.6
Building and Real Estate		5.4			1.0
Retail		4.2			4.6
Beverage, Food and Tobacco		3.9			4.0
Chemicals		3.9			4.4
Containers and Packaging		2.9			2.7


Industry	September 30, 2010			December 31, 2009
Entertainment and Leisure		1.5			2.6
Transportation		0.4			6.3
Metals		—			4.1
Utilities		—			3.6

Total		100.0	%		100.0	%

The geographic composition of the portfolio at fair value at September 30, 2010 was United States 92.5% and Canada 7.5%, and at December 31, 2009 was United States 93.7%, Canada 6.3% and United Kingdom and other less than 0.1%. The geographic composition is determined by the location of the corporate headquarters of the portfolio company.

In the ordinary course of its business, the Company manages a variety of risks relating to its investments, including market risk and credit risk. Market risk is the risk of potential adverse changes to the values of investments because of changes in market conditions such as interest rate movements and volatility in investment prices. Credit risk is the risk of default or non-performance by portfolio companies equivalent to the investment’s carrying amount. The Company is also exposed to credit risk related to maintaining all of its cash and cash equivalents at a major financial institution.

The Company has investments in lower rated and comparable quality unrated senior and junior secured, unsecured and subordinated debt securities and loans, which are subject to a greater degree of credit risk than more highly rated investments. The risk of loss due to default by the issuer is significantly greater for holders of such securities and loans, particularly in cases where the investment is unsecured or subordinated to other creditors of the issuer.

6. Foreign currency transactions

The Company may enter into forward foreign currency contracts from time to time to facilitate settlement of purchases and sales of investments denominated in foreign currencies or to help mitigate the impact that an adverse change in foreign exchange rates would have on the value of the Company’s investments denominated in foreign currencies. A forward foreign currency contract is a commitment to purchase or sell a foreign currency at a future date (usually the security transaction settlement date) at a negotiated forward rate. These contracts are marked-to-market by recognizing the difference between the contract exchange rate and the current market rate as unrealized appreciation or depreciation. Realized gains or losses are recognized when contracts are settled. The Company’s forward foreign currency contracts generally have terms of approximately three months. The volume of open contracts at the end of each reporting period is reflective of the typical volume of transactions during each calendar quarter. Risks may arise as a result of the potential inability of the counterparties to meet the terms of their contracts. The Company attempts to limit this risk by dealing with creditworthy counterparties.

At September 30, 2010, details of open forward foreign currency contracts were as follows:


Foreign Currency	Settlement Date		Amount and Transaction		US$ Value at Settlement Date		US$ Value at September 30, 2010		Unrealized Depreciation
Canadian dollar		October 20, 2010		30,125,000 Sold	$	28,794,961	$	29,229,521	$	(434,560	)

At December 31, 2009, details of open forward foreign currency contracts were as follows:


Foreign Currency	Settlement Date		Amount and Transaction		US$ Value at Settlement Date			US$ Value at December 31, 2009			Unrealized Appreciation
Canadian dollar		January 27, 2010		795,444 Purchased	$	(759,501	)	$	(760,561	)	$	1,060
Canadian dollar		January 27, 2010		31,500,000 Sold		30,316,883			30,118,610			198,273
Canadian dollar		January 27, 2010		800,000 Sold		769,582			764,917			4,665

Total					$	30,326,964		$	30,122,966		$	203,998

All realized and unrealized gains and losses on forward foreign currency contracts are included in earnings (changes in net assets) and are reported as separate line items within the Company’s statements of operations. Unrealized gains and losses on forward foreign currency contracts are also reported as separate line items within the Company’s statements of assets and liabilities.

7. Credit facility and borrowings

Under the terms of the Company’s amended and restated Senior Secured, Multi-Currency Credit Agreement (the “Credit Facility”), as amended on December 28, 2007, certain lenders agreed to extend credit to the Company in an

aggregate principal amount not to exceed $545,000,000 outstanding, at any one time, consisting of $400,000,000 in revolving loan commitments and $145,000,000 in term loan commitments. On April 20, 2010, the Company amended the Credit Facility to extend through December 6, 2013 certain existing lenders’ commitments. These extended commitments, together with the addition of commitments from new lenders, total $375,000,000, consisting of $275,000,000 of revolving loan commitments and $100,000,000 of term loan commitments. Non-extending lender commitments of $245,000,000, consisting of $200,000,000 of revolving loan commitments and $45,000,000 of term loan commitments, mature on December 6, 2010 unless extended prior to such date. The Credit Facility is secured by substantially all of the assets in the Company’s portfolio, including cash and cash equivalents. Subject to certain exceptions, pricing for outstanding borrowings made by extending lenders and new lenders is at LIBOR plus an applicable spread of either 3.00% or 3.25% for revolving loans, based on a pricing grid depending on the Company’s credit rating, and LIBOR plus 3.00% for term loans. Pricing for outstanding borrowings made by non-extending lenders remains at LIBOR plus 0.875% with respect to revolving loans and LIBOR plus 1.50% with respect to term loans. The Credit Facility does not contain a LIBOR floor requirement. At September 30, 2010, the effective LIBOR spread under the Credit Facility was 2.83%. Term loan commitments under the Credit Facility have been fully drawn and, once repaid, may not be reborrowed. The Credit Facility also includes an “accordion” feature that allows the Company, under certain circumstances, to increase the size of the Credit Facility by up to an additional $275,000,000 of revolving loan commitments and $250,000,000 of term loan commitments. The Credit Facility is used to supplement the Company’s equity capital to make additional portfolio investments and for other general corporate purposes.

At September 30, 2010, the Company had $205,500,000 drawn on the Credit Facility versus $296,000,000 at December 31, 2009. Of the amount drawn at September 30, 2010, $70,473,685 matures on December 6, 2010 and $135,026,315 matures on December 6, 2013. The average debt outstanding on the Credit Facility during the three and nine months ended September 30, 2010 was $176,288,043 and $219,033,333, respectively. The maximum amounts borrowed during the three and nine months ended September 30, 2010 were $205,500,000 and $314,000,000, respectively, and during the three and nine months ended September 30, 2009 were $383,000,000 and $434,000,000. The remaining amount available under the Credit Facility was $414,500,000 at September 30, 2010, of which $245,000,000 expires December 6, 2010.

The weighted average annual interest cost under the Credit Facility for the three and nine months ended September 30, 2010 was 2.96% and 2.25%, respectively, and for the three and nine months ended September 30, 2009 was 1.44% and 1.56%, exclusive of commitment fees and of other prepaid expenses related to establishing the Credit Facility. With respect to any unused portion of the commitments under the Credit Facility, the Company incurs an annual commitment fee of 0.50% to extending lenders and new lenders and 0.17% to non-extending lenders. Commitment fees incurred for the three and nine months ended September 30, 2010 were $417,243 and $843,784, respectively, and for the three and nine months ended September 30, 2009 were $76,451 and $181,040.

The April 2010 amendment to the Credit Facility did not substantially change the financial and operational covenants required under the previous agreement. At September 30, 2010, the Company was in compliance with all such covenants.

8. Capital stock

As a closed-end investment company regulated as a BDC under the 1940 Act, the Company is prohibited from selling shares of its common stock at a price below the current net asset value of the stock, or NAV, unless the Company’s stockholders approve such a sale and its Board of Directors makes certain determinations. On February 8, 2010, subject to certain Board of Director determinations, the Company’s stockholders approved the ability to sell or otherwise issue shares of the Company’s common stock at a price below its then current net asset value per share for a twelve month period expiring on the anniversary of the date of stockholder approval. In any such case, the price at which the Company’s common stock would be issued and sold may not be less than a price that, in the determination of the Company’s Board of Directors, closely approximates the market value of such common stock. Any sale of the Company’s common stock at a price below NAV would have a dilutive effect on NAV.

In 2008, the Company’s Board of Directors approved a share repurchase plan under which the Company may repurchase up to 2.5 percent of its outstanding shares of common stock from time to time in open market or privately negotiated transactions. In 2009, the Board of Directors approved an extension and increase to the plan which authorized the Company to repurchase up to an additional 2.5 percent of its outstanding shares of common stock. In May 2010, the repurchase plan was further extended through the earlier of June 30, 2011 or until the approved number of shares has been repurchased. During the nine months ended September 30, 2009, the Company purchased a total 583,572 shares of its common stock on the open market for $2,234,892, including brokerage commissions. There were no such purchases during the nine months ended September 30, 2010. Since inception of the repurchase plan through September 30, 2010, the Company has purchased 961,679 shares of its common stock on the open market for $5,425,900, including brokerage commissions. At September 30, 2010, the total number of remaining shares authorized for repurchase was 1,794,971. The Company currently holds the shares it repurchased in treasury.

On June 7, 2010, the Company’s stockholders approved an amendment to the Company’s Certificate of Incorporation to increase the number of authorized shares of the Company’s common stock from 100,000,000 to 200,000,000. The amendment was effective on that date.

9. Guarantees and commitments

In the normal course of business, the Company may enter into guarantees on behalf of portfolio companies. Under these arrangements, the Company would be required to make payments to third parties if the portfolio companies were to default on their related payment obligations. At September 30, 2010 and December 31, 2009, the maximum amount of potential future payments under such guarantees was $6,000,000, with an expiration of December 31, 2011. Guarantees made on behalf of portfolio companies are considered in determining the fair value of the Company’s investments. The potential liability under such guarantees is reflected at fair value in the Company’s schedules of investments.

In the normal course of business, the Company enters into contractual agreements that provide general indemnifications against losses, costs, claims and liabilities arising from the performance of individual obligations under such agreements. The Company has had no prior claims or payments pursuant to such agreements. The Company’s individual maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, based on management’s experience, the Company expects the risk of loss to be remote.

From time to time, the Company may be a party to certain legal proceedings incidental to the normal course of its business, including the enforcement of the Company’s rights under contracts with its portfolio companies. While the Company cannot predict the outcome of these legal proceedings with certainty, it does not expect that these proceedings will have a material effect on its financial statements.

10. Fair value of financial instruments

The carrying values of the Company’s financial instruments approximate fair value. The carrying values of receivables, other assets, accounts payable and accrued expenses approximate fair value due to their short maturities. The carrying and fair values of the Company’s Credit Facility payable were $205,500,000 and $204,473,000 at September 30, 2010 and $296,000,000 and $287,120,000 at December 31, 2009, respectively.

The following tables summarize the fair values of the Company’s investments, forward foreign currency contracts and cash and cash equivalents based on the inputs used at September 30, 2010 and December 31, 2009 in determining such fair values:


				Fair Value Inputs at September 30, 2010
	Fair Value at September 30, 2010			Price Quotations (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Senior secured notes	$	86,493,161		$	—	$	—		$	86,493,161
Unsecured debt		4,285,214			—		—			4,285,214
Subordinated debt		213,054,395			—		—			213,054,395
Senior secured loans		423,949,715			—		—			423,949,715
Preferred stock		5,355,040			—		—			5,355,040
Common stock		71,658,614			—		—			71,658,614
Limited partnership/limited liability company interests		23,715,147			—		—			23,715,147
Equity warrants/options		5,235,808			—		—			5,235,808

Total investments		833,747,094			—		—			833,747,094
Forward foreign currency contracts		(434,560	)		—		(434,560	)		—
Cash and cash equivalents		54,551,235			54,551,235		—			—

Total	$	887,863,769		$	54,551,235	$	(434,560	)	$	833,747,094


				Fair Value Inputs at December 31, 2009
	Fair Value at December 31, 2009			Price Quotations (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Senior secured notes	$	48,407,746		$	—	$	—		$	48,407,746
Unsecured debt		126,312,042			—		—			126,312,042
Subordinated debt		131,337,094			—		—			131,337,094


			Fair Value Inputs at December 31, 2009
	Fair Value at December 31, 2009		Price Quotations (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Senior secured loans		501,811,506		—		—		501,811,506
Preferred stock		5,896,040		—		—		5,896,040
Common stock		18,870,342		—		—		18,870,342
Limited partnership/limited liability company interests		13,082,528		—		—		13,082,528
Equity warrants/options		1,024,747		—		—		1,024,747

Total investments		846,742,045		—		—		846,742,045
Forward foreign currency contracts		203,998		—		203,998		—
Cash and cash equivalents		5,807,901		5,807,901		—		—

Total	$	852,753,944	$	5,807,901	$	203,998	$	846,742,045

In determining the fair values of the Company’s forward foreign currency contracts at September 30, 2010 and December 31, 2009, the Company used unadjusted indicative price quotations for similar assets (Level 2). The following tables summarize the valuation techniques used at September 30, 2010 and December 31, 2009 in determining the fair values of the Company’s investments for which significant unobservable inputs (Level 3) were used:


			Valuation Techniques at September 30, 2010
	Fair Value at September 30, 2010		Broker Quote(s) for Identical or Similar Assets		Market Approach, Income Approach or Both, Utilizing One or More Third-Party Valuation Firms
Senior secured notes	$	86,493,161	$	—	$	86,493,161
Unsecured debt		4,285,214		—		4,285,214
Subordinated debt		213,054,395		—		213,054,395
Senior secured loans		423,949,715		2,573,012		421,376,703
Preferred stock		5,355,040		—		5,355,040
Common stock		71,658,614		—		71,658,614
Limited partnership/limited liability company interests		23,715,147		—		23,715,147
Equity warrants/options		5,235,808		—		5,235,808

Total investments	$	833,747,094	$	2,573,012	$	831,174,082


			Valuation Techniques at December 31, 2009
	Fair Value at December 31, 2009		Broker Quote(s) for Identical or Similar Assets		Market Approach, Income Approach or Both, Utilizing One or More Third-Party Valuation Firms
Senior secured notes	$	48,407,746	$	—	$	48,407,746
Unsecured debt		126,312,042		—		126,312,042
Subordinated debt		131,337,094		—		131,337,094
Senior secured loans		501,811,506		4,042,540		497,768,966
Preferred stock		5,896,040		—		5,896,040
Common stock		18,870,342		—		18,870,342
Limited partnership/limited liability company interests		13,082,528		—		13,082,528
Equity warrants/options		1,024,747		—		1,024,747

Total investments	$	846,742,045	$	4,042,540	$	842,699,505

The following is a reconciliation for the three months ended September 30, 2010 of investments for which Level 3 inputs were used in determining fair value:


	Fair Value at June 30, 2010		Amortization of Premium/ Discount - Net		Net Realized Gain (Loss)		Net Change in Unrealized Appreciation or Depreciation			Net Purchases, Sales or Redemptions			Net Transfers in and/or out of Level 3		Fair Value at September 30, 2010
Senior secured notes	$	86,944,431	$	22,203	$	—	$	(473,473	)	$	—		$	—	$	86,493,161
Unsecured debt		8,260,675		149,082		—		(4,262,668	)		138,125			—		4,285,214
Subordinated debt		122,465,964		458,612		—		(960,325	)		91,090,144			—		213,054,395
Senior secured loans		441,466,981		1,929,519		382,107		(5,823,079	)		(14,005,813	)		—		423,949,715
Preferred stock		5,314,040		—		—		41,000			—			—		5,355,040
Common stock		62,672,266		—		—		8,986,348			—			—		71,658,614
Limited partnership/limited liability company interests		21,901,394		—		—		1,813,753			—			—		23,715,147
Equity warrants/options		4,565,206		—		—		670,602			—			—		5,235,808

Total investments*	$	753,590,957	$	2,559,416	$	382,107	$	(7,842	)	$	77,222,456		$	—	$	833,747,094

*	Pursuant to fair value measurement and disclosure guidance, the Company currently categorizes investments by class as shown above.

The following is a reconciliation for the nine months ended September 30, 2010 of investments for which Level 3 inputs were used in determining fair value:


	Fair Value at December 31, 2009		Amortization of Premium/ Discount - Net		Net Realized Gain (Loss)			Net Change in Unrealized Appreciation or Depreciation			Net Purchases, Sales or Redemptions			Net Transfers in and/or out of Level 3		Fair Value at September 30, 2010
Senior secured notes	$	48,407,746	$	56,789	$	111,657		$	(2,102,804	)	$	40,019,773		$	—	$	86,493,161
Unsecured debt		126,312,042		717,070		—			(15,651,628	)		(107,092,270	)		—		4,285,214
Subordinated debt		131,337,094		2,101,268		358			3,066,297			76,549,378			—		213,054,395
Senior secured loans		501,811,506		4,555,527		(49,661,903	)		55,915,017			(88,670,432	)		—		423,949,715
Preferred stock		5,896,040		—		—			(1,641,000	)		1,100,000			—		5,355,040
Common stock		18,870,342		—		1,061,929			16,290,260			35,436,083			—		71,658,614
Limited partnership/limited liability company interests		13,082,528		—		(14,426,995	)		16,525,820			8,533,794			—		23,715,147
Equity warrants/options		1,024,747		—		—			2,595,801			1,615,260			—		5,235,808

Total investments*	$	846,742,045	$	7,430,654	$	(62,914,954	)	$	74,997,763		$	(32,508,414	)	$	—	$	833,747,094

*	Pursuant to fair value measurement and disclosure guidance, the Company currently categorizes investments by class as shown above.

The following is a reconciliation for the three months ended September 30, 2009 of investments for which Level 3 inputs were used in determining fair value:


	Fair Value at June 30, 2009		Amortization of Premium/ Discount - Net		Net Realized Gain (Loss)			Net Change in Unrealized Appreciation or Depreciation		Net Purchases, Sales or Redemptions			Net Transfers in and/or out of Level 3		Fair Value at September 30, 2009
Debt investments	$	852,436,849	$	1,359,922	$	(53,195,865	)	$	66,711,615	$	(24,117,262	)	$	—	$	843,195,259
Equity investments		32,418,749		—		(2,135,407	)		425,875		6,772,549			—		37,481,766

Total investments*	$	884,855,598	$	1,359,922	$	(55,331,272	)	$	67,137,490	$	(17,344,713	)	$	—	$	880,677,025

*	Pursuant to fair value measurement and disclosure guidance, the Company formerly categorized investments by class as shown above.

The following is a reconciliation for the nine months ended September 30, 2009 of investments for which Level 3 inputs were used in determining fair value:


	Fair Value at December 31, 2008		Amortization of Premium/ Discount - Net		Net Realized Gain (Loss)			Net Change in Unrealized Appreciation or Depreciation			Net Purchases, Sales or Redemptions			Net Transfers in and/or out of Level 3		Fair Value at September 30, 2009
Debt investments	$	894,752,768	$	4,023,105	$	(60,258,822	)	$	50,436,857		$	(45,758,649	)	$	—	$	843,195,259
Equity investments		32,092,158		—		(2,123,167	)		(5,665,683	)		13,178,458			—		37,481,766

Total investments*	$	926,844,926	$	4,023,105	$	(62,381,989	)	$	44,771,174		$	(32,580,191	)	$	—	$	880,677,025

*	Pursuant to fair value measurement and disclosure guidance, the Company formerly categorized investments by class as shown above.

There were no transfers between Levels during the three and nine months ended September 30, 2010 and 2009. All realized and unrealized gains and losses are included in earnings (changes in net assets) and are reported as separate line items within the Company’s statements of operations.

The following table contains information with respect to net unrealized appreciation or depreciation on investments for which Level 3 inputs were used in determining fair value that are still held by the Company at September 30, 2010.


	Net Change in Unrealized Appreciation or Depreciation for the Nine Months Ended September 30, 2010 on Investments Held at September 30, 2010			Net Unrealized Appreciation or Depreciation on Investments Held at September 30, 2010
Senior secured notes	$	(2,102,804	)	$	(8,330,012	)
Unsecured debt		(17,802,778	)		(59,974,931	)
Subordinated debt		4,016,295			(10,217,740	)
Senior secured loans		5,881,653			(57,309,776	)
Preferred stock		(1,641,000	)		(8,335,342	)
Common stock		16,667,673			14,287,860
Limited partnership/limited liability company interests		2,098,825			(5,767,352	)
Equity warrants/options		2,595,801			2,567,098

Total investments*	$	9,713,665		$	(133,080,195	)

*	Pursuant to fair value measurement and disclosure guidance, the Company currently categorizes investments by class as shown above.

The following table contains information with respect to net unrealized appreciation or depreciation on investments for which Level 3 inputs were used in determining fair value that were still held by the Company at September 30, 2009.


	Net Change in Unrealized Appreciation or Depreciation for the Nine Months Ended September 30, 2009 on Investments Held at September 30, 2009			Net Unrealized Depreciation on Investments Held at September 30, 2009
Debt investments	$	(8,299,797	)	$	(202,643,742	)
Equity investments		(7,793,553	)		(61,571,868	)

Total investments*	$	(16,093,350	)	$	(264,215,610	)

*	Pursuant to fair value measurement and disclosure guidance, the Company formerly categorized investments by class as shown above.

11. Financial highlights

The following per share data and ratios have been derived from information provided in the financial statements. The following is a schedule of financial highlights for a common share outstanding during the nine months ended September 30, 2010 and 2009.


	Nine months ended September 30, 2010			Nine months ended September 30, 2009
Per Share Data:
Net asset value, beginning of period	$	9.55		$	9.23

Net investment income		0.96			1.28
Net realized and unrealized gain (loss)		0.19			(0.37	)

Total from investment operations		1.15			0.91
Dividend distributions to stockholders from net investment income		(0.96	)		(0.48	)
Issuance of stock at prices above (below) net asset value		0.09			(0.12	)
Offering costs		(0.07	)		—
Purchases of treasury stock at prices below net asset value		—			0.05

Net increase in net assets		0.21			0.36

Net asset value, end of period	$	9.76		$	9.59

Market price, end of period	$	11.50		$	7.42

Total return(1)(2)		49.95	%		(19.81	)%
Ratios / Supplemental Data:
Ratio of operating expenses to average net assets(3)		3.92	%		4.65	%
Ratio of credit facility related expenses to average net assets(3)		1.37	%		1.42	%


	Nine months ended September 30, 2010			Nine months ended September 30, 2009
Ratio of total expenses to average net assets(3)		5.29	%		6.07	%
Ratio of net investment income to average net assets(3)		13.05	%		18.31	%
Net assets, end of period	$	639,077,694		$	540,376,295
Average debt outstanding	$	219,033,333		$	410,515,697
Weighted average shares outstanding		59,898,128			55,738,396
Average debt per share(4)	$	3.66		$	7.37
Portfolio turnover(2)		45	%		8	%

(1)	Total return is based on the change in market price per share during the respective periods. Total return calculations take into account dividends and distributions, if any, reinvested in accordance with the Company’s dividend reinvestment plan and do not reflect brokerage commissions.

(2)	Not annualized.

(3)	Annualized.

(4)	Average debt per share is calculated as average debt outstanding divided by the weighted average shares outstanding during the applicable period.

12. Subsequent events

On November 3, 2010, the Company’s Board of Directors declared a dividend of $0.32 per share, payable on January 3, 2011 to stockholders of record at the close of business on December 20, 2010.

On October 22, 2010, the Company closed an add-on public offering through which it sold 6,000,000 shares of its common stock at a price of $11.95 per share receiving net proceeds of approximately $68 million. On November 1, 2010, the underwriters of the add-on offering exercised their over-allotment option under the underwriting agreement and elected to purchase an additional 900,000 shares of common stock at a price of $11.95 per share, which would result in net proceeds of approximately $10 million on the anticipated closing date of November 4, 2010.

In addition to the subsequent events included in these notes to the financial statements, the Company conducted a review for additional subsequent events and determined that no additional subsequent events had occurred that would require accrual or additional disclosures.

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 the financial statements and notes thereto appearing elsewhere in this report.

Overview

We were incorporated in Delaware on April 13, 2005 and were initially funded on July 25, 2005. Our investment objective is to provide a combination of current income and capital appreciation. We intend to invest primarily in debt and equity securities of private and certain public U.S. middle-market companies.

We are externally managed and have elected to be regulated as a BDC under the 1940 Act. As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets,” including securities of private or thinly traded public U.S. companies, cash, cash equivalents, U.S. Government securities and high-quality debt investments that mature in one year or less.

Investments

Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount of debt and equity capital available to middle-market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we make.

As a BDC, we must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in “eligible portfolio companies.” Under the relevant SEC rules, the term “eligible portfolio company” includes all private companies, companies whose securities are not listed on a national securities exchange, and certain public companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million. These rules also permit us to include as qualifying assets certain follow-on investments in companies that were eligible portfolio companies at the time of initial investment but that no longer meet the definition.

Revenues

We generate revenues primarily in the form of interest on the debt we hold, dividends on our equity interests and capital gains on the sale of warrants and other debt or equity interests that we acquire in portfolio companies. Our investments in fixed income instruments generally have an expected maturity of three to ten years, although we have no lower or upper constraint on maturity, and typically bear interest at a fixed or floating rate. Interest on our debt securities is generally payable quarterly or semi-annually. Payments of principal of our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt instruments and preferred stock investments may defer payments of cash interest or dividends or pay interest or dividends in-kind. Any outstanding principal amount of our debt securities and any accrued but unpaid interest will generally become due at the maturity date. In addition, we may generate revenue in the form of prepayment fees, commitment, origination, structuring or due diligence fees, fees for providing significant managerial assistance and consulting fees.

Expenses

Our primary operating expenses include the payment of a base management fee and, depending on our operating results, an incentive management fee, expenses reimbursable under the management agreement, administration fees and the allocable portion of overhead under the administration agreement. The base management fee and incentive management fee compensate the Advisor for work in identifying, evaluating, negotiating, closing and monitoring our investments. Our management agreement with the Advisor provides that we will reimburse the Advisor for costs and expenses incurred by the Advisor for office space rental, office equipment and utilities allocable to the Advisor under the management agreement, as well as any costs and expenses incurred by the Advisor relating to any non-investment advisory, administrative or operating services provided by the Advisor to us. We bear all other costs and expenses of our operations and transactions.

Critical accounting policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. Our critical accounting policies are further described in the notes to the financial statements and in Note 2 to the financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, which was filed with the SEC on March 12, 2010. See Note 2 to the financial statements in this Quarterly Report for a description of recently issued accounting pronouncements.

Financial and operating highlights

At September 30, 2010:

Investment Portfolio: $888.3 million

Net Assets: $639.1 million

Indebtedness (borrowings under Credit Facility): $205.5 million

Net Asset Value per share: $9.76

Portfolio Activity for the Three Months Ended September 30, 2010:

Cost of investments during period: $177.4 million

Sales, repayments and other exits during period: $100.2 million

Number of portfolio companies at end of period: 51

Operating Results for the Three Months Ended September 30, 2010:

Net investment income before Incentive Fees per share: $0.26

Net investment income per share: $0.26

Dividends declared per share: $0.32

Earnings per share: $0.25

Net investment income before Incentive Fees: $16.8 million

Net investment income: $16.8 million

Net realized and unrealized losses: ($0.5) million

Net increase in net assets from operations: $16.3 million

Portfolio and investment activity

During the three months ended September 30, 2010, we invested approximately $177.4 million across four new and several existing portfolio companies. The new investments consisted primarily of senior loans secured by first liens ($47.2 million, or 27% of the total) or second liens ($39.0 million, or 22%), and unsecured or subordinated debt securities ($91.2 million, or 51%). Additionally, we received proceeds from sales/repayments of investment principal of approximately $100.2 million during the three months ended September 30, 2010.

At September 30, 2010, our net portfolio of $888 million (at fair value) consisted of 51 portfolio companies and was invested 48% in senior secured loans, 24% in unsecured or subordinated debt securities, 12% in equity investments, 10% in senior secured notes and 6% in cash and cash equivalents. Our average portfolio company investment at amortized cost was approximately $19.0 million at September 30, 2010. Our largest portfolio company investment by value was approximately $50.0 million and our five largest portfolio company investments by value comprised approximately 26% of our portfolio at September 30, 2010. At December 31, 2009, our net portfolio of $853 million (at fair value) consisted of 57 portfolio companies and was invested 59% in senior secured loans, 30% in unsecured or subordinated debt securities, 6% in senior secured notes, 5% in equity investments and less than 1% in cash and cash equivalents. Our average portfolio company investment at amortized cost was approximately $18.5 million at December 31, 2009. Our largest portfolio company investment by value was approximately $56.1 million and our five largest portfolio company investments by value comprised approximately 26% of our portfolio at December 31, 2009.

The weighted average yield of the debt and income producing equity securities in our portfolio at fair value was 12.4% at September 30, 2010 and 13.7% at December 31, 2009. The weighted average yields on our senior secured loans and other debt securities at fair value were 10.6% and 15.0%, respectively, at September 30, 2010, versus 11.6% and 17.2% at December 31, 2009. The weighted average yield of the debt and income producing equity securities in our portfolio at their current cost basis was 10.5% at September 30, 2010 and 11.2% at December 31, 2009. The weighted average yields on our senior secured loans and other debt securities at their current cost basis were 9.4% and 11.9%, respectively, at September 30, 2010, versus 9.4% and 14.2% at December 31, 2009. Yields are computed using interest rates and dividend yields as of the balance sheet date and include amortization of loan origination and commitment fees, original issue discount and market premium or discount. Yields exclude common equity investments, preferred equity investments with no stated dividend rate, short-term investments, cash and cash equivalents.

At September 30, 2010, 43% of our debt investments bore interest based on floating rates, such as LIBOR, the Federal Funds Rate or the Prime Rate, and 57% bore interest at fixed rates. The percentage of our total debt investments that bore floating rate interest based on an interest rate floor was 17% at September 30, 2010. At December 31, 2009, 41% of our debt investments bore interest based on floating rates and 59% bore interest at fixed rates. The percentage of our total debt investments that bore floating rate interest based on an interest rate floor was 5% at December 31, 2009.

The Advisor employs a grading system for our entire portfolio. The Advisor grades all loans on a scale of 1 to 4. This system is intended to reflect the performance of the borrower’s business, the collateral coverage of the loans and other factors considered relevant. Generally, the Advisor assigns only one loan grade to each portfolio company for all loan investments in that portfolio company; however, the Advisor will assign multiple ratings when appropriate for different investments in one portfolio company. The following is a description of the conditions associated with each investment rating:

Grade 1: Investments in portfolio companies whose performance is substantially within the Advisor’s expectations and whose risk factors are neutral to favorable to those at the time of the original investment.

Grade 2: Investments in portfolio companies whose performance is below the Advisor’s expectations and that require closer monitoring; however, no loss of investment return (interest and/or dividends) or principal is expected.

Grade 3: Investments in portfolio companies whose performance is below the Advisor’s expectations and for which risk has increased materially since origination. Some loss of investment return is expected, but no loss of principal is expected. Companies graded 3 generally will be out of compliance with debt covenants and will be unlikely to make debt repayments on their original schedule.

Grade 4: Investments in portfolio companies whose performance is materially below the Advisor’s expectations where business trends have deteriorated and risk factors have increased substantially since the original investment. Investments graded 4 are those for which some loss of principal is expected.

The Advisor monitors and, when appropriate, changes the investment ratings assigned to each investment in our portfolio. In connection with our valuation process, the Advisor and Board of Directors review these investment ratings on a quarterly basis. Our average investment rating was 1.30 at September 30, 2010 versus 1.46 at December 31, 2009. The following is a distribution of the investment ratings of our portfolio companies at September 30, 2010 and December 31, 2009:


	September 30, 2010			December 31, 2009
Grade 1	$	643,120,739		$	553,361,682
Grade 2		166,472,284			224,552,728
Grade 3		6,159,981			51,207,962
Grade 4		25,300,073			21,528,959

Total investments including unearned income		841,053,077			850,651,331
Unearned income		(7,305,983	)		(3,909,286	)

Total investments	$	833,747,094		$	846,742,045

Results comparisons for the three months ended September 30, 2010 and 2009.

Investment income

Investment income totaled $24,818,170 and $29,359,486, respectively, for the three months ended September 30, 2010 and 2009, of which $14,846,614 and $15,097,495 were attributable to interest and fees on senior secured loans, $9,098,750 and $13,529,859 to interest earned on other debt securities, $870,182 and $730,987 to dividends from preferred equity securities and $2,624 and $1,145 to interest earned on cash equivalents, respectively. The decrease in investment income for the three months ended September 30, 2010 primarily reflects a reduction in the size of our portfolio due to sales, repayments and other exits. Total investments at their current cost basis were $966,827,289 at September 30, 2010, compared to $1,144,892,635 at September 30, 2009.

Expenses

Expenses for the three months ended September 30, 2010 and 2009 were $8,006,918 and $7,577,905, respectively, which consisted of $4,049,347 and $4,555,811 in base management fees, $1,748,712 and $1,456,369 in interest expense and fees related to the Credit Facility, $713,305 and $172,031 in amortization of debt issuance costs, $394,306 and $341,872 in Advisor expenses, $394,589 and $342,878 in professional fees, $203,182 and $174,490 in administrative services, $123,409 and $152,181 in insurance expenses, $93,500 and $84,083 in director fees and $286,568 and $298,190 in other expenses, respectively. The decrease in base management fees reflects a reduction in the size of our portfolio due to sales, repayments and other exits. The increase in interest expense and fees related to the Credit Facility and amortization of debt issuance costs reflect the higher interest spread we pay and the incurrence of structuring and arrangement fees as a result of the amendment of our Credit Facility in April 2010.

Net investment income

Net investment income was $16,811,252 and $21,781,581 for the three months ended September 30, 2010 and 2009, respectively. The decrease is primarily a result of a decline in interest income.

Net realized gain or loss

Net realized gain of $1,275,938 for the three months ended September 30, 2010 was the result of $400,317 in net gains realized from the disposition of our investments and $875,621 in net gain realized on foreign currency transactions. Foreign currency gains mainly represent gains on forward currency contracts used to hedge our investments denominated in foreign currencies. For the three months ended September 30, 2009, net realized loss was $(56,312,662), which was comprised of $(55,331,272) in net losses realized from the disposition or restructuring of our investments and $(981,390) in net loss realized on foreign currency transactions.

Net unrealized appreciation or depreciation

For the three months ended September 30, 2010 and 2009, the change in net unrealized depreciation was a decrease (increase) in net unrealized depreciation of $(1,771,486) and $65,677,047, respectively. The increase in net unrealized depreciation for the three months ended September 30, 2010 was comprised of an increase in net unrealized depreciation on investments of $(7,842) and a net unrealized foreign currency translation loss of $(1,763,644). The valuations of our investments on a net basis were relatively unchanged during the period, primarily a result of stabilizing capital market conditions. Market-wide movements and trading multiples are not necessarily indicative of any fundamental change in the condition or prospects of our portfolio companies. The decrease in net unrealized depreciation for the three months ended September 30, 2009 was comprised of a decrease in net unrealized depreciation on investments of $67,137,490 and a net unrealized foreign currency translation loss of $(1,460,443).

Net increase or decrease in net assets resulting from operations

The net increase or decrease in net assets resulting from operations for the three months ended September 30, 2010 and 2009 was an increase of $16,315,704 and $31,145,966, respectively. As compared to the prior period, the decrease primarily reflects the decline in net investment income and increase in net unrealized depreciation on investments, net of realized gains and losses, for the three months ended September 30, 2010.

Results comparisons for the nine months ended September 30, 2010 and 2009.

Investment income

Investment income totaled $80,828,224 and $94,610,414, respectively, for the nine months ended September 30, 2010 and 2009, of which $45,417,080 and $52,118,042 were attributable to interest and fees on senior secured loans, $32,835,665 and $40,338,190 to interest earned on other debt securities, $2,532,011 and $2,143,157 to dividends from preferred equity securities, $5,968 and $11,025 to interest earned on cash equivalents and $37,500 and zero to other income, respectively. The decrease in investment income for the nine months ended September 30, 2010 primarily reflects a reduction in the size of our portfolio due to sales, repayments and other exits. Total investments at their current cost basis were $966,827,289 at September 30, 2010, compared to $1,144,892,635 at September 30, 2009.

Expenses

Expenses for the nine months ended September 30, 2010 and 2009 were $23,331,070 and $23,542,048, respectively, which consisted of $12,522,832 and $13,951,061 in base management fees, $493,951 and zero in incentive management fees, $4,570,476 and $5,004,980 in interest expense and fees related to the Credit Facility, $1,469,481 and $511,520 in amortization of debt issuance costs, $1,178,267 and $1,028,939 in Advisor expenses, $790,820 and $949,444 in professional fees, $681,892 and $605,525 in administrative services, $458,020 and $413,406 in insurance expenses, $281,169 and $268,238 in director fees and $884,162 and $808,935 in other expenses, respectively. The decrease in base management fees reflects a reduction in the size of our portfolio due to sales, repayments and other exits. The increase in incentive management fees is due to strong investment earnings, without the substantial net capital depreciation (including net realized and unrealized gains and losses) that had occurred in the prior period. The decrease in interest expense and fees related to the Credit Facility is mainly a result of reduced borrowing levels. Total borrowings were $205,500,000 at September 30, 2010, compared to $347,500,000 at September 30, 2009. The increase in amortization of debt issuance costs reflects the incurrence of structuring and arrangement fees in connection with the amendment of our Credit Facility in April 2010.

Net investment income

Net investment income was $57,497,154 and $71,068,366 for the nine months ended September 30, 2010 and 2009, respectively. The decrease is primarily a result of a decline in interest income.

Net realized gain or loss

Net realized loss of $(62,738,253) for the nine months ended September 30, 2010 was the result of $(62,905,251) in net losses realized from the disposition or restructuring of our investments and $166,998 in net gain realized on foreign currency transactions. Net realized loss on investments for the nine months ended September 30, 2010 resulted primarily from the restructuring of our investments in Arclin US Holdings Inc., Electrical Components International, Inc. and Penton Media Inc. Nearly the entire net realized loss on investments represents amounts that had been reflected in unrealized depreciation on investments in prior periods. Foreign currency gains mainly represent gains on forward currency contracts used to hedge our investments denominated in foreign currencies. For the nine months ended September 30, 2009, net realized loss was $(64,850,420), which was comprised of $(62,381,989) in net losses realized from the disposition or restructuring of our investments and $(2,468,431) in net loss realized on foreign currency transactions.

Net unrealized appreciation or depreciation

For the nine months ended September 30, 2010 and 2009, the change in net unrealized depreciation was a decrease in net unrealized depreciation of $74,374,686 and $44,682,650, respectively. The decrease in net unrealized depreciation for the nine months ended September 30, 2010 was comprised of a decrease in net unrealized depreciation on investments of $74,997,763 and a net unrealized foreign currency translation loss of $(623,077). The decrease in net unrealized depreciation during the first nine months of 2010 was primarily a result of the reversals of prior periods’ net

unrealized depreciation as a result of the investment restructurings and dispositions described above and improved capital market conditions. The valuations of our investments were favorably impacted by market-wide decreases in interest yields, as well as increases in multiples used to estimate the fair value of some of our investments. Market-wide movements and trading multiples are not necessarily indicative of any fundamental change in the condition or prospects of our portfolio companies. The decrease in net unrealized depreciation for the nine months ended September 30, 2009 was comprised of a decrease in net unrealized depreciation on investments of $44,771,174 and a net unrealized foreign currency translation loss of $(88,524).

Net increase or decrease in net assets resulting from operations

The net increase or decrease in net assets resulting from operations for the nine months ended September 30, 2010 and 2009 were increases of $69,133,587 and $50,900,596, respectively. As compared to the prior period, the increase primarily reflects the decrease in net unrealized depreciation on investments, net of realized gains and losses, for the nine months ended September 30, 2010.

Supplemental information

We report our financial results on a GAAP basis; however, management believes that evaluating our ongoing operating results may be enhanced if investors have additional non-GAAP basis financial measures. Management reviews non-GAAP financial measures to assess ongoing operations and, for the reasons described below, considers them to be effective indicators, for both management and investors, of our financial performance over time. Management does not advocate that investors consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.

We record our liability for Incentive Fees as we become legally obligated to pay them, based on a hypothetical liquidation at the end of each reporting period. Our obligation to pay Incentive Fees with respect to any fiscal quarter is based on a formula that reflects our results over a trailing four-fiscal quarter period ending with the current fiscal quarter. We are legally obligated to pay the amount resulting from the formula less any cash payments of Incentive Fees during the prior three quarters. The formula’s requirement to reduce the Incentive Fees by amounts paid with respect to Incentive Fees in the prior three quarters has caused our Incentive Fees expense to become, and currently is expected to be, concentrated in the fourth quarter of each year. Management believes that reflecting Incentive Fees throughout the year, as the related investment income is earned, is an effective measure of our profitability and financial performance that facilitates comparison of current results with historical results and with those of our peers. Our “as adjusted” results reflect Incentive Fees based on the formula we utilize for each trailing four-fiscal quarter period, with the formula applied to the current quarter’s incremental earnings and without any reduction for Incentive Fees paid during the prior three quarters. The resulting amount represents an upper limit of each quarter’s incremental Incentive Fees that we may become legally obligated to pay at the end of the year. Prior year amounts are estimated in the same manner. These estimates represent upper limits because, in any calendar year, subsequent quarters’ investment underperformance could reduce the Incentive Fees payable with respect to prior quarters’ operating results. Changes in the economic environment, financial markets and other parameters used in determining such estimates could cause actual results to differ and such differences could be material. See Note 3 to the financial statements in this Quarterly Report for a more detailed description of the Company’s incentive management fee.

Computations for all periods are derived from our financial statements as follows:


	Three months ended September 30, 2010			Three months ended September 30, 2009			Nine months ended September 30, 2010			Nine months ended September 30, 2009
GAAP Basis:
Net Investment Income	$	16,811,252		$	21,781,581		$	57,497,154		$	71,068,366
Net Increase in Net Assets from Operations		16,315,704			31,145,966			69,133,587			50,900,596
Net Asset Value at end of period		639,077,694			540,376,295			639,077,694			540,376,295
Less: Incremental Incentive Fee expense using existing formula as applied to current period operating results		(3,791,636	)		(4,196,459	)		(11,423,444	)		(13,514,318	)
As Adjusted:
Net Investment Income	$	13,019,616		$	17,585,122		$	46,073,710		$	57,554,048
Net Increase in Net Assets from Operations		12,524,068			26,949,507			57,710,143			37,386,278
Net Asset Value at end of period		627,654,250			526,861,977			627,654,250			526,861,977

Per Share Amounts, GAAP Basis:
Net Investment Income	$	0.26		$	0.39		$	0.96		$	1.28


	Three months ended September 30, 2010		Three months ended September 30, 2009		Nine months ended September 30, 2010		Nine months ended September 30, 2009
Net Increase in Net Assets from Operations		0.25		0.55		1.15		0.91
Net Asset Value at end of period		9.76		9.59		9.76		9.59

Per Share Amounts, As Adjusted:
Net Investment Income	$	0.20	$	0.31	$	0.77	$	1.03
Net Increase in Net Assets from Operations		0.19		0.48		0.96		0.67
Net Asset Value at end of period		9.58		9.35		9.58		9.35

Financial condition, liquidity and capital resources

During the nine months ended September 30, 2010, we generated operating cash flows primarily from interest earned and fees received on senior secured loans and other debt securities, as well as from sales and unsettled purchases of selected portfolio company investments or repayments of principal.

Net cash provided by operating activities during the nine months ended September 30, 2010 was $113,757,266. Our primary sources of cash from operating activities during the period consisted of a net increase in net assets from operations of $69,133,587, an increase of $45,032,517 in payable for investments purchased and proceeds from sales and repayments of investments (net of purchases) of $32,514,600.

We used $65,028,603 for financing activities during the nine months ended September 30, 2010. Our primary uses of cash for financing activities were $50,619,212 of dividend distributions, $90,500,000 of net repayments under our Credit Facility and $7,801,398 of debt issuance costs incurred in connection with our Credit Facility amendment. During the period, we raised $83,892,007 in net proceeds from an add-on public offering of our common stock.

Our senior secured, multi-currency Credit Facility provides us with $620,000,000 in total availability, consisting of $475,000,000 in revolving loan commitments and $145,000,000 in term loan commitments. Commitments that mature on December 6, 2013 total $375,000,000, consisting of $275,000,000 of available revolving loans and $100,000,000 of available term loans. Commitments that mature on December 6, 2010, unless extended prior to such date, total $245,000,000, consisting of $200,000,000 of available revolving loans and $45,000,000 of available term loans. Subject to certain conditions, we have the ability in the future to seek additional commitments from new and existing lenders up to an additional $275,000,000 of revolving loan commitments and $250,000,000 of term loan commitments. The interest rates applicable to the commitments that mature in December 2013 are generally LIBOR plus a spread of either 3.00% or 3.25% for revolving loans, based on a pricing grid depending on our credit rating, and LIBOR plus 3.00% for term loans. The interest rates applicable to the commitments that mature in December 2010 are generally LIBOR plus 0.875% with respect to revolving loans and LIBOR plus 1.50% with respect to term loans. The facility does not contain a LIBOR floor requirement. At September 30, 2010, the effective LIBOR spread under the Credit Facility was 2.83%. The term loans have been fully drawn and, once repaid, may not be reborrowed. The Credit Facility is secured by substantially all of the assets in our portfolio, including cash and cash equivalents. At September 30, 2010, we had $205,500,000 drawn and outstanding under the Credit Facility, with $414,500,000 available to us, subject to compliance with customary affirmative and negative covenants, including the maintenance of a minimum stockholders’ equity, the maintenance of a ratio of not less than 200% of total assets (less total liabilities other than indebtedness) to total indebtedness, and restrictions on certain payments and issuance of debt. Of the amount drawn at September 30, 2010, $70,473,685 matures on December 6, 2010 and $135,026,315 matures on December 6, 2013.

At September 30, 2010, we had $54,551,235 in cash and cash equivalents.

The primary use of existing funds is expected to be purchases of investments in portfolio companies, cash distributions to our stockholders, repayment of indebtedness and other general corporate purposes.

On June 7, 2010, our stockholders approved an amendment to our Certificate of Incorporation to increase the number of authorized shares of our common stock from 100,000,000 to 200,000,000. The amendment became effective on that date.

Our shelf registration permits us to offer, from time to time, up to approximately $830 million (after giving effect to our October 2010 add-on public offering described below) of our common stock, preferred stock, debt securities, warrants representing rights to purchase shares of our common stock, preferred stock or debt securities and subscription rights. As a closed-end investment company regulated as a BDC under the 1940 Act, we are prohibited from selling shares of our common stock at a price below the current net asset value of the stock, or NAV, unless our stockholders approve such a sale and our Board of Directors makes certain determinations. On February 8, 2010, subject to certain

Board of Director determinations, our stockholders approved our ability to sell or otherwise issue shares of our common stock at a price below its then current net asset value per share for a twelve month period expiring on the anniversary of the date of stockholder approval. In any such case, the price at which our common stock would be issued and sold may not be less than a price that, in the determination of our Board of Directors, closely approximates the market value of such common stock. Any sale of the Company’s common stock at a price below NAV would have a dilutive effect on our NAV.

Contractual obligations

A summary of our significant contractual payment obligations for the repayment of outstanding borrowings under our Credit Facility at September 30, 2010 is as follows:


	Payments Due By Period (dollars in millions)
	Total		Less than 1 year		1-3 years		3-5 years		After 5 years

Credit Facility Payable(1)	$	205.5	$	70.5	$	—	$	135.0	$	—
Interest and Commitment Fees Payable on Credit Facility		0.2		0.2		—		—		—

(1)	At September 30, 2010, $414.5 million remained unused under our Credit Facility.

Off-balance sheet arrangements

Dividends

Our quarterly dividends, if any, are determined by our Board of Directors. Dividends are declared considering our estimate of annual taxable income available for distribution to stockholders and the amount of taxable income carried over from the prior year for distribution in the current year. We cannot assure stockholders that they will receive any dividends and distributions or dividends and distributions at a particular level. Dividends declared by the Company since July 25, 2005 (inception of operations) have been as follows:


Dividend Amount Per Share Outstanding		Record Date	Pay Date
	$0.20	December 31, 2005	January 31, 2006
	$0.20	March 15, 2006	March 31, 2006
	$0.23	June 15, 2006	June 30, 2006
	$0.30	September 15, 2006	September 29, 2006
	$0.42	December 31, 2006	January 31, 2007
	$0.42	March 15, 2007	March 30, 2007
	$0.42	May 15, 2007	May 31, 2007
	$0.42	September 14, 2007	September 28, 2007
	$0.43	December 14, 2007	December 31, 2007
	$0.43	March 17, 2008	March 31, 2008
	$0.43	June 16, 2008	June 30, 2008
	$0.43	September 15, 2008	September 30, 2008
	$0.43	December 15, 2008	December 31, 2008
	$0.16	March 20, 2009	April 3, 2009
	$0.16	June 19, 2009	July 2, 2009
	$0.16	September 18, 2009	October 2, 2009
	$0.32	December 21, 2009	January 4, 2010
	$0.32	March 22, 2010	April 5, 2010
	$0.32	May 17, 2010	July 2, 2010
	$0.32	September 17, 2010	October 1, 2010
	$0.32	December 20, 2010	January 3, 2011

Tax characteristics of all dividends are reported to stockholders on Form 1099 after the end of the calendar year.

We have qualified and elected and intend to continue to qualify for the tax treatment applicable to regulated investment companies under Subchapter M of the Code, and, among other things, have made and intend to continue to make the requisite distributions to our stockholders which will relieve us from federal income taxes. Therefore, no provision has been recorded for federal income taxes. We may, at our discretion, carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. We will accrue excise tax on estimated undistributed taxable income as required.

In order to qualify for favorable tax treatment as a RIC, we are required to distribute annually to our stockholders at least 90% of investment company taxable income, as defined by the Code. To avoid federal excise taxes, we must distribute annually at least 98% of our income (both ordinary income and net capital gains).

A portion of amounts we have paid or will pay as dividends to stockholders during 2010 may consist of taxable income carried forward from the prior year. Taxable income carried forward from the prior year to 2010 totaled approximately $25,600,000, or $0.39 per share outstanding at September 30, 2010.

We maintain an “opt out” dividend reinvestment plan for our common stockholders. As a result, except as discussed below, if we declare a dividend, stockholders’ cash dividends will be automatically reinvested in additional shares of our common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash dividends. With respect to our dividends and distributions paid to stockholders during the nine months ended September 30, 2010 and 2009, dividends reinvested pursuant to our dividend reinvestment plan totaled $3,722,710 and $8,164,444, respectively.

Under the terms of our amended and restated dividend reinvestment plan adopted on March 4, 2009, dividends may be paid in newly issued or treasury shares of our common stock at a price equal to 95% of the market price on the dividend payment date. This feature of the plan means that, under certain circumstances, we may issue shares of our common stock at a price below net asset value per share, which could cause our stockholders to experience dilution.

Income we receive from origination, structuring, closing, commitment and other upfront fees associated with investments in portfolio companies is treated as taxable income when received and accordingly, distributed to stockholders. For financial reporting purposes, such fees are recorded as unearned income and accreted/amortized over the life of the respective investment. For the three and nine months ended September 30, 2010, these fees totaled $4,835,000 and $7,235,962. For the three and nine months ended September 30, 2009, there were no such fees. We anticipate earning additional upfront fees in the future and such fees may cause our taxable income to exceed our GAAP income, although the differences are expected to be temporary in nature.

In order to satisfy the annual distribution requirement applicable to RICs, we have the ability to declare a large portion of a dividend in shares of our common stock instead of in cash. As long as a sufficient portion of such dividend is paid in cash (which portion can be as low as 10% for our taxable years ending on or before December 31, 2011) and certain requirements are met, the entire distribution would be treated as a taxable dividend for U.S. federal income tax purposes.

Recent developments

On November 3, 2010, our Board of Directors declared a dividend of $0.32 per share, payable on January 3, 2011 to stockholders of record at the close of business on December 20, 2010.

On October 22, 2010, we closed an add-on public offering through which we sold 6,000,000 shares of our common stock at a price of $11.95 per share receiving approximately $68 million in net proceeds. On November 1, 2010, the underwriters of the add-on offering exercised their over-allotment option under the underwriting agreement and elected to purchase an additional 900,000 shares of common stock at a price of $11.95 per share, which would result in net proceeds of approximately $10 million on the anticipated closing date of November 4, 2010.

Notice is hereby given in accordance with Section 23 of the 1940 Act that from time to time we may purchase shares of our common stock in the open market at prevailing market prices.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We are subject to financial market risks, including changes in interest rates. At September 30, 2010, 43% of our debt investments bore interest based on floating rates, such as LIBOR, the Federal Funds Rate or the Prime Rate. The interest rates on such investments generally reset by reference to the current market index after one to six months. At September 30, 2010, the percentage of our total debt investments that bore floating rate interest based on an interest rate floor was 17%. Floating rate investments subject to a floor generally reset by reference to the current market index after one to six months only if the index exceeds the floor.

To illustrate the potential impact of changes in interest rates, we have performed the following analysis based on our September 30, 2010 balance sheet and assuming no changes in our investment structure. Net asset value is analyzed using the assumptions that interest rates, as defined by the LIBOR and U.S. Treasury yield curves, increase or decrease and that the yield curves of the rate shocks will be parallel to each other. Under this analysis, an instantaneous 100 basis point increase in LIBOR and U.S. Treasury yields would cause a decline of approximately $13,900,000, or $0.21 per share, in the value of our net assets at September 30, 2010 and a corresponding 100 basis point decrease in LIBOR and U.S. Treasury yields would cause an increase of approximately $12,300,000, or $0.19 per share, in the value of our net assets on that date.

While hedging activities may help to insulate us against adverse changes in interest rates, they also may limit our ability to participate in the benefits of lower interest rates with respect to our portfolio of investments. During the three and nine months ended September 30, 2010 and 2009, we did not engage in any interest rate hedging activity.

Item 4.

Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15 under the Securities Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our current disclosure controls and procedures are effective in timely alerting them to material information relating to us that is required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934.

There have been no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

From time to time, we and the Advisor may be a party to certain legal proceedings incidental to the normal course of our business, including the enforcement of our rights under contracts with our portfolio companies. While we cannot predict the outcome of these legal proceedings with certainty, we do not expect that these proceedings will have a material effect on our financial statements.

Item 1A.

Risk Factors

There have been no material changes from the risk factors previously disclosed in our most recent Form 10-K filing.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Sales of unregistered securities

None.

Issuer purchases of equity securities

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

[Reserved]

Item 5.

Other Information

None.

Item 6.

Exhibits.

(a)

Exhibits.



10.1		Underwriting Agreement dated October 19, 2010 by and among BlackRock Kelso Capital Corporation, BlackRock Kelso Capital Advisors LLC and Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse Securities (USA) LLC, and UBS Securities LLC as representatives of the several underwriters named in Schedule A thereto.

31.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	BLACKROCK KELSO CAPITAL CORPORATION

Date: November 4, 2010	By:	/s/ James R. Maher
		James R. Maher
		Chief Executive Officer

Date: November 4, 2010	By:	/s/ Frank D. Gordon
		Frank D. Gordon
		Chief Financial Officer Chief Financial Officer

BlackRock Capital Investment Corp - FORM 10-Q - November 4, 2010

Attached files

Stock widget

Investing forum

BlackRock Capital Investment Corp Reports

Also read