UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[x]         Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

or

[  ]         Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant has submitted electronically 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).

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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Number of outstanding limited partnership interests of the registrant on November 8, 2013 is 258,816.

Table of contents    

 PART I – FINANCIAL INFORMATION

Item 1.  Consolidated Financial Statements

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(1)       Basis of Presentation and Consolidation

The accompanying consolidated financial statements of ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P. (the “Partnership”) have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission for Quarterly Reports on Form 10-Q.  In the opinion of the general partner of the Partnership, ICON GP 14, LLC, a Delaware limited liability company (the “General Partner”), which is a wholly-owned subsidiary of ICON Capital, LLC, a Delaware limited liability company formerly known as ICON Capital Corp. (the “Investment Manager”), all adjustments, which are of a normal recurring nature, considered necessary for a fair presentation have been included.  These consolidated financial statements should be read together with the consolidated financial statements and notes included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2012.  The results for the interim period are not necessarily indicative of the results for the full year.

Credit Quality of Notes Receivable and Finance Leases and Credit Loss Reserve

The Investment Manager weighs all credit decisions based on a combination of external credit ratings as well as internal credit evaluations of all borrowers. A borrower’s credit is analyzed using those credit ratings as well as the borrower’s financial statements and other financial data deemed relevant. 

As the Partnership’s financing receivables, generally notes receivable and finance leases, are limited in number, the Investment Manager is able to estimate the credit loss reserve based on a detailed analysis of each financing receivable as opposed to using portfolio-based metrics and credit loss reserve.  Financing receivables are analyzed quarterly and categorized as either performing or non-performing based on payment history. If a financing receivable becomes non-performing due to a borrower’s missed scheduled payments or failed financial covenants, the Investment Manager analyzes whether a credit loss reserve should be established or whether the financing receivable should be restructured. Material events would be specifically disclosed in the discussion of each financing receivable held.

Notes receivable are generally placed in a non-accrual status when payments are more than 90 days past due. Additionally, the Investment Manager periodically reviews the creditworthiness of companies with payments outstanding less than 90 days and based upon the Investment Manager’s judgment, these accounts may be placed in a non-accrual status.

In accordance with the cost recovery method, payments received on non-accrual loans are applied to principal if there is doubt regarding the ultimate collectability of principal. If collection of the principal of non-accrual loans is not in doubt, interest income is recognized on a cash basis. Loans in a non-accrual status may not be restored to accrual status until all delinquent payments have been received, and the Partnership believes recovery of the remaining unpaid receivable is probable.

The Partnership charges off a loan in the period that it is deemed uncollectible and records a reduction in the allowance for loan losses and the balance of the loan.

(2)       Net Investment in Notes Receivable

Net investment in notes receivable consisted of the following:

On July 26, 2011, the Partnership made a secured term loan to Western Drilling Inc. and Western Landholdings, LLC (collectively “Western Drilling”) in the amount of $9,465,000. The loan bears interest at 14% per year and matures on September 1, 2016.  The loan is secured by, among other collateral, a first priority security interest in oil and gas drilling rigs and a mortgage on real property.  Due to a change in market demand, the utilization of Western Drilling’s rigs has declined which led to Western Drilling’s failure to meet recent payment obligations. As a result, the loan was placed on a non-accrual status and the Partnership recorded a credit loss of $2,484,517 during the three months ended September 30, 2013 based on the estimated value of the recoverable collateral. The carrying value of the non-accrual status loan (the estimated value of the recoverable collateral less estimated selling costs) at September 30, 2013 was $5,660,070. Finance income recognized on the impaired loan was approximately $9,000 and $635,000 for the three and nine months ended September 30, 2013, respectively. As a non-accrual status loan, any future change in the fair value of the recoverable collateral will be recorded as an adjustment to credit loss.  However, the net carrying amount of the loan shall at no time exceed the recorded investment in the loan at the time it was deemed impaired.

On March 9, 2012, the Partnership made a term loan in the amount of $7,500,000 to Kanza Construction, Inc. The loan bore interest at 13% per year and was for a period of 60 months. The loan was secured by all of Kanza’s assets. As a result of Kanza’s unexpected financial hardship and failure to meet certain payment obligations, the loan was placed on a non-accrual status and the Partnership recorded a credit loss reserve of $2,940,000 during the year ended December 31, 2012 based on the estimated value of the recoverable collateral. During the nine months ended September 30, 2013, the Partnership recorded an additional credit loss reserve of approximately $19,000 based on cash proceeds of approximately $754,000 received from the sale of the collateral. No finance income was recognized on the impaired loan during the nine months ended September 30, 2013. As of September 30, 2013, the Partnership has fully reserved the remaining balance of the loan of $2,958,795. The Partnership continues to pursue all legal remedies to obtain payment.

On March 1, 2013, the Partnership made a secured term loan in the amount of $4,800,000 to Heniff Transportation Systems, LLC and Heniff TTL, LLC (collectively, “Heniff”).  The loan bears interest at 12.25% per year and is for a period of 42 months.  The loan is secured by, among other things, a second priority security interest in Heniff’s assets, including tractors and stainless steel tank trailers.

On September 3, 2013, EMS Enterprise Holdings, LLC, EMS Holdings II, LLC, EMS Engineered Materials Solutions, LLC, EMS CUP, LLC and EMS EUROPE, LLC (collectively, “EMS”) satisfied its obligation in connection with a term loan scheduled to mature on September 1, 2014 by making a prepayment of approximately $2,135,000 to the Partnership, comprised of all outstanding principal, accrued and unpaid interest, and prepayment fees of $108,750. As a result, the Partnership recognized additional finance income of approximately $84,000.

On September 16, 2013, the Partnership made a secured term loan in the amount of $9,000,000 to Cenveo Corporation (“Cenveo”). The loan bears interest at the London Interbank Offered Rate (“LIBOR”) plus 11.0% per year and is for a period of 60 months. The loan is secured by a first priority security interest in specific equipment used to produce, print, fold, and package printed commercial envelopes. Subsequent to September 30, 2013, the Partnership borrowed $5,850,000 of non-recourse long-term debt secured by the Partnership’s interest in the secured term loan to, and collateral from, Cenveo.

On September 25, 2013, the Partnership, together with a third-party creditor, made a senior secured term loan (the “Loan”) to Asphalt Carrier Shipping Company Limited (“Asphalt”), of which the Partnership’s share is $2,200,000 (the “Partnership Loan”). The Partnership Loan bears interest at 15.5% per year and matures on December 31, 2018. The Loan is secured by a first priority security interest in Asphalt’s vessel, earnings from the vessel and the equity interests of Asphalt. In accordance with the loan agreement, proceeds from the repayment of the Loan and enforcement of any security interest will first be provided to the third-party creditor and then to the Partnership.

(3)       Net Investment in Finance Leases  

Net investment in finance leases consisted of the following:

On February 28, 2013, Global Crossing Telecommunications, Inc. (“Global Crossing”) exercised its option to purchase certain telecommunications equipment at lease expiration for approximately $642,000. No gain or loss was recorded as a result of the transaction.

The Partnership has three vessels subject to bareboat charters with subsidiaries of Geden Holdings Ltd. (“Geden”), which expire between June 2016 and October 2017. As a result of the depressed shipping market and historically low time charter rates, Geden’s subsidiaries only partially satisfied their lease payment obligations. During the three months ended June 30, 2013, the outstanding amount became more than 90 days past due and the Partnership placed the leases on a non-accrual status. Since then, the Partnership has recognized finance income on a cash basis. The Investment Manager is currently in discussions with Geden’s management team and has determined that no credit loss reserve is required at September 30, 2013.

(4)       Leased Equipment at Cost

Leased equipment at cost consisted of the following:

Depreciation expense was $3,842,488 and $4,374,352 for the three months ended September 30, 2013 and 2012, respectively. Depreciation expense was $11,527,463 and $13,123,060 for the nine months ended September 30, 2013 and 2012, respectively.

(5)       Investment in Joint Ventures

On February 15, 2013, the Partnership, through a joint venture owned 38% by the Partnership, 58% by ICON ECI Fund Fifteen, L.P. (“Fund Fifteen”) and 4% by ICON ECI Partners L.P. (“ECI Partners”), each an entity also managed by the Investment Manager,  purchased onshore oil field services equipment from Go Frac, LLC (“Go Frac”) for approximately $11,804,000. Simultaneously, the equipment was leased back to Go Frac for a period of 45 months, expiring on November 30, 2016. On July 19, 2013, the joint venture purchased additional onshore oil field services equipment from Go Frac for approximately $165,000 which was leased back to Go Frac for a period of 45 months, expiring on April 30, 2017. The Partnership’s total contribution to the joint venture was approximately $3,606,000.

On April 2, 2013, the Partnership, through two joint ventures each owned 45% by the Partnership and 55% by Fund Fifteen, purchased two chemical tanker vessels, the Ardmore Capella and the Ardmore Calypso, from wholly-owned subsidiaries of Ardmore Shipholding Limited (“Ardmore”).  Simultaneously, the vessels were bareboat chartered back to the Ardmore subsidiaries for a period of five years.  The aggregate purchase price for the vessels was funded by $8,850,000 in cash, $22,750,000 of financing through non-recourse long-term debt and $5,500,000 of financing through subordinated, non-interest-bearing seller’s credits. The Partnership’s contribution to the joint venture was approximately $4,361,000.

On May 30, 2013, ICON Atlas, LLC (“ICON Atlas”), a joint venture owned 40.53% by the Partnership, 49.54% by ICON Leasing Fund Twelve, LLC (“Fund Twelve”), an entity also managed by the Investment Manager, and 9.93% by Hardwood Partners, LLC, in accordance with the terms of a lease, sold eight gas compressors to Atlas Pipeline Mid-Continent, LLC (“Atlas”) for $7,500,000. Simultaneously, the joint venture prepaid and satisfied its non-recourse debt obligation with Wells Fargo Equipment Finance, Inc. (“Wells Fargo”), secured by the gas compressors, for $7,500,000.

(6)       Non-Recourse Long-Term Debt

As of September 30, 2013 and December 31, 2012, the Partnership had non-recourse long-term debt obligations of $185,593,407 and $200,660,283, respectively, with maturity dates ranging from March 29, 2014 to March 29, 2021, and interest rates ranging from 4.555% to 12% per year, some of which were fixed after giving effect to the respective interest rate swap agreements.

The Partnership, through certain subsidiaries of its joint venture with Fund Twelve, borrowed $128,000,000 (the “Senior Debt”) in connection with the acquisition of the vessels on bareboat charter to AET Inc. Limited (collectively, the “AET Vessels”).  The joint venture also borrowed $22,000,000 of subordinated non-recourse long-term debt from an unaffiliated third party (the “Sub Debt”).

On April 20, 2012, the joint venture with the AET Vessels was notified of an event of default on the Senior Debt.  Due to a change in the fair value of the AET Vessels, a provision in the Senior Debt loan agreement restricts the Partnership’s ability to utilize cash generated by the charters of the AET Vessels as of January 12, 2012 for purposes other than paying the Senior Debt.  Charter payments in excess of the Senior Debt loan service are held in reserve by the Senior Debt lender until such time as the restriction is cured. Once cured, the reserves will be released to the Partnership.  At September 30, 2013, $7,282,652 was included in restricted cash.  While this restriction is in place, the Partnership is prevented from applying the charter proceeds to the Sub Debt. As a result of the Partnership’s failure to make required Sub Debt loan payments from June 2012 through September 2013, the Sub Debt lender has certain rights, including step-in rights, which allow it to collect cash generated from the charters until such time as the Sub Debt lender has received all unpaid amounts. The Sub Debt lender has reserved, but not exercised, its rights under the loan agreement.

The Partnership was notified of an event of default related to certain financial covenants in connection with the non-recourse long-term debt associated with the vessels on bareboat charter to Fantastic Shipping Ltd., Amazing Shipping Ltd. and Center Navigation Ltd., each subsidiaries of Geden, as a result of reduced charter hire payments.  The lender has reserved, but not exercised, its rights under the loan agreement.

(7)       Revolving Line of Credit, Recourse

On May 10, 2011, the Partnership entered into an agreement with California Bank & Trust (“CB&T”) for a revolving line of credit of up to $15,000,000 (the “Facility”), which is secured by all of the Partnership’s assets not subject to a first priority lien. Amounts available under the Facility are subject to a borrowing base that is determined, subject to certain limitations, based on the present value of the future receivables under certain loans and lease agreements in which the Partnership has a beneficial interest. At September 30, 2013, the Partnership had $4,500,000 available under the Facility pursuant to the borrowing base.

The Facility has been extended through March 31, 2015.  The interest rate for general advances under the Facility is CB&T’s prime rate.  The Partnership may elect to designate up to five advances on the outstanding principal balance of the Facility to bear interest at LIBOR plus 2.5% per year.  In all instances, borrowings under the Facility are subject to an interest

rate floor of 4.0% per year. In addition, the Partnership is obligated to pay an annualized 0.5% fee on unused commitments under the Facility. 

At September 30, 2013, the Partnership had $10,500,000 outstanding under the Facility.  Subsequent to September 30, 2013, the Partnership repaid the $10,500,000.

At September 30, 2013, the Partnership was in compliance with all covenants related to the Facility.

(8)       Transactions with Related Parties  

The Partnership paid distributions to the General Partner of $52,286 and $156,862 for the three and nine months ended September 30, 2013, respectively.  The Partnership paid distributions to the General Partner of $52,289 and $156,867 for the three and nine months ended September 30, 2012, respectively.  Additionally, the General Partner’s interest in the net (loss) income attributable to the Partnership was $(1,180) and $110,182 for the three and nine months ended September 30, 2013, respectively.  The General Partner’s interest in the net income attributable to the Partnership was $42,136 and $79,973 for the three and nine months ended September 30, 2012, respectively.

Fees and other expenses paid or accrued by the Partnership to the General Partner or its affiliates were as follows:

At September 30, 2013, the Partnership had a net payable of $118,871 due to the General Partner and its affiliates that primarily consisted of payables due to an affiliate related to such affiliate’s noncontrolling interest in a joint venture with the Partnership.  At December 31, 2012, the Partnership had a net payable of $28,617 due to the General Partner and its affiliates that primarily consisted of administrative expense reimbursements.

At September 30, 2013 and December 31, 2012, the Partnership had a note receivable from a joint venture of $2,566,036 and $2,442,457, respectively, and accrued interest of approximately $29,000 and $28,000, respectively. The accrued interest is included in other assets on the consolidated balance sheets.  For the three and nine months ended September 30, 2013, interest income relating to the note receivable from the joint venture of approximately $101,000 and $294,000, respectively, was recognized and included in finance income on the consolidated statements of operations. For the three and nine months ended September 30, 2012, interest income relating to the note receivable from the joint venture of approximately $104,000 and $345,000, respectively, was recognized and included in finance income on the consolidated statements of operations.

(9)       Derivative Financial Instruments 

The Partnership may enter into derivative financial instruments for purposes of hedging specific financial exposures, including movements in foreign currency exchange rates and changes in interest rates on its non-recourse long-term debt. The Partnership enters into these instruments only for hedging underlying exposures. The Partnership does not hold or issue

derivative financial instruments for purposes other than hedging, except for warrants, which are not hedges. Certain derivatives may not meet the established criteria to be designated as qualifying accounting hedges, even though the Partnership believes that these are effective economic hedges.

The Partnership recognizes all derivative financial instruments as either assets or liabilities on the consolidated balance sheets and measures those instruments at fair value. Changes in the fair value of such instruments are recognized immediately in earnings unless certain criteria are met. These criteria demonstrate that the derivative is expected to be highly effective at offsetting changes in the fair value or expected cash flows of the underlying exposure at both the inception of the hedging relationship and on an ongoing basis and include an evaluation of the counterparty risk and the impact, if any, on the effectiveness of the derivative. If these criteria are met, which the Partnership must document and assess at inception and on an ongoing basis, the Partnership recognizes the changes in fair value of such instruments in accumulated other comprehensive income (loss), a component of equity on the consolidated balance sheets. Changes in the fair value of the ineffective portion of all derivatives are recognized immediately in earnings.

Interest Rate Risk

The Partnership’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements on its variable long-term debt. The Partnership’s strategy to accomplish these objectives is to match the projected future cash flows with the underlying debt service. Each interest rate swap involves the receipt of floating-rate interest payments from a counterparty in exchange for the Partnership making fixed-rate interest payments over the life of the agreement without exchange of the underlying notional amount.

Counterparty Risk

The Partnership manages exposure to possible defaults on derivative financial instruments by monitoring the concentration of risk that the Partnership has with any individual bank and through the use of minimum credit quality standards for all counterparties. The Partnership does not require collateral or other security in relation to derivative financial instruments. Since it is the Partnership’s policy to enter into derivative contracts only with banks of internationally acknowledged standing and the fair value of the Partnership’s derivatives is in a liability position, the Partnership considers the counterparty risk to be remote.

As of September 30, 2013 and December 31, 2012, the Partnership had only warrants in an asset position that were not material to the consolidated financial statements; therefore, the Partnership considers the counterparty risk to be remote.

As of September 30, 2013 and December 31, 2012, the fair value of the derivatives in a liability position was $7,351,040 and $11,395,234, respectively.  Derivative contracts may contain credit-risk related contingent features that can trigger a termination event, such as maintaining specified financial ratios.  In the event that the Partnership would be required to settle its obligations under the derivative contracts as of September 30, 2013 and December 31, 2012, the termination value would be $7,667,621 and $12,202,772, respectively.

Non-designated Derivatives

As of September 30, 2013 and December 31, 2012, the Partnership had five interest rate swaps with DVB Bank SE that are not designated and not qualifying as cash flow hedges with an aggregate notional amount of $131,535,000 and $144,615,000, respectively. These interest rate swaps are not speculative and are used to meet the Partnership’s objectives in using interest rate derivatives to add stability to interest expense and to manage its exposure to interest rate movements.

Additionally, the Partnership holds warrants that are held for purposes other than hedging. All changes in the fair value of the interest rate swaps not designated as hedges and the warrants are recorded directly in earnings, which is included in loss (gain) on derivative financial instruments.

The table below presents the fair value of the Partnership’s derivative financial instruments as well as their classification within the Partnership’s consolidated balance sheets as of September 30, 2013 and December 31, 2012:

The Partnership’s derivative financial instruments not designated as hedging instruments generated a loss on derivative financial instruments on the consolidated statements of operations for the three months ended September 30, 2013 and 2012 of $665,471 and $1,487,091, respectively.  The loss recorded for the three months ended September 30, 2013 was comprised of losses of $661,129 relating to interest rate swap contracts and $4,342 relating to warrants. The loss recorded for the three months ended September 30, 2012 was comprised of losses of $1,487,091 relating to interest rate swap contracts. The Partnership’s derivative financial instruments not designated as hedging instruments generated a (gain) loss on derivative financial instruments on the consolidated statements of operations for the nine months ended September 30, 2013 and 2012 of $(1,326,276) and $4,409,838, respectively.  The gain recorded for the nine months ended September 30, 2013 was comprised of gains of $1,314,973 relating to interest rate swap contracts and $11,303 relating to warrants. The loss recorded for the nine months ended September 30, 2012 was comprised of losses of $4,409,838 relating to interest rate swap contracts. These amounts were recorded as a component of loss (gain) on derivative financial instruments on the consolidated statements of operations.

(10)      Fair Value Measurements

Assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

Financial Assets and Liabilities Measured on a Recurring Basis

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Investment Manager’s assessment, on the Partnership’s behalf, of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.

The following table summarizes the valuation of the Partnership’s financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2013:

The following table summarizes the valuation of the Partnership’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2012:

The Partnership’s derivative financial instruments, including interest rate swaps and warrants, are valued using quoted market prices available in active markets for identical assets or liabilities or models based on readily observable or unobservable market parameters for all substantial terms of the Partnership’s derivative financial instruments and are classified within Level 2 or Level 3. As permitted by the accounting pronouncements, the Partnership uses market prices and pricing models for fair value measurements of its derivative financial instruments.

Interest Rate Swaps

The Partnership utilizes a model that incorporates common market pricing methods as well as underlying characteristics of the particular swap contract for fair value measurements of its interest rate swaps, which are classified within Level 2.  Interest rate swaps are modeled by incorporating such inputs as the term to maturity, LIBOR swap curves, Overnight Index Swap (“OIS”) curves and the payment rate on the fixed portion of the interest rate swap. Thereafter, the Partnership compares third party quotations received to its own estimate of fair value to evaluate for reasonableness. The fair value of the interest rate swaps was recorded in derivative financial instruments within the consolidated balance sheets.

As of January 1, 2013, the Partnership made two significant, but related, changes to its derivatives valuation methodology: (1) changing from LIBOR-based discount factors to OIS-based discount factors; and (2) changing from a traditional LIBOR swap curve to a dual-curve including both the LIBOR swap curve and the OIS curve. The Partnership made the changes to better align its inputs, assumptions, and pricing methodologies with those used in its principal market by most dealers and major market participants.  The change in valuation methodology is applied prospectively as a change in accounting estimate and is not material to the Partnership’s consolidated financial statements.

Warrants

As of September 30, 2013 and December 31, 2012, the Partnership’s warrants were valued using the Black-Scholes-Merton pricing model based on observable and unobservable inputs that are significant to the fair value measurement and are classified within Level 3. Unobservable inputs used in the Black-Scholes-Merton pricing model include, but are not limited to, the expected stock price volatility and the expected period until the warrants are exercised. In addition, one of the significant inputs used in the fair value measurement of the Partnership’s warrants at September 30, 2013 was the observable closing price of the company’s stock on the date of measurement as opposed to the use of an enterprise value to earnings before interest, taxes, depreciation and amortization multiple of 3.01x at December 31, 2012. The change in the input from December 31, 2012 was due to the company that issued the warrants completing its listing on a public exchange during the second quarter of 2013. Increases or decreases of these inputs would result in a higher or lower fair value measurement. 

The fair value of the warrants was recorded in other assets within the consolidated balance sheets. The unrealized gain on the change in fair value of the warrants was recorded in loss (gain) on derivative financial instruments on the consolidated statements of operations.  

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The Partnership is required, on a nonrecurring basis, to adjust the carrying value or provide valuation allowances for certain assets and liabilities using fair value measurements.  The valuation of the Partnership’s financial assets, such as notes receivable or direct financing leases, is included below only when fair value has been measured and recorded based on the fair value of the underlying collateral.  The following tables summarize the valuation of the Partnership’s material financial assets measured at fair value on a nonrecurring basis, of which the fair value information presented is not current but rather as of the date the impairment was recorded, and the carrying value of the assets as of September 30, 2013 and December 31, 2012: