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EX-31.2 - CERTIFICATION OF THE CHIEF FINANCIAL OFFICER - American Capital Senior Floating, Ltd.acsf-20140630xexhibit3125.htm
EX-32.1 - 906 CERTIFICATION - American Capital Senior Floating, Ltd.acsf-20140630xexhibit325.htm
EX-31.1 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER - American Capital Senior Floating, Ltd.acsf-20140630xexhibit3115.htm


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
For the Quarter Ended June 30, 2014
 
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 814-01025
AMERICAN CAPITAL SENIOR FLOATING, LTD.
(Exact name of registrant as specified in its charter) 
Maryland
 
46-1996220
(State of Incorporation)
 
(I.R.S. Employer
Identification No.)
 
 2 Bethesda Metro Center
14th Floor
Bethesda, MD 20814
 
 
 (Address of principal executive offices)
 
 
301-968-9310
 
 
(Registrant’s telephone number, including area code)
 
     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 and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically 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 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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer
¨
 
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
x
(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 Exchange     Act).    Yes  ¨    No  x
The number of shares of the issuer's Common Stock, $.01 par value, outstanding as of August 12, 2014 was 10,000,100.




AMERICAN CAPITAL SENIOR FLOATING, LTD.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2014
TABLE OF CONTENTS

 
 
 
 
PAGE
PART I. FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
PART II. OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
 
 
 



2



PART I. FINANCIAL INFORMATION
We are filing this Form 10-Q, or the Report, in compliance with Rule 13a-13 promulgated by the Securities and Exchange Commission, or the SEC. In this Report, except where the context suggests otherwise, the terms "ACSF", “we”, “us”, and “our” refer to American Capital Senior Floating, Ltd. and its consolidated subsidiary, ACSF Funding I, LLC or "ACSF Funding"; "ACSF Management" or "Manager" refers to American Capital ACSF Management, LLC; "1940 Act" refers to the Investment Company Act of 1940, as amended; "Code" refers to the Internal Revenue Code of 1986, as amended; "RIC" refers to a regulated investment company under the Code; and "BDC" refers to a business development company under the 1940 Act. References to our portfolio, our investments, our secured revolving credit facility, as amended, or the "Credit Facility", and our business include investments we make through our wholly-owned consolidated subsidiary ACSF Funding.


3




Item 1. Financial Statements


AMERICAN CAPITAL SENIOR FLOATING, LTD.
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(dollars in thousands, except share and per share data)
 
 
 
June 30, 2014
(unaudited)
 
December 31, 2013
Assets:
 
 
 
 
Investments, fair value (cost of $286,185 and $198,268, respectively)
 
$
287,533

 
$
199,565

Cash and cash equivalents
 
3,877

 
12,493

Receivable for investments sold
 
5

 
5,394

Deferred financing costs
 
577

 
474

Interest receivable
 
629

 
303

Prepaid expenses and other assets
 
369

 
467

Receivable from affiliate
 
264

 

Total assets
 
$
293,254

 
$
218,696

Liabilities:
 
 
 
 
Secured revolving credit facility payable (see note 8)
 
$
128,000

 
$

Revolving credit facility payable (see note 8)
 

 
194,748

Payable for investments purchased
 
9,888

 
20,494

Dividends payable (see note 11)
 
2,800

 

Management fee payable (see note 3)
 
574

 

Interest payable (see note 8)
 
72

 
943

Taxes payable
 
30

 
803

Payable to affiliate (see note 3)
 
247

 
295

Other liabilities and accrued expenses
 
454

 
397

Total liabilities
 
142,065

 
217,680

Commitments and contingencies (see note 12)
 
 
 
 
Net Assets:
 
 
 
 
Common stock, par value $0.01 per share. 10,000,100 and 100 issued and outstanding, respectively. 300,000,000 and 1,000 authorized, respectively.
 
100

 

Paid-in capital in excess of par
 
149,705

 
1

Undistributed net investment income
 
500

 
246

Accumulated net realized gain (loss) from investments
 
45

 
(7
)
Net unrealized appreciation on investments
 
839

 
776

Total net assets
 
151,189

 
1,016

Total liabilities and net assets
 
$
293,254

 
$
218,696

Net asset value per share
 
$
15.12

 
N/M


See notes to the consolidated financial statements.


4




AMERICAN CAPITAL SENIOR FLOATING, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
June 30, 2014
 
June 30, 2014
 
Investment income:
 
 
 
 
 
Interest
 
$
4,590

 
$
8,387

 
Total investment income
 
4,590

 
8,387

 
Expenses:
 
 
 
 
 
Interest and commitment fee (see note 8)
 
683

 
1,675

 
Management fee (see note 3)
 
574

 
1,000

 
Insurance
 
135

 
243

 
Amortization of deferred financing costs
 
98

 
194

 
Other general and administrative expenses
 
407

 
866

 
Total expenses
 
1,897

 
3,978

 
Expense reimbursement (see note 3)
 
(264
)
 
(554
)
 
Net expenses
 
1,633

 
3,424

 
Net investment income before tax
 
2,957

 
4,963

 
Income tax provision
 
(30
)
 
(109
)
 
Net investment income
 
2,927

 
4,854

 
Realized and unrealized (loss) gain on investments:
 
 
 
 
 
Net realized gain on investments
 
115

 
264

 
Net unrealized (depreciation) appreciation on investments
 
(193
)
 
51

 
Income tax provision
 

 
(200
)
 
Net realized and unrealized (loss) gain on investments
 
(78
)
 
115

 
Net increase in net assets resulting from operations
 
$
2,849

 
$
4,969

 
Earnings per share (see note 5)
 
$
0.28

 
$
0.50

 

  
See notes to consolidated financial statements.



5




AMERICAN CAPITAL SENIOR FLOATING, LTD.
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
(unaudited, in thousands)
 
 
 
Six Months Ended
 
 
 
June 30, 2014
 
Increase in net assets resulting from operations:
 
 
 
Net investment income
 
$
4,854

 
Net realized gain
 
52

 
Net unrealized appreciation on investments
 
63

 
Net increase in net assets resulting from operations
 
4,969

 

 
 
 
Distributions to common shareholders:
 
 
 
From net investment income
 
(4,600
)
 

 
 
 
Capital transactions:
 
 
 
Proceeds from public offering
 
150,000

 
Offering costs
 
(770
)
 
Contribution for taxes waived (see note 9)
 
574

 
Net increase in net assets from capital transactions
 
149,804

 
Net increase in net assets
 
150,173

 
 
 
 
 
Net assets:
 
 
 
Beginning of period
 
1,016

 
End of period
 
$
151,189

 
 
 
 
 
Capital share activity:
 
 
 
Shares issued in public offering
 
10,000

 

 
See notes to consolidated financial statements.



6



AMERICAN CAPITAL SENIOR FLOATING, LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited, in thousands)
 
 
 
Six Months Ended
 
 
 
June 30, 2014
 
Cash Flows from Operating Activities:
 
 
 
Net increase in net assets resulting from operations
 
$
4,969

 
Adjustments to reconcile net increase in net assets resulting from operations:
 
 
 
Net realized gain on investments
 
(264
)
 
Net change in unrealized appreciation on investments
 
(51
)
 
Accretion of CLO interest income
 
(2,578
)
 
Net amortization of premium on loans
 
8

 
Amortization of deferred financing costs
 
194

 
Purchase of investments
 
(148,423
)
 
Proceeds from dispositions of investments
 
63,340

 
Decrease in receivable for investments sold
 
5,389

 
Decrease in payable for investments purchased
 
(10,606
)
 
Increase in receivable from affiliate
 
(264
)
 
Increase in interest receivable
 
(326
)
 
Decrease in prepaid expenses and other assets
 
98

 
Decrease in interest payable
 
(871
)
 
Increase in other liabilities and accrued expenses
 
57

 
Decrease in payable to affiliate
 
(48
)
 
Increase in management fee payable
 
574

 
Decrease in taxes payable
 
(199
)
 
Net cash used in operating activities
 
(89,001
)
 
Cash Flows from Financing Activities:
 
 
 
Proceeds from the issuance of common stock
 
150,000

 
Offering costs from the issuance of common stock
 
(770
)
 
Dividends paid
 
(1,800
)
 
Proceeds from debt
 
149,900

 
Payments on debt
 
(216,648
)
 
Deferred financing costs paid
 
(297
)
 
Net cash provided by financing activities
 
80,385

 
Net decrease in cash and cash equivalents
 
(8,616
)
 
Cash and cash equivalents at beginning of period
 
12,493

 
Cash and cash equivalents at end of period
 
$
3,877

 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest and commitment fees
 
$
2,545

 
Cash paid for income taxes
 
$
517

 
Supplemental disclosure of non-cash financing activity:
 
 
 
Contribution for taxes waived
 
$
574

 
        
See notes to consolidated financial statements.



7



AMERICAN CAPITAL SENIOR FLOATING, LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS
JUNE 30, 2014
(unaudited, in thousands)


Description
 
Maturity
 
Interest Rate (1)
 
Basis 
Point
Spread
Above
Index 
(2)
 
Industry
 
Par Amount
 
Cost
 
Fair
Value
First Lien Floating Rate Loans — 135.2% of net assets
 
 
 
 
 
 
 
 
 
 
24 Hour Fitness Worldwide, Inc. (5), (7)
 
5/28/2021
 
4.75
%
 
 L+3.75
 
Hotels, Restaurants & Leisure
 
$
2,700

 
$
2,690

 
$
2,720

Accellent, Inc. (7)
 
3/12/2021
 
4.50
%
 
 L+3.50
 
Health Care Equipment & Supplies
 
1,995

 
1,995

 
1,991

Acosta, Inc. (7)
 
3/2/2018
 
4.25
%
 
 L+3.25
 
Media
 
1,594

 
1,610

 
1,604

Aegis Toxicology Sciences Corporation (7)
 
2/24/2021
 
5.50
%
 
 L+4.50
 
Health Care Providers & Services
 
1,667

 
1,656

 
1,682

American Renal Holdings Inc. (7)
 
8/20/2019
 
4.50
%
 
 L+3.25
 
Health Care Providers & Services
 
2,977

 
2,950

 
2,983

American Tire Distributors, Inc. (5), (7)
 
6/1/2018
 
5.75
%
 
 L+4.75
 
Distributors
 
1,500

 
1,500

 
1,512

AmWINS Group, LLC (7)
 
9/6/2019
 
5.00
%
 
 L+3.75
 
Insurance
 
2,979

 
2,997

 
2,991

Aquilex, LLC (7)
 
12/31/2020
 
5.00
%
 
 L+4.00
 
Commercial Services & Supplies
 
1,990

 
1,985

 
1,985

ARG IH Corporation (7)
 
11/15/2020
 
5.00
%
 
 L+4.00
 
Hotels, Restaurants & Leisure
 
2,487

 
2,499

 
2,506

Armor Holding II, LLC (7)
 
6/26/2020
 
5.75
%
 
 L+4.50
 
Diversified Financial Services
 
1,938

 
1,963

 
1,943

Ascend Learning, LLC (7)
 
7/31/2019
 
6.00
%
 
 L+5.00
 
Diversified Consumer Services
 
597

 
594

 
605

Ascensus, Inc. (7)
 
12/2/2019
 
5.00
%
 
 L+4.00
 
Commercial Services & Supplies
 
995

 
990

 
1,000

Aspen Dental Management, Inc. (7)
 
10/6/2016
 
7.00
%
 
 L+5.50
 
Health Care Providers & Services
 
992

 
984

 
998

Asurion, LLC (7)
 
5/24/2019
 
5.00
%
 
 L+3.75
 
Commercial Services & Supplies
 
1,990

 
1,992

 
2,005

Atlantic Power Limited Partnership (3), (7)
 
2/24/2021
 
4.75
%
 
 L+3.75
 
Independent Power and Renewable Electricity Producers
 
1,875

 
1,866

 
1,900

BarBri, Inc. (7)
 
7/17/2019
 
4.50
%
 
 L+3.50
 
Diversified Consumer Services
 
958

 
958

 
962

BJ's Wholesale Club, Inc. (7)
 
9/26/2019
 
4.50
%
 
 L+3.50
 
Food & Staples Retailing
 
1,493

 
1,494

 
1,496

Blackboard Inc. (7)
 
10/4/2018
 
4.75
%
 
 L+3.75
 
Software
 
4,478

 
4,479

 
4,514

Blue Coat Systems, Inc. (7)
 
5/31/2019
 
4.00
%
 
 L+3.00
 
Software
 
3,057

 
3,074

 
3,064

Calceus Acquisition, Inc. (7)
 
1/31/2020
 
5.00
%
 
 L+4.00
 
Textiles, Apparel & Luxury Goods
 
2,977

 
2,991

 
2,965

Camp International Holding Company (7)
 
5/31/2019
 
4.75
%
 
 L+3.75
 
Transportation Infrastructure
 
1,990

 
2,020

 
2,002

Caraustar Industries, Inc. (7)
 
5/1/2019
 
7.50
%
 
 L+6.25
 
Containers & Packaging
 
746

 
739

 
757

Carecore National, LLC (7)
 
3/5/2021
 
5.50
%
 
 L+4.50
 
Health Care Providers & Services
 
2,078

 
2,078

 
2,101

CEC Entertainment, Inc. (7)
 
2/12/2021
 
4.25
%
 
 L+3.25
 
Hotels, Restaurants & Leisure
 
2,494

 
2,482

 
2,481

Centerplate, Inc. (7)
 
11/26/2019
 
4.75
%
 
 L+3.75
 
Hotels, Restaurants & Leisure
 
1,995

 
1,986

 
2,006

Checkout Holding Corp. (7)
 
4/9/2021
 
4.50
%
 
 L+3.50
 
Media
 
2,500

 
2,498

 
2,506

CHS/Community Health Systems, Inc. (3), (7)
 
1/27/2021
 
4.25
%
 
 L+3.25
 
Health Care Providers & Services
 
995

 
990

 
1,002

CityCenter Holdings, LLC (7)
 
10/16/2020
 
5.00
%
 
 L+4.00
 
Hotels, Restaurants & Leisure
 
1,819

 
1,831

 
1,834

Connolly, LLC (7)
 
5/14/2021
 
5.00
%
 
 L+4.00
 
Professional Services
 
1,500

 
1,485

 
1,520


See notes to consolidated financial statements.
8



AMERICAN CAPITAL SENIOR FLOATING, LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)
JUNE 30, 2014
(unaudited, in thousands)


Description
 
Maturity
 
Interest Rate (1)
 
Basis 
Point
Spread
Above
Index 
(2)
 
Industry
 
Par Amount
 
Cost
 
Fair
Value
First Lien Floating Rate Loans (continued) — 135.2% of net assets
 
 
 
 
 
 
 
 
 
 
CPG International, LLC (7)
 
9/30/2020
 
4.75
%
 
 L+3.75
 
Building Products
 
$
3,972

 
$
3,974

 
$
3,992

CT Technologies Intermediate
Holdings, Inc. (7)
 
10/4/2019
 
5.25
%
 
 L+4.00
 
Health Care Technology
 
2,487

 
2,499

 
2,502

DAE Aviation Holdings, Inc. (7)
 
11/2/2018
 
5.00
%
 
 L+4.00
 
Aerospace & Defense
 
1,365

 
1,381

 
1,381

Datapipe, Inc. (7)
 
3/15/2019
 
5.25
%
 
 L+4.25
 
IT Services
 
1,938

 
1,951

 
1,944

Deltek, Inc. (7)
 
10/10/2018
 
4.50
%
 
 L+3.50
 
Software
 
2,977

 
2,987

 
3,002

Dole Food Company, Inc. (7)
 
11/1/2018
 
4.50
%
 
 L+3.50
 
Food Products
 
3,706

 
3,698

 
3,717

Duff & Phelps Corporation (7)
 
4/23/2020
 
4.50
%
 
 L+3.50
 
Capital Markets
 
3,474

 
3,476

 
3,493

DynCorp International, Inc. (7)
 
7/7/2016
 
6.25
%
 
 L+4.50
 
Aerospace & Defense
 
1,959

 
1,971

 
1,967

Electrical Components International, Inc. (7)
 
5/28/2021
 
5.75
%
 
 L+4.75
 
Electrical Equipment
 
2,000

 
2,005

 
2,035

Emerald Expositions Holding, Inc. (7)
 
6/17/2020
 
5.50
%
 
 L+4.25
 
Media
 
2,858

 
2,885

 
2,882

EWT Holdings III Corp. (7)
 
1/15/2021
 
4.75
%
 
 L+3.75
 
Machinery
 
995

 
990

 
998

ExGen Renewables I, LLC (7)
 
2/6/2021
 
5.25
%
 
 L+4.25
 
Independent Power and Renewable Electricity Producers
 
1,487

 
1,494

 
1,519

Fairmount Minerals, Ltd. (7)
 
9/5/2019
 
4.50
%
 
 L+3.50
 
Metals & Mining
 
2,978

 
2,995

 
3,012

First Data Corporation (7)
 
3/23/2018
 
4.15
%
 
 L+4.00
 
IT Services
 
2,000

 
2,007

 
2,006

Fitness International, LLC (5), (6), (7)
 
7/1/2020
 
5.50
%
 
 L+4.50
 
Hotels, Restaurants & Leisure
 
1,800

 
1,782

 
1,796

Global Tel*Link Corporation (7)
 
5/22/2020
 
5.00
%
 
 L+3.75
 
Diversified Telecommunication Services
 
1,840

 
1,805

 
1,835

Great Wolf Resorts, Inc. (7)
 
8/6/2020
 
4.50
%
 
 L+3.50
 
Hotels, Restaurants & Leisure
 
2,977

 
2,984

 
2,990

Greeneden U.S. Holdings II, LLC (7)
 
11/13/2020
 
4.50
%
 
 L+3.50
 
Software
 
1,990

 
1,981

 
2,007

HGIM Corp. (7)
 
6/18/2020
 
5.50
%
 
 L+4.50
 
Marine
 
1,489

 
1,494

 
1,483

Hyland Software, Inc. (7)
 
2/19/2021
 
4.75
%
 
 L+3.75
 
Software
 
1,362

 
1,355

 
1,372

Ikaria, Inc. (7)
 
2/12/2021
 
5.00
%
 
 L+4.00
 
Health Care Providers & Services
 
2,667

 
2,673

 
2,688

Indra Holdings Corp. (7)
 
5/1/2021
 
5.25
%
 
 L+4.25
 
Textiles, Apparel & Luxury Goods
 
1,250

 
1,238

 
1,254

Information Resources, Inc. (7)
 
9/30/2020
 
4.75
%
 
 L+3.75
 
Professional Services
 
1,985

 
1,999

 
2,002

Inmar, Inc. (7)
 
1/27/2021
 
4.25
%
 
 L+3.25
 
Commercial Services & Supplies
 
2,000

 
1,981

 
1,982

Ion Media Networks, Inc. (7)
 
12/18/2020
 
5.00
%
 
 L+4.00
 
Media
 
1,990

 
2,014

 
2,006

J.C. Penney Corporation, Inc. (3), (5), (7)
 
6/20/2019
 
5.00
%
 
 L+4.00
 
Multiline Retail
 
1,000

 
993

 
1,005

JLL/Delta Dutch Newco B.V. (3), (7)
 
3/11/2021
 
4.25
%
 
 L+3.25
 
Pharmaceuticals
 
2,000

 
1,995

 
1,988

Landslide Holdings, Inc.  (7)
 
2/25/2020
 
5.00
%
 
 L+4.00
 
Software
 
998

 
993

 
1,001

Learning Care Group (US) No. 2, Inc. (7)
 
5/5/2021
 
6.05
%
 
 L+4.50
 
Diversified Consumer Services
 
1,031

 
1,027

 
1,049

Leonardo Acquisition Corp. (7)
 
1/29/2021
 
4.25
%
 
 L+3.25
 
Internet & Catalog Retail
 
2,993

 
3,005

 
2,999

The Men's Wearhouse, Inc. (3), (7)
 
6/18/2021
 
4.50
%
 
 L+3.50
 
Specialty Retail
 
2,000

 
1,980

 
2,014

Metaldyne, LLC (7)
 
12/18/2018
 
4.25
%
 
 L+3.25
 
Auto Components
 
1,961

 
1,961

 
1,975

Millennium Laboratories, LLC (7)
 
4/16/2021
 
5.25
%
 
 L+4.25
 
Health Care Providers & Services
 
2,450

 
2,426

 
2,479

Mitchell International, Inc. (7)
 
10/13/2020
 
4.50
%
 
 L+3.50
 
IT Services
 
2,985

 
3,001

 
3,002

Murray Energy Corporation (7)
 
12/5/2019
 
5.25
%
 
 L+4.25
 
Oil, Gas & Consumable Fuels
 
2,993

 
2,979

 
3,033

National Financial Partners Corp. (7)
 
7/1/2020
 
5.25
%
 
 L+4.25
 
Insurance
 
497

 
497

 
501

Opal Acquisition, Inc. (7)
 
11/27/2020
 
5.00
%
 
 L+4.00
 
Health Care Providers & Services
 
2,985

 
2,962

 
2,997


See notes to consolidated financial statements.
9



AMERICAN CAPITAL SENIOR FLOATING, LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)
JUNE 30, 2014
(unaudited, in thousands)


Description
 
Maturity
 
Interest Rate (1)
 
Basis 
Point
Spread
Above
Index 
(2)
 
Industry
 
Par Amount
 
Cost
 
Fair
Value
First Lien Floating Rate Loans (continued) — 135.2% of net assets
 
 
 
 
 
 
 
 
 
 
Ortho-Clinical Diagnostics S.A. (3), (5), (7)
 
6/30/2021
 
4.75
%
 
 L+3.75
 
Health Care Providers & Services
 
$
2,000

 
$
1,997

 
$
2,018

Oxbow Carbon, LLC (7)
 
7/19/2019
 
4.25
%
 
 L+3.25
 
Metals & Mining
 
962

 
969

 
965

P2 Lower Acquisition, LLC (7)
 
10/22/2020
 
5.50
%
 
 L+4.50
 
Health Care Providers & Services
 
2,251

 
2,243

 
2,260

PharMEDium Healthcare Corporation (7)
 
1/28/2021
 
4.25
%
 
 L+3.25
 
Pharmaceuticals
 
2,431

 
2,446

 
2,433

Phillips-Medisize Corporation (5), (7)
 
6/16/2021
 
4.75
%
 
 L+3.75
 
Health Care Equipment & Supplies
 
1,227

 
1,225

 
1,230

PRA Holdings, Inc. (7)
 
9/23/2020
 
4.50
%
 
 L+3.50
 
Life Sciences Tools & Services
 
1,985

 
1,985

 
1,979

Quikrete Holdings, Inc. (7)
 
9/28/2020
 
4.00
%
 
 L+3.00
 
Construction Materials
 
2,977

 
2,991

 
2,986

Ranpak Corp. (7)
 
4/23/2019
 
4.50
%
 
 L+3.25
 
Containers & Packaging
 
1,947

 
1,956

 
1,959

Raven Power Finance, LLC (7)
 
12/19/2020
 
6.50
%
 
 L+4.25
 
Independent Power and Renewable Electricity Producers
 
1,710

 
1,694

 
1,715

RCHP, Inc. (7)
 
4/23/2019
 
6.00
%
 
 L+5.00
 
Health Care Providers & Services
 
2,000

 
1,981

 
2,001

Renaissance Learning, Inc. (7)
 
4/9/2021
 
4.50
%
 
 L+3.50
 
Software
 
1,995

 
1,993

 
1,997

RGIS Services, LLC (7)
 
10/18/2017
 
5.50
%
 
 L+4.25
 
Commercial Services & Supplies
 
2,977

 
2,961

 
2,988

Sabre GLBL, Inc. (7)
 
2/19/2019
 
4.25
%
 
 L+3.25
 
Software
 
2,482

 
2,507

 
2,492

Securus Technologies Holdings, Inc. (7)
 
4/30/2020
 
4.75
%
 
 L+3.50
 
Diversified Telecommunication Services
 
1,914

 
1,885

 
1,924

Sheridan Holdings, Inc. (7)
 
6/29/2018
 
4.50
%
 
 L+3.50
 
Health Care Providers & Services
 
2,278

 
2,299

 
2,282

The SI Organization, Inc. (7), (8)
 
11/23/2019
 
5.75
%
 
 L+4.75
 
Aerospace & Defense
 
2,208

 
2,183

 
2,219

Signode Industrial Group Lux S.A. (Signode Industrial Group US Inc.) (3), (7)
 
5/1/2021
 
4.00
%
 
 L+3.00
 
Machinery
 
1,000

 
998

 
998

Spin Holdco Inc. (7)
 
11/14/2019
 
4.25
%
 
 L+3.25
 
Diversified Consumer Services
 
2,985

 
2,986

 
2,994

Standard Aero Limited (3), (7)
 
11/2/2018
 
5.00
%
 
 L+4.00
 
Aerospace & Defense
 
619

 
626

 
626

Station Casinos LLC (7)
 
3/2/2020
 
4.25
%
 
 L+3.25
 
Hotels, Restaurants & Leisure
 
2,883

 
2,907

 
2,895

STS Operating, Inc. (7)
 
2/12/2021
 
4.75
%
 
 L+3.75
 
Trading Companies & Distributors
 
1,995

 
2,008

 
2,007

TCH-2 Holdings, LLC (TravelCLICK, Inc.) (7)
 
5/6/2021
 
5.50
%
 
 L+4.50
 
Software
 
600

 
594

 
601

Thermasys Corp. (7)
 
5/3/2019
 
5.25
%
 
 L+4.00
 
Machinery
 
1,863

 
1,867

 
1,862

TMS International Corp. (7)
 
10/16/2020
 
4.50
%
 
 L+3.50
 
Metals & Mining
 
2,985

 
2,992

 
3,006

TransFirst Holdings, Inc. (7)
 
12/27/2017
 
4.00
%
 
 L+3.00
 
IT Services
 
2,758

 
2,770

 
2,764

Turbocombustor Technology, Inc. (7)
 
12/2/2020
 
5.50
%
 
 L+4.50
 
Aerospace & Defense
 
3,482

 
3,450

 
3,465

USI, Inc. (7)
 
12/27/2019
 
4.25
%
 
 L+3.25
 
Insurance
 
1,985

 
2,003

 
1,991

USIC Holdings, Inc. (7)
 
7/10/2020
 
4.00
%
 
 L+3.00
 
Construction & Engineering
 
2,977

 
2,991

 
2,959

Vitera Healthcare Solutions, LLC (7)
 
11/4/2020
 
6.00
%
 
 L+5.00
 
Health Care Technology
 
2,239

 
2,222

 
2,244

WideOpenWest Finance, LLC (7)
 
4/1/2019
 
4.75
%
 
 L+3.75
 
Media
 
1,990

 
2,013

 
1,999

WP CPP Holdings, LLC (7)
 
12/28/2019
 
4.75
%
 
 L+3.75
 
Aerospace & Defense
 
2,977

 
2,970

 
2,994

Total First Lien Floating Rate Loans
 
 
 
 
 
 
 
$
203,477

 
$
203,526

 
$
204,396


See notes to consolidated financial statements.
10



AMERICAN CAPITAL SENIOR FLOATING, LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)
JUNE 30, 2014
(unaudited, in thousands)


Description
 
Maturity
 
Interest Rate (1)
 
Basis 
Point
Spread
Above
Index 
(2)
 
Industry
 
Par Amount
 
Cost
 
Fair
Value
Second Lien Floating Rate Loans — 23.4% of net assets
 
 
 
 
 
 
 
 
 
 
Accellent, Inc. (7)
 
3/11/2022
 
7.50
%
 
 L+6.50
 
Health Care Equipment & Supplies
 
$
1,500

 
$
1,496

 
$
1,493

Ameriforge Group, Inc.
 
12/21/2020
 
8.75
%
 
 L+7.50
 
Energy Equipment & Services
 
500

 
500

 
512

Applied Systems, Inc.
 
1/24/2022
 
7.50
%
 
 L+6.50
 
Software
 
1,000

 
993

 
1,022

Asurion, LLC (7)
 
3/3/2021
 
8.50
%
 
 L+7.50
 
Commercial Services & Supplies
 
1,000

 
986

 
1,039

BJ's Wholesale Club, Inc. (7)
 
3/26/2020
 
8.50
%
 
 L+7.50
 
Food & Staples Retailing
 
2,000

 
1,991

 
2,054

Camp International Holding Company
 
11/29/2019
 
8.25
%
 
 L+7.25
 
Transportation Infrastructure
 
1,000

 
1,000

 
1,027

Checkout Holding Corporation (7)
 
4/11/2022
 
7.75
%
 
 L+6.75
 
Media
 
2,000

 
2,006

 
2,005

Connolly Intermediate, Inc. (7)
 
5/13/2022
 
8.00
%
 
 L+7.00
 
Professional Services
 
1,250

 
1,238

 
1,273

Del Monte Foods, Inc. (3), (7)
 
8/18/2021
 
8.25
%
 
 L+7.25
 
Food Products
 
1,500

 
1,499

 
1,477

Drew Marine Group, Inc.
 
5/19/2021
 
8.00
%
 
 L+7.00
 
Chemicals
 
2,000

 
1,995

 
2,030

EWT Holdings III Corp.
 
1/15/2022
 
8.50
%
 
L+7.50
 
Machinery
 
1,000

 
995

 
1,007

Filtration Group Corporation (7)
 
11/22/2021
 
8.25
%
 
 L+7.25
 
Industrial Conglomerates
 
500

 
495

 
513

Ikaria, Inc. (7)
 
2/14/2022
 
8.75
%
 
 L+7.75
 
Health Care Providers & Services
 
1,000

 
1,013

 
1,020

Inmar, Inc. (7)
 
1/27/2022
 
8.00
%
 
 L+7.00
 
Commercial Services & Supplies
 
1,500

 
1,486

 
1,492

Jonah Energy, LLC (7)
 
5/12/2021
 
7.50
%
 
 L+6.50
 
Oil, Gas & Consumable Fuels
 
500

 
493

 
505

Landslide Holdings, Inc.
 
2/25/2021
 
8.25
%
 
 L+7.25
 
Software
 
1,000

 
993

 
1,006

P2 Lower Acquisition, LLC (5)
 
10/22/2021
 
9.50
%
 
 L+8.50
 
Health Care Providers & Services
 
500

 
497

 
503

Performance Food Group, Inc. (7)
 
11/14/2019
 
6.25
%
 
 L+5.25
 
Food & Staples Retailing
 
2,977

 
2,960

 
3,013

PharMEDium Healthcare Corporation (7)
 
1/28/2022
 
7.75
%
 
 L+6.75
 
Pharmaceuticals
 
2,000

 
1,990

 
2,027

Prescrix, Inc. (3) , (7)
 
5/2/2022
 
8.00
%
 
 L+7.00
 
Containers & Packaging
 
1,333

 
1,320

 
1,342

Road Infrastructure Investment, LLC (7)
 
9/30/2021
 
7.75
%
 
 L+6.75
 
Chemicals
 
2,000

 
2,010

 
1,993

Sedgwick Claims Management
Services, Inc. (7)
 
2/28/2022
 
6.75
%
 
 L+5.75
 
Insurance
 
2,000

 
1,990

 
2,003

Sheridan Holdings, Inc.
 
12/20/2021
 
8.25
%
 
 L+7.25
 
Health Care Providers & Services
 
2,000

 
1,991

 
2,050

TWCC Holding Corp. (7)
 
6/26/2020
 
7.00
%
 
 L+6.00
 
Media
 
2,000

 
1,990

 
1,986

WP CPP Holdings, LLC (7)
 
4/30/2021
 
8.75
%
 
 L+7.75
 
Aerospace & Defense
 
1,000

 
1,024

 
1,012

Total Second Lien Floating Rate Loans
 
 
 
 
 
 
 
$
35,060

 
$
34,951

 
$
35,404


See notes to consolidated financial statements.
11



AMERICAN CAPITAL SENIOR FLOATING, LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)
JUNE 30, 2014
(unaudited, in thousands)


Description
 
Maturity
 
Interest Rate (1)
 
Basis 
Point
Spread
Above
Index 
(2)
 
Industry
 
Par Amount
 
Cost
 
Fair
Value
CLO Equity — 31.6% of net assets
 
 
 
 
 
 
 
 
 
 
Apidos CLO XIV, Income Notes (3), (4)
 
4/15/2025
 


 

 

 
$
4,400

 
$
4,131

 
$
4,351

Ares XXIX CLO Ltd., Subordinated
Notes (3), (4)
 
4/17/2026
 


 

 

 
4,750

 
4,468

 
4,334

Blue Hill CLO, Ltd., Subordinated Notes (3), (4)
 
1/15/2026
 


 

 

 
5,400

 
5,176

 
5,434

Blue Hill CLO, Ltd., Subordinated Fee
Notes (3), (4)
 
1/15/2026
 


 

 

 
100

 
104

 
102

Carlyle Global Market Strategies CLO 2013-3, Ltd., Subordinated Notes (3), (4)
 
7/15/2025
 
 
 
 
 
 
 
2,750

 
2,223

 
2,463

Cent CLO 18 Limited, Subordinated
Notes (3), (4)
 
7/23/2025
 


 

 

 
4,675

 
4,236

 
4,278

Cent CLO 19 Limited, Subordinated
Notes (3), (4)
 
10/29/2025
 


 

 

 
2,750

 
2,532

 
2,477

Dryden 31 Senior Loan Fund, Subordinated Notes (3), (4)
 
4/18/2026
 
 
 
 
 
 
 
5,250

 
5,021

 
4,929

Galaxy XVI CLO, Ltd., Subordinated
Notes (3), (4)
 
11/17/2025
 
 
 
 
 
 
 
2,750

 
2,536

 
2,400

Halcyon Loan Advisors Funding 2014-1 Ltd., Subordinated Notes (3), (4)
 
4/18/2026
 
 
 
 
 
 
 
3,750

 
3,591

 
3,703

Magnetite VIII, Limited, Subordinated
Notes (3), (4)
 
4/15/2026
 
 
 
 
 
 
 
3,000

 
2,942

 
2,894

Neuberger Berman CLO XV, Ltd., Subordinated Notes (3), (4)
 
10/15/2025
 
 
 
 
 
 
 
3,410

 
3,017

 
2,886

Octagon Investment Partners XIV, Ltd., Income Notes (3), (4)
 
1/15/2024
 
 
 
 
 
 
 
5,500

 
4,887

 
4,689

THL Credit Wind River 2014-1 CLO Ltd., Subordinated Notes (3), (4)
 
4/18/2026
 
 
 
 
 
 
 
3,000

 
2,844

 
2,793

Total CLO Equity 
 
 
 
 
 
 
 
 
 
$
51,485

 
$
47,708

 
$
47,733

Total Investments — 190.2% of net assets
 
 
 
 
 
$
290,022

 
$
286,185

 
$
287,533

Liabilities in Excess of Other Assets — (90.2%)
 
 
 
 
 
 
 
 
 
(136,344
)
Net Assets — 100.0%
 
 
 
 
 
 
 
 
 
 
 
 
 
$
151,189


(1)
Floating rate debt investments typically bear interest at a rate determined by reference to either the London Interbank Offered Rate (“LIBOR” or “L”) index rate or the prime index rate ("PRIME" or “P”), and which typically reset monthly, quarterly or semi-annually. For each debt investment we have provided the current interest rate in effect as of June 30, 2014.
(2)
Floating rate instruments accrue interest at a predetermined spread relative to an index, typically the LIBOR or PRIME rate. These instruments are typically subject to a LIBOR or PRIME rate floor.
(3)
Investments that are not "qualifying assets" under Section 55(a) of the 1940 Act. Under the 1940 Act, we may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets.
(4)
These securities are exempt from registration under Rule 144A of the Securities Act of 1933, as amended. These securities may be resold in transactions that are exempt from registration, normally to qualified institutional buyers.
(5)
All or a portion of this position has not settled as of June 30, 2014.
(6)
Denotes a "when issued" security that was scheduled to close after June 30, 2014
(7)
Assets are held at ACSF Funding and are pledged as collateral for the Credit Facility.
(8)
Includes $(3) of cost and $1 of fair value for an unfunded obligation of $292 par.




See notes to consolidated financial statements.
12



AMERICAN CAPITAL SENIOR FLOATING, LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS
DECEMBER 31, 2013
(in thousands)



 
Description

Maturity

Interest Rate (1)

Basis Point
Spread
Above
Index (2)

Industry

Par Amount

Cost

Fair
Value
First Lien Floating Rate Loans














Akorn, Inc. (3), (5), (6)

11/13/2020

4.50
%

L+3.50

Pharmaceuticals

$
2,500


$
2,488


$
2,517

American Renal Holdings, Inc.

8/20/2019

4.50
%

L+3.25

Health Care Providers & Services

2,992


2,963


3,006

AmWINS Group, LLC

9/6/2019

5.00
%

L+3.75

Insurance

998


996


1,006

Aquilex, LLC (5)

12/18/2020

5.00
%

L+4.00

Commercial Services & Supplies

2,000


1,995


2,010

ARG IH Corporation

11/15/2020

5.00
%

L+4.00

Hotels, Restaurants & Leisure

2,000


2,006


2,014

Ascensus, Inc.

12/2/2019

5.00
%

L+4.00

Commercial Services & Supplies

1,000


995


1,009

Aspen Dental Management, Inc.

10/6/2016

7.00
%

L+5.50

Health Care Providers & Services

997


988


990

BJ's Wholesale Club, Inc.

9/26/2019

4.50
%

L+3.50

Food & Staples Retailing

1,000


995


1,007

Blackboard Inc.

10/4/2018

4.75
%

L+3.75

Software

4,000


3,995


4,061

Blue Coat Systems, Inc.

5/31/2019

4.50
%

L+3.50

Software

3,072


3,091


3,087

BMC Software Finance, Inc.

9/10/2020

5.00
%

L+4.00

Software

3,000


3,022


3,021

Calceus Acquisition, Inc.

1/31/2020

5.00
%

L+4.00

Textiles, Apparel & Luxury Goods

2,993


3,007


3,014

Catalina Marketing Corporation

10/12/2020

5.25
%

L+4.25

Media

2,494


2,494


2,532

Centerplate, Inc.

11/26/2019

4.75
%

L+3.75

Hotels, Restaurants & Leisure

2,000


1,990


2,014

Chromaflo Technologies Corporation (Chromaflo Technologies
Finance B.V.) (3)

12/2/2019

4.50
%

L+3.50

Chemicals

2,000


1,995


2,004

CityCenter Holdings, LLC

10/16/2020

5.00
%

L+4.00

Hotels, Restaurants & Leisure

2,000


2,015


2,033

CPG International, LLC

9/30/2020

4.75
%

L+3.75

Building Products

2,993


2,985


3,013

CT Technologies Intermediate Holdings, Inc.

10/4/2019

5.25
%

L+4.00

Health Care Technology

2,500


2,512


2,519

Deltek, Inc.

10/10/2018

5.00
%

L+3.75

Software

2,992


3,003


3,009

Dialysis Newco, Inc.

8/16/2020

5.25
%

L+4.25

Health Care Providers & Services

1,995


1,997


2,000

Dole Food Company, Inc.

11/1/2018

4.50
%

L+3.50

Food Products

3,250


3,234


3,268

Drew Marine Group, Inc. (5)

11/19/2020

4.50
%

L+3.50

Chemicals

2,000


2,004


2,010

Duff & Phelps Corporation

4/23/2020

4.50
%

L+3.50

Capital Markets

3,491


3,494


3,496

Emerald Exposition Holding, Inc.

6/17/2020

5.50
%

L+4.25

Media

2,992


3,022


3,007

Fairmount Minerals, Ltd. (5)

9/5/2019

5.00
%

L+4.00

Metals & Mining

2,993


3,011


3,045

Filtration Group Corporation

11/20/2020

4.50
%

L+3.50

Industrial Conglomerates

1,250


1,244


1,265

First Data Corporation

3/23/2018

4.16
%

L+4.00

IT Services

2,000


2,007


2,007

GENEX Services, Inc.

7/26/2018

5.25
%

L+4.25

Insurance

2,115


2,136


2,136

Global Tel*Link Corporation

5/22/2020

5.00
%

L+3.75

Diversified Telecommunication Services

1,995


1,956


1,954

Great Wolf Resorts, Inc.

8/6/2020

4.50
%

L+3.50

Hotels, Restaurants & Leisure

2,992


3,000


3,013

Greeneden U.S. Holdings II, LLC (7)

11/13/2020

4.50
%

L+3.50

Software

667


657


674


See notes to consolidated financial statements.
13



AMERICAN CAPITAL SENIOR FLOATING, LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)
DECEMBER 31, 2013
(in thousands)


Description

Maturity

Interest Rate (1)

Basis Point
Spread
Above
Index (2)

Industry

Par Amount

Cost

Fair
Value
First Lien Floating Rate Loans (continued)
 
 
 
 
 
 
 
 
 
 
HGIM Corp.

6/18/2020

5.50
%

L+4.50

Marine

$
1,496


$
1,502


$
1,512

Information Resources, Inc.

9/30/2020

4.75
%

L+3.75

Professional Services

1,995


2,010


2,009

Intrawest Operations Group, LLC (5)

12/9/2020

5.50
%

L+4.50

Hotels, Restaurants & Leisure

2,200


2,182


2,227

Metaldyne, LLC

12/18/2018

5.00
%

L+3.75

Auto Components

1,995


1,995


2,021

Mitchell International, Inc.

10/12/2020

4.50
%

L+3.50

IT Services

2,000


2,005


2,016

Murray Energy Corporation

12/5/2019

5.25
%

L+4.25

Oil, Gas & Consumable Fuels

3,000


2,985


3,036

The Neiman Marcus Group LTD, Inc.

10/25/2020

5.00
%

L+4.00

Multiline Retail

3,000


3,003


3,042

North American Lifting Holdings, Inc.

11/27/2020

5.50
%

L+4.50

Commercial Services & Supplies

2,000


1,960


1,990

Opal Acquisition, Inc. (5)

11/27/2020

5.00
%

L+4.00

Health Care Providers & Services

3,000


2,975


3,007

Oxbow Carbon, LLC

7/19/2019

4.25
%

L+3.25

Metals & Mining

987


995


994

P2 Lower Acquisition, LLC

10/22/2020

5.50
%

L+4.50

Health Care Providers & Services

2,423


2,414


2,436

Party City Holdings, Inc.

7/27/2019

4.25
%

L+3.25

Specialty Retail

2,992


3,004


3,010

PRA Holdings, Inc.

9/23/2020

5.00
%

L+4.00

Life Sciences Tools & Services

1,995


1,995


2,004

Quikrete Holdings, Inc.

9/26/2020

4.00
%

L+3.00

Construction Materials

2,993


3,007


3,011

Ranpak Corp.

4/23/2019

4.50
%

L+3.25

Containers & Packaging

1,957


1,966


1,979

Raven Power Finance, LLC

12/19/2020

5.25
%

L+4.25

Independent Power and Renewable Electricity Producers

2,000


1,980


2,005

Renaissance Learning, Inc.

11/16/2020

5.00
%

L+4.00

Software

3,990


3,951


4,020

RGIS Services, LLC

10/18/2017

5.50
%

L+4.25

Commercial Services & Supplies

2,992


2,974


2,961

Sabre, Inc.

2/19/2019

5.25
%

L+4.00

Software

1,995


2,017


2,013

Securus Technologies Holdings, Inc.

4/30/2020

4.75
%

L+3.50

Diversified Telecommunication Services

1,924


1,893


1,907

Spin Holdco Inc. (5), (6)

11/14/2019

4.25
%

L+3.25

Diversified Consumer Services

3,000


3,001


3,026

Station Casinos LLC (5)

3/2/2020

5.00
%

L+4.00

Hotels, Restaurants & Leisure

2,992


3,019


3,030

TMS International Corp.

10/16/2020

4.50
%

L+3.50

Metals & Mining

3,000


3,007


3,029

TransFirst Holdings, Inc.

12/27/2017

5.75
%

L+3.50

IT Services

2,835


2,849


2,844

TriNet HR Corporation

8/20/2020

5.00
%

L+4.00

Professional Services

1,995


1,985


2,015

Turbocombustor Technology, Inc.

12/2/2020

5.50
%

L+4.50

Aerospace & Defense

3,500


3,465


3,491

USI, Inc.

12/27/2019

4.25
%

L+3.25

Insurance

1,995


2,015


2,007

USIC Holdings, Inc.

7/10/2020

4.75
%

L+3.75

Construction & Engineering

2,993


3,007


3,015

Vitera Healthcare Solutions, LLC

11/4/2020

6.00
%

L+5.00

Health Care Technology

2,250


2,232


2,250

WASH MultiFamily Laundry Systems, LLC

2/21/2019

4.50
%

L+3.50

Diversified Consumer Services

3,491


3,494


3,500

World Kitchen, LLC

3/4/2019

5.50
%

L+4.25

Household Durables

2,992


2,977


3,030

WP CPP Holdings, LLC

12/28/2019

4.75
%

L+3.75

Aerospace & Defense

2,992


2,985


3,022

WTG Holdings III Corp. (5), (6)

1/15/2021

4.75
%

L+3.75

Machinery

1,000


995


1,007

Total First Lien Floating Rate Loans








$
153,240


$
153,141


$
154,207


See notes to consolidated financial statements.
14



AMERICAN CAPITAL SENIOR FLOATING, LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)
DECEMBER 31, 2013
(in thousands)


Description

Maturity

Interest Rate (1)

Basis Point
Spread
Above
Index (2)

Industry

Par Amount

Cost

Fair
Value
Second Lien Floating Rate Loans












Ameriforge Group, Inc. (5)

12/21/2020

8.75
%

L+7.50

Energy Equipment & Services

$
500


$
500


$
511

BJ's Wholesale Club, Inc.

3/26/2020

8.50
%

L+7.50

Food & Staples Retailing

2,000


1,990


2,045

Camp International Holding
Company

11/29/2019

8.25
%

L+7.25

Transportation Infrastructure

1,000


1,000


1,022

Chromaflo Technologies Corporation (Chromaflo Technologies
Finance B.V.) (3)

6/2/2020

8.25
%

L+7.25

Chemicals

1,000


995


1,010

Del Monte Foods, Inc. (3), (5), (6)

7/26/2021

8.25
%

L+7.25

Food Products

1,000


990


1,012

Drew Marine Group, Inc.

5/19/2021

8.00
%

L+7.00

Chemicals

2,000


1,995


2,015

Filtration Group Corporation

11/22/2021

8.25
%

L+7.25

Industrial Conglomerates

500


495


512

Performance Food Group, Inc.

11/14/2019

6.25
%

L+5.25

Food & Staples Retailing

2,993


2,974


3,015

Sheridan Holdings, Inc.

12/20/2021

8.25
%

L+7.25

Health Care Providers & Services

2,000


1,990


2,019

WP CPP Holdings, LLC (5)

4/30/2021

8.75
%

L+7.75

Aerospace & Defense

1,000


1,025


1,020

WTG Holdings III Corp. (5), (6)

1/15/2022

8.50
%

L+7.50

Machinery

1,000


995


1,005

Total Second Lien Floating Rate Loans







$
14,993


$
14,949


$
15,186

CLO Equity














Apidos CLO XIV, Income Notes (3), (4)

4/15/2025







$
4,400


$
4,440


$
4,442

Blue Hill CLO, Ltd., Subordinated Notes (3), (4)

1/15/2026







5,400


4,854


4,930

Blue Hill CLO, Ltd. Subordinated Fee Notes (3), (4)

1/15/2026







100


108


110

Cent CLO 18 Limited, Subordinated
Notes (3), (4)

7/23/2025







4,675


4,675


4,709

Cent CLO 19 Limited, Subordinated
Notes (3), (4)

10/29/2025







2,750


2,524


2,476

Carlyle Global Market Strategies CLO 2013-3, Subordinated Notes (3),(4)

7/15/2025







2,750


2,699


2,839

Galaxy XVI CLO, Ltd., Subordinated Notes (3), (4)

11/17/2025







2,750


2,511


2,466

Neuberger Berman CLO XV, Ltd., Subordinated Notes (3), (4)

10/15/2025







3,410


3,112


3,047

Octagon Investment Partners XIV, Ltd., Income Notes (3), (4)

1/15/2024







5,500


5,255


5,153

Total CLO Equity 









$
31,735


$
30,178


$
30,172

Total Investments 









$
199,968


$
198,268


$
199,565

Liabilities in Excess of Other Assets









(198,549
)
Net Assets













$
1,016

 
(1)
Floating rate debt investments typically bear interest at a rate determined by reference to either the London Interbank Offered Rate (“LIBOR” or “L”) index rate or the prime index rate ("PRIME" or “P”), and which typically reset monthly, quarterly or semi-annually. For each debt investment we have provided the current interest rate in effect as of December 31, 2013.
(2)
Floating rate instruments accrue interest at a predetermined spread relative to an index, typically the LIBOR or PRIME rate. These instruments are typically subject to a LIBOR or PRIME rate floor.

See notes to consolidated financial statements.
15



AMERICAN CAPITAL SENIOR FLOATING, LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)
DECEMBER 31, 2013
(in thousands)


(3)
Investments that are not "qualifying assets" under Section 55(a) of the 1940 Act. Under the 1940 Act, we may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets.
(4)
These securities are exempt from registration under Rule 144A of the Securities Act of 1933, as amended. These securities may be resold in transactions that are exempt from registration, normally to qualified institutional buyers.
(5)
All or a portion of this position has not settled as of December 31, 2013.
(6)
Denotes a "when issued" security that was scheduled to close after December 31, 2013
(7)
Includes the unfunded obligations of $1,333 par at $5 fair value.




See notes to consolidated financial statements.
16

AMERICAN CAPITAL SENIOR FLOATING, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(in thousands, except share and per share amounts)



Note 1. Organization
American Capital Senior Floating, Ltd. (which is referred to as “ACSF”, “we”, "us" and “our”) was organized in February 2013 as a Maryland corporation and commenced operations on October 15, 2013. We are structured as an externally managed, non-diversified closed-end investment management company that has elected to be regulated as a business development company ("BDC") under the Investment Company Act of 1940, as amended (the "1940 Act"). On November 14, 2013, we formed a wholly-owned special purpose financing vehicle, ACSF Funding I, LLC, a Delaware limited liability company (“ACSF Funding”).
In January 2014, we completed an initial public offering (“IPO”) of 10,000,000 shares of common stock at the public offering price of $15.00 per share for gross proceeds of $150,000. Upon completion of the IPO, we became externally managed by American Capital ACSF Management, LLC (our "Manager"), an indirect subsidiary of American Capital Asset Management, LLC, ("ACAM"), which is a wholly-owned portfolio company of American Capital, Ltd. ("American Capital"). Prior to the completion of our IPO, we were wholly-owned by ACAM. Following completion of the IPO, ACAM owned approximately 3% of our outstanding common stock, the maximum amount permissible under the 1940 Act. In conjunction with the IPO, our Manager paid the underwriting commissions of $7,952. Our common stock is listed on the NASDAQ Global Select Market, where it trades under the symbol “ACSF”. In connection with the IPO, we elected to be treated as a BDC under the 1940 Act and intend to elect to be taxed as a regulated investment company (“RIC”), as defined in Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).
Investment Objective
Our investment objective is to provide attractive, risk-adjusted returns over the long-term primarily through current income while seeking to preserve our capital. We actively manage a leveraged portfolio composed primarily of diversified investments in first lien and second lien floating rate loans to large U.S. based companies (collectively, "Senior Secured Floating Rate Loans" or "Loans") which are commonly referred to as leveraged loans. We also invest opportunistically in equity tranches of collateralized loan obligations (“CLOs”) collateralized primarily by Loans and may invest in debt tranches of CLOs collateralized primarily by Loans. In addition, we may selectively invest in loans issued by middle market companies, mezzanine and unitranche loans and high yield bonds. Additionally, we may from time to time hold or invest in other equity investments and other debt or equity securities generally arising from a restructuring of Loan positions previously held by us.
Note 2. Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. In the opinion of management, all adjustments which are of a normal recurring nature and considered necessary for the fair presentation of the financial statements for the interim period, have been included. The current period's results of operations are not necessarily indicative of results that ultimately may be achieved for the year.
The consolidated financial statements include our accounts and those of our wholly-owned subsidiary, ACSF Funding. Intercompany accounts and transactions have been eliminated in consolidation. The accounts of ACSF Funding are prepared for the same reporting period as ours using consistent accounting policies. References to the Accounting Standards Codification, or ASC, serve as a single source of accounting literature. Subsequent events are evaluated and disclosed as appropriate for events occurring through the date the consolidated financial statements are issued.
Use of Estimates
The preparation of our 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 amount of income and expenses during the reported period. Changes in economic environment, financial markets, and any other parameters used in determining such estimates could cause actual results to differ.


17

AMERICAN CAPITAL SENIOR FLOATING, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
JUNE 30, 2014
(in thousands, except share and per share amounts)


Investment Classification
As required by the 1940 Act, investments are classified by level of control. "Control Investments" are defined as investments in portfolio companies that we are deemed to control as defined in the 1940 Act. "Affiliate Investments" are investments in those companies that are affiliated companies, as defined in the 1940 Act, other than Control Investments. "Non-Control/Non-Affiliate Investments" are those that are neither Control Investments nor Affiliate Investments.
Generally, under the 1940 Act, we are deemed to control a company in which we have invested if we own more than 25% of the voting securities of such company. We are deemed to be an affiliate of a company if we own 5% or more of the voting securities of such company.
As of June 30, 2014 and December 31, 2013, all of our investments were Non-Control/Non-Affiliate investments.
Fair Value Measurements
We value our investments in accordance with the 1940 Act and ASC Topic 820, Fair Value Measurements and Disclosures, ("ASC 820") as determined in good faith by our Board of Directors. Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. Due to the uncertainty inherent in the valuation process, estimates of fair value may differ significantly from the values that would have been used had a ready market for our investments existed, and the differences could be material. Additionally, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned.
We undertake a multi-step valuation process to determine the fair value of our investments in accordance with ASC 820. The valuation process begins with the development of a preliminary valuation recommendation for each investment as determined in accordance with our valuation policy by a group of our Manager’s valuation, accounting and finance professionals, which is independent of our Manager's investment team. To prepare the proposed valuation, the group reviews information provided by a nationally recognized independent pricing service and broker-dealers, and may consult with the investment team and other internal resources of our Manager and its affiliates. The preliminary valuation recommendations are then presented to the Investment Committee and reviewed and approved by our Audit and Compliance Committee. The valuation recommendations are then reviewed by our Board of Directors for final approval. There were no changes to our valuation techniques or the nature of the related inputs considered in the valuation process during the three and six months ended June 30, 2014.
Securities Transactions
Securities transactions are recorded on the trade date. Cost is determined based on consideration given and the unrealized gains or losses on investment securities represent the changes in fair values as determined in compliance with the valuation policy. Realized gains and losses from securities are recorded on the basis of weighted-average cost.
Investment Income
For debt investments, we record interest income on the accrual basis to the extent that such amounts are expected to be collected. Original issue discount ("OID") and purchased discounts and premiums are accreted/amortized into interest income using the effective interest method, where applicable. Loan origination fees are deferred and accreted into interest income using the effective interest method. We record prepayment premiums on loans and other investments as interest income when such amounts are received. We stop accruing interest on investments when it is determined that interest is no longer collectible. As of June 30, 2014 and December 31, 2013, we had no loans on non-accrual status.
Interest income on the CLO equity investments is recognized using the effective interest method as required by ASC Subtopic 325-40, Investments-Other, Beneficial Interests in Securitized Financial Assets ("ASC 325-40"). At the time of purchase, we estimate the future expected cash flows and determine the effective interest rate based on these estimated cash flows and our cost basis. Subsequent to the purchase on a quarterly basis, the estimated future cash flows are updated and a revised yield is calculated prospectively based on the current amortized cost of the investment as adjusted for credit impairments, if any.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits and highly liquid financial instruments with original maturities of 90 days or less including those held in overnight sweep bank deposit accounts. Cash and cash equivalents are carried at cost, which approximates fair value.
Consolidation
As permitted under Regulation S-X and as explained by ASC 946-810-45, Financial Services - Investment Companies - Consolidation, we will generally not consolidate an investment in a company other than an investment company subsidiary or a


18

AMERICAN CAPITAL SENIOR FLOATING, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
JUNE 30, 2014
(in thousands, except share and per share amounts)


controlled operating company whose business consists primarily of providing services to us. Accordingly, we have consolidated the results of ACSF Funding in our consolidated financial statements.
Dividends to Common Shareholders
Dividends and distributions to common shareholders are recorded on the ex-dividend date.
Note 3. Agreements
Management Agreement
We have entered into a management agreement with our Manager effective as of the date of the closing of our IPO. Under the management agreement, our Manager has agreed to provide investment advisory services to us, in addition to providing additional services, personnel and facilities necessary for our operations. Unless terminated earlier, the management agreement will continue to be in effect for a period of two years. It will remain in effect from year to year thereafter if approved annually by our Board of Directors or by the affirmative vote of the holders of a majority of our outstanding voting securities, and, in either case if also approved by a majority of our directors who are not "Interested Persons" as defined under the 1940 Act.
Our Manager receives a management fee from us that is payable quarterly in arrears. The management fee is calculated at an annual rate of 0.8% of our total consolidated assets, excluding cash and cash equivalents and net unrealized appreciation or depreciation, each as determined by GAAP at the end of the most recently completed fiscal quarter. There is no incentive compensation paid to our Manager under the management agreement. The management fee is prorated for any partial period and totaled $574 and $1,000 for the three and six months ended June 30, 2014, respectively.
Since our Manager has no employees, it has entered into an administrative agreement with both its parent and American Capital pursuant to which our Manager will be provided with personnel, services and resources necessary for our Manager to perform its obligations under the management agreement.
We have also agreed to reimburse our Manager and its affiliates for certain expenses related to operations incurred on our behalf, excluding employment-related expenses of our and our Manager’s officers and any employees of American Capital or its affiliates who provide services to us pursuant to the management agreement or to our Manager pursuant to the administrative services agreement. In addition, our Manager or one of its affiliates may pay for or incur certain expenses and then allocate these expenses to ACSF. For the three and six months ended June 30, 2014, we recognized $243 and $509, respectively, of expenses that are reimbursable to our Manager and its affiliates.
For the first full 24 months after the date of our IPO, our Manager has agreed to be responsible for certain of our operating expenses in excess of 0.75% of our consolidated net assets, less net unrealized appreciation or depreciation, each as determined under GAAP at the end of the most recently completed fiscal quarter. Operating expenses subject to this reimbursement include both (i) our operating expenses reimbursed to our Manager and its affiliates for the expenses related to our operations incurred on our behalf, and (ii) our operating expenses directly incurred by us excluding the management fee, interest costs, taxes, and accrued costs and fees related to actual, pending, or threatened litigation, each as determined under GAAP for the most recently completed fiscal quarter. As a result of this operating expense limit, any reimbursements to our Manager and its affiliates could be reduced or eliminated, and in certain instances, our Manager could be required to reimburse us so that our other expenses do not exceed the limit described above. Subsequent to the first full 24 months after the date of our IPO, there are no limits on the reimbursement to our Manager or its affiliates of such expenses related to our operations. For the three and six months ended June 30, 2014, our Manager was required to reimburse us for $264 and $554, respectively, of operating expenses as a result of the expense cap.    
ACSF Funding Investment Advisory Agreement
ACSF Funding entered into an investment advisory agreement with our Manager to manage its assets. No additional compensation is payable to our Manager under such agreement.
License Agreement
American Capital owns all the rights, title and interest in the service marks and domain names associated with American Capital, its affiliates and subsidiaries. We have entered into a royalty-free license agreement with American Capital for the right to use the names "American Capital Senior Floating" and “American Capital”, logo and domain address for so long as our Manager or one of its affiliates remains our investment manager and it is used in connection with our business activities.


19

AMERICAN CAPITAL SENIOR FLOATING, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
JUNE 30, 2014
(in thousands, except share and per share amounts)


Tax Sharing Agreement
For the period prior to the IPO date during which we were treated as a taxable C corporation for tax purposes, we had a tax sharing agreement with American Capital and other members of its consolidated tax group, under which such members bore their full share of their individual tax obligation and members were compensated for their losses and other tax benefits that were able to be used by other members of the consolidated tax group based on their pro-forma stand-alone federal income tax return.
Note 4. Net Asset Value Per Share
At June 30, 2014, our total net assets and net asset value per share were $151,189 and $15.12, respectively. Net asset value per share at December 31, 2013 is not considered meaningful and has been marked "N/M" in the consolidated financial statements.
Note 5. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30, 2014:
 
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2014
 
June 30, 2014
Numerator—net increase in net assets resulting from operations
 
$
2,849

 
$
4,969

Denominator—weighted average shares (1)
 
10,000,100

 
10,000,100

Earnings per share
 
$
0.28

 
$
0.50

(1)
Assumes the 10,000,000 common shares issued in our IPO on January 22, 2014 were issued on January 1, 2014.
Note 6. Investments
Our investments primarily focus on Senior Secured Floating Rate Loans and opportunistic investments in equity tranches of CLOs. Our investments in Senior Secured Floating Rate Loans are typically arranged by a syndicate of investment or commercial banks who syndicate loans to third-party investors. Investors may seek to buy and sell Senior Secured Floating Rate Loans through both primary and secondary markets. During the three months ended June 30, 2014, we purchased Senior Secured Floating Rate Loans of 20 new and 3 existing portfolio companies for a total purchase price of $40,151. During the six months ended June 30, 2014, we purchased Senior Secured Floating Rate Loans of 61 new and 17 existing portfolio companies for a total purchase price of $130,003. During the three and six months ended June 30, 2014, we purchased 3 and 5 CLO equity investments, respectively, for an aggregate purchase price of $10,028 and $18,420, respectively. Investment sales and repayments during the three and six months ended June 30, 2014 totaled $43,591 and $63,340, respectively. We may, from time to time, transact in purchases or sales of securities with affiliates of our Manager at fair market value on trade date. During the three and six months ended June 30, 2014, total proceeds from sales to affiliates were $5,030 and $11,572, respectively.
As of June 30, 2014, our investments consisted of the following:
 
 
Cost
 
Fair Value
First lien floating rate loans
 
$
203,526

 
$
204,396

Second lien floating rate loans
 
34,951

 
35,404

CLO equity
 
47,708

 
47,733

Total Investments
 
$
286,185

 
$
287,533

As of June 30, 2014, our portfolio consisted of 121 portfolio companies, including 108 Loan portfolio companies and 13 CLO equity investments.
As of December 31, 2013, our investments consisted of the following:
 
 
Cost
 
Fair Value
First lien floating rate loans
 
$
153,141

 
$
154,207

Second lien floating rate loans
 
14,949

 
15,186

CLO equity
 
30,178

 
30,172

Total Investments
 
$
198,268

 
$
199,565



20

AMERICAN CAPITAL SENIOR FLOATING, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
JUNE 30, 2014
(in thousands, except share and per share amounts)


As of December 31, 2013, our portfolio consisted of 77 portfolio companies, including 69 Loan portfolio companies and 8 CLO equity investments.
We use the Global Industry Classification Standards (“GICS®”) for classifying the industry groupings of our Loan investments. The GICS® was developed by MSCI, an independent provider of global indexes and benchmark-related products and services, and Standard & Poor’s, an independent international financial data and investment services company and provider of global equity indexes. The following table shows the Loan portfolio composition by industry grouping at fair value as a percentage of total Loans as of June 30, 2014 and December 31, 2013. The investments in CLOs are excluded from the table below:


June 30, 2014

December 31, 2013
Health Care Providers & Services

12.1%

7.9%
Software

9.2%

11.7%
Hotels, Restaurants & Leisure

8.0%

8.4%
Media

6.3%

3.3%
Aerospace & Defense

5.7%

4.4%
Commercial Services & Supplies

5.2%

4.7%
IT Services

4.1%

4.0%
Insurance

3.1%

3.0%
Metals & Mining

2.9%

4.2%
Food & Staples Retailing

2.7%

3.6%
Pharmaceuticals

2.7%

1.5%
Diversified Consumer Services

2.3%

3.8%
Food Products

2.2%

2.5%
Independent Power and Renewable Electricity Producers

2.1%

1.2%
Machinery

2.0%

1.2%
Professional Services

2.0%

2.4%
Health Care Technology

2.0%

2.8%
Health Care Equipment & Supplies

2.0%

—%
Textiles, Apparel & Luxury Goods

1.8%

1.8%
Containers & Packaging

1.7%

1.2%
Chemicals

1.7%

4.1%
Building Products

1.7%

1.8%
Diversified Telecommunication Services

1.6%

2.3%
Oil, Gas & Consumable Fuels

1.5%

1.8%
Capital Markets

1.5%

2.1%
Transportation Infrastructure

1.3%

—%
Internet & Catalog Retail

1.3%

—%
Construction Materials

1.2%

1.8%
Construction & Engineering

1.2%

1.8%
Multiline Retail

0.4%

1.8%
Industrial Conglomerates

0.2%

1.0%
Household Durables

—%

1.8%
Specialty Retail

—%

1.8%
Other

6.3%

4.3%
Total

100.0%

100.0%


21

AMERICAN CAPITAL SENIOR FLOATING, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
JUNE 30, 2014
(in thousands, except share and per share amounts)


Note 7. Fair Value
We value our investments at fair value in accordance with ASC 820, which defines fair value as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. Due to the uncertainty inherent in the valuation process, estimates of fair value may differ significantly from the values that would have been used had a ready market for our investments existed, and the differences could be material. Additionally, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned.
ASC 820 provides a framework for measuring the fair value of assets and liabilities and provides guidance regarding a fair value hierarchy, which prioritizes information used to measure fair value and the effect of fair value measurements on earnings. When available, we base the fair value of our investments using unadjusted quoted prices in active markets. Where inputs for an asset or liability fall in more than one level in the fair value hierarchy, the investment is classified in its entirety based on the lowest level input that is significant to that investment's fair value measurement. We use judgment and consider factors specific to the investment in determining the significance of an input to a fair value measurement. Our policy is to recognize transfers in and out of levels as of the beginning of each reporting period. The three levels of the fair value hierarchy and investments that fall into each of the levels are described below:
Level 1: Inputs are unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. This may include valuations based on executed trades, broker quotations that constitute an executable price, and alternative pricing sources supported by observable inputs which, in each case, are either directly or indirectly observable for the asset in connection with market data at the measurement date.
Level 3: Inputs are unobservable and cannot be corroborated by observable market data. In certain cases, investments classified within Level 3 may include securities for which we have obtained indicative quotes from broker-dealers that do not necessarily represent prices the broker may be willing to trade on.
The valuation techniques used maximize the use of observable inputs and minimize the use of unobservable inputs. Our Loans are predominately valued based on evaluated prices from a nationally recognized independent pricing service approved by our Board of Directors or from third-party brokers who make markets in such debt investments. When possible, we make inquiries of third-party pricing sources to understand their use of significant inputs and assumptions. We review the third-party fair value estimates and perform procedures to validate their reasonableness, including an analysis of the range and dispersion of third-party estimates, frequency of pricing updates, comparison of recent trade activity for similar securities, and review for consistency with market conditions observed as of the measurement date.
There may be instances when independent or third-party pricing sources are not available, or cases where we believe that the third-party pricing sources do not provide sufficient evidence to support a market participant's view of the fair value of the debt investment being valued. These instances may result from an investment in a less liquid loan such as a middle market loan, a mezzanine loan or unitranche loan, or a loan to a company that has become financially distressed. In these instances, we may estimate the fair value based on a combination of a market yield valuation methodology and evaluated pricing discussed above, or solely based on a market yield valuation methodology. Under the market yield valuation methodology, we estimate the fair value based on a discounted cash flow technique. For these debt investments, the unobservable inputs used in the market yield valuation methodology to measure fair value reflect management's best estimate of assumptions that would be used by market participants when pricing the investment in a hypothetical transaction, including estimated remaining life, current market yield and interest rate spreads of similar loans and securities as of the measurement date. We will estimate the remaining life based on market data for the average life of similar loans. However, if we have information that the loan is expected to be repaid in the near term, we would use an estimated remaining life based on the expected repayment date. The average life to be used to estimate the fair value of our loans may be shorter than the legal maturity of the loans since many loans are prepaid prior to the maturity date. The interest rate spreads used to estimate the fair value of our loans is based on current interest rate spreads of similar loans. If there is a significant deterioration of the credit quality of a loan, we may consider other factors that a hypothetical market participant would use to estimate fair value, including the proceeds that would be received in a liquidation analysis.
We estimate the fair value of our CLO equity investments using a combination of third-party broker quotes, purchases or sales of the same or similar securities, and cash flow forecasts subject to assumptions that a market participant would use regarding the investments' underlying collateral including, but not limited to, assumptions of default and recovery rates, reinvestment spreads and prepayment rates. Cash flow forecasts are discounted using market participant's market yield assumptions


22

AMERICAN CAPITAL SENIOR FLOATING, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
JUNE 30, 2014
(in thousands, except share and per share amounts)


that are derived from multiple sources including, but not limited to, third-party broker quotes, industry research reports and transactions of securities and indices with similar structures and risk characteristics. We weight the use of third-party broker quotes, if any, when determining fair value based on our understanding of the level of actual transactions used by the broker to develop the quote and whether the quote was an indicative price or binding offer, the depth and consistency of broker quotes and the correlation of changes in broker quotes with underlying performance and other market indices. For the three and six months ended June 30, 2014, there were no changes to our valuation techniques or the nature of the related inputs considered in the valuation process.
The following fair value hierarchy table sets forth our investments measured at fair value on a recurring basis by level as of June 30, 2014: 
 
 
Total
 
Level 1
 
Level 2
 
Level 3
First lien floating rate loans
 
$
204,396

 
$

 
$
196,744

 
$
7,652

Second lien floating rate loans
 
35,404

 

 
32,869

 
2,535

CLO equity
 
47,733

 

 

 
47,733

Total Investments
 
$
287,533

 
$

 
$
229,613

 
$
57,920

The following fair value hierarchy table sets forth our investments measured at fair value on a recurring basis by level as of December 31, 2013:
 
 
Total
 
Level 1
 
Level 2
 
Level 3
First lien floating rate loans
 
$
154,207

 
$

 
$
117,950

 
$
36,257

Second lien floating rate loans
 
15,186

 

 
11,650

 
3,536

CLO equity
 
30,172

 

 

 
30,172

Total Investments
 
$
199,565

 
$

 
$
129,600

 
$
69,965

The following table provides a summary of the changes in fair value of Level 3 assets for the three months ended June 30, 2014 as well as the portion of gains or losses included in income attributable to unrealized gain or losses related to those assets still held at June 30, 2014:  
 
 
First lien floating rate loans
 
Second lien floating rate loans
 
CLO equity
 
Total
Beginning Balance – March 31, 2014
 
$
35,540

 
$
11,049

 
$
37,913

 
$
84,502

Purchases
 

 
493

 
10,028

 
10,521

Dispositions
 
(9,632
)
 
(2,498
)
 
(1,659
)
 
(13,789
)
Transfers out
 
(18,159
)
 
(6,531
)
 

 
(24,690
)
Transfers in
 

 

 

 

Amortization discount/premium (1)
 

 
1

 
1,483

 
1,484

Realized gains, net
 
38

 
24

 

 
62

Unrealized depreciation, net
 
(135
)
 
(3
)
 
(32
)
 
(170
)
Ending Balance – June 30, 2014
 
$
7,652

 
$
2,535

 
$
47,733

 
$
57,920

Net change in unrealized (depreciation) appreciation reported within the net change in unrealized (depreciation) appreciation on investments in our consolidated statement of operations attributable to our Level 3 assets still held at the reporting date
 
$
(60
)
 
$
22

 
$
(32
)
 
$
(70
)
(1) Includes income accrual from CLO equity investments.
Investments were transferred out of Level 3 into Level 2 due to changes in the quantity and quality of inputs obtained to support the fair value of each investment. Transfers into and out of the levels are recognized at the beginning of the period.    


23

AMERICAN CAPITAL SENIOR FLOATING, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
JUNE 30, 2014
(in thousands, except share and per share amounts)


The following table provides a summary of the changes in fair value of Level 3 assets for the six months ended June 30, 2014 as well as the portion of gains or losses included in income attributable to unrealized gain or losses related to those assets still held at June 30, 2014:  
 
 
First lien floating rate loans
 
Second lien floating rate loans
 
CLO equity
 
Total
Beginning Balance – December 31, 2013
 
$
36,257

 
$
3,536

 
$
30,172

 
$
69,965

Purchases
 
9,505

 
7,924

 
18,420

 
35,849

Dispositions
 
(16,870
)
 
(2,497
)
 
(3,468
)
 
(22,835
)
Transfers out
 
(29,368
)
 
(6,531
)
 

 
(35,899
)
Transfers in
 
8,019

 

 

 
8,019

Amortization discount/premium (1)
 
4

 
2

 
2,578

 
2,584

Realized gains, net
 
132

 
24

 

 
156

Unrealized appreciation (depreciation), net
 
(27
)
 
77

 
31

 
81

Ending Balance – June 30, 2014
 
$
7,652

 
$
2,535

 
$
47,733

 
$
57,920

Net change in unrealized (depreciation) appreciation reported within the net change in unrealized (depreciation) appreciation on investments in our consolidated statement of operations attributable to our Level 3 assets still held at the reporting date
 
$
(27
)
 
$
27

 
$
31

 
$
31

(1) Includes income accrual from CLO equity investments.
Investments were transferred into and out of Level 3 and into and out of Level 2 due to changes in the quantity and quality of inputs obtained to support the fair value of each investment. Transfers into and out of the levels are recognized at the beginning of the period.
     The following table summarizes the significant unobservable inputs in the fair value measurements of our Level 3 investments by category of investment and valuation technique as of June 30, 2014
 
 
Fair Value as of
June 30, 2014
 
Valuation
Techniques/
Methodology
 
Unobservable
Inputs
 
Range
(Weighted Average)
First lien floating rate loans
 
$
7,652

 
Third-party vendor pricing service
 
Vendor quotes
 

Second lien floating rate loans
 
$
2,535

 
Third-party vendor pricing service
 
Vendor quotes
 
 
CLO equity
 
$
47,733

 
Discounted Cash Flow
 
Discount rate
Constant prepayment rate
Constant default rate
 
11.0% – 13.3% (11.6%)
30.0% – 33.0% (30.9%)
0.9% – 2.0% (1.7%)
The following table summarizes the significant unobservable inputs in the fair value measurements of our Level 3 investments by category of investment and valuation technique as of December 31, 2013:
 
 
Fair Value as of
December 31, 2013
 
Valuation
Techniques/
Methodology
 
Unobservable
Inputs
 
Range
(Weighted Average)
First lien floating rate loans
 
$
36,257

 
Third-party vendor pricing service
 
Vendor quotes
 
 
Second lien floating rate loans
 
$
3,536

 
Third-party vendor pricing service
 
Vendor quotes
 
 
CLO equity
 
$
30,172

 
Discounted Cash Flow
 
Discount rate
Constant prepayment rate
Constant default rate
 
13.9% – 17.5% (14.8%)
30.0% – 33.0% (31.3%)
0.9% – 2.0% (1.5%)


24

AMERICAN CAPITAL SENIOR FLOATING, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
JUNE 30, 2014
(in thousands, except share and per share amounts)



The significant unobservable inputs used in the fair value measurement of CLO equity include the default and prepayment rates used to establish projected cash flows and the discount rate applied in the valuation models to those projected cash flows. An increase in any one of these individual inputs in isolation would likely result in a decrease to fair value. However, given the interrelationship between these inputs, overall market conditions would likely have a more significant impact on our Level 3 fair values than changes in any one unobservable input.  
Note 8. Debt
Revolving Credit Facility
On October 15, 2013, we entered into a revolving credit facility with ACAM (the “ACAM Facility”) which provided up to $200,000 to finance eligible investments, working capital expenses and general corporate requirements (comprised of Loan A and Loan B). Under the ACAM Facility, we were able to draw up to $180,000 under Loan A and up to $20,000 under Loan B at any one time. Any amounts drawn on Loan A had a fixed interest rate of 4.75% per annum, and any amounts drawn on Loan B had a fixed interest rate of 7.25% per annum, with all interest paid upon maturity of the ACAM Facility. The ACAM Facility matured on the closing date of our IPO. On January 22, 2014, we repaid the ACAM Facility in full plus accrued interest and terminated it. For the six months ended June 30, 2014, we incurred interest expense of $568 on the ACAM Facility.
Secured Revolving Credit Facility
On December 18, 2013, ACSF Funding entered into a two-year $140,000 secured revolving credit facility with Bank of America, N.A., as agent (the “Credit Facility”). ACSF Funding may make draws under the Credit Facility from time to time to purchase or acquire certain eligible assets. The Credit Facility is secured by ACSF Funding’s assets pursuant to a security agreement and contains customary financial and negative covenants and events of default. As of June 30, 2014 and December 31, 2013, the fair value of assets owned by ACSF Funding and pledged as collateral was $230,643 and $0, respectively. The Credit Facility is non-recourse to ACSF. Amounts drawn under the Credit Facility bear interest at a rate per annum equal to either (a) LIBOR plus 1.80%, or (b) 0.80% plus the highest of (i) the Federal funds rate plus 0.5%, (ii) Bank of America, N.A.’s prime rate, or (iii) one-month LIBOR plus 1%. ACSF Funding may borrow, prepay and reborrow loans under the Credit Facility at any time prior to November 18, 2015, the commitment termination date, subject to certain terms and conditions, including maintaining a certain borrowing base. Any outstanding balance on the Credit Facility as of the commitment termination date must be repaid on the maturity date, which is December 18, 2015, unless otherwise extended.
ACSF Funding is required to pay a commitment fee in an amount equal to 0.75% on the actual daily unused amount of the lender commitments under the Credit Facility from February 14, 2014 to the commitment termination date, payable quarterly in arrears. In addition, if ACSF Funding terminates the commitment amount in whole or in part prior to June 18, 2015, ACSF Funding will be required to pay a make-whole fee equal to the sum of the present values of all future spread amounts that would have been payable in respect of the total commitments (or terminated portion thereof) during the period from the termination date through June 18, 2015.
As of June 30, 2014, there was $128,000 outstanding under the Credit Facility which had a fair value of $128,000 and a weighted average interest rate of 1.95%. There were no borrowings outstanding under the Credit Facility as of December 31, 2013. As of June 30, 2014, ACSF Funding was in compliance with all covenants of the Credit Facility, including compliance with a borrowing base that applies various advance rates of up to 80% on the assets pledged as collateral by ACSF Funding.
For the three months ended June 30, 2014, we incurred interest expense and commitment fees of $668 and $15, respectively, on the Credit Facility. For the six months ended June 30, 2014, we incurred interest expense and commitment fees of $1,067 and $40, respectively, on the Credit Facility.
    The average debt outstanding for the three and six months ended June 30, 2014 was $132,364 and $125,815, respectively. The weighted average annual interest cost, including commitment fees, for the three and six months ended June 30, 2014, was 2.07% and 2.68%, exclusive of 0.29% and 0.31% on the average debt outstanding for amortization of debt issuance costs, respectively. This weighted average annual interest cost reflects the average interest cost during the period for both the ACAM Facility and Credit Facility. The maximum amount of debt outstanding during the three and six months ended June 30, 2014 was $137,000 and $194,748, respectively.
Note 9. Taxes
From our inception through the date of our IPO, we were a taxable corporation under Subchapter C of the Code (“C corporation”), subject to federal and state income taxes on our taxable ordinary income and capital gains. Prior to our IPO, we


25

AMERICAN CAPITAL SENIOR FLOATING, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
JUNE 30, 2014
(in thousands, except share and per share amounts)


were an indirect wholly-owned subsidiary of ACAM, which was wholly-owned by American Capital. As such, we were required to be consolidated in American Capital’s federal consolidated tax group, which has a September 30 tax year end. We had a tax sharing agreement with American Capital and other members of the consolidated tax group, under which such members bore their full share of their individual tax obligation and members were compensated for their losses and other tax benefits that were able to be used by other members of the consolidated tax group based on their pro forma stand-alone federal income tax return.
We intend to elect to be taxed as a RIC under Subchapter M of the Code beginning with the date of our IPO through our tax fiscal year end of December 31. As part of our election to be taxed as a RIC, we intend to make a “deemed sale election” whereby we will treat our net unrealized gains (“net built-in gain”) on the date of our IPO as recognized for tax purposes in our final pre-IPO C corporation federal tax return. As a result of these intended elections, we will be required to distribute to our shareholders in our first tax year as a RIC all of our undistributed after-tax earnings and profits as of the date of our election to be taxed as a RIC, which amounted to $1,402.
The federal tax sharing payment that we owed to American Capital attributable to our net built-in gain was $574. American Capital waived this payment which was then treated as a deemed capital contribution to us.
The taxes on the net built-in gain at the time of the IPO totaled $721. As we exit the investments held at the time of the IPO, the tax expense, which was originally recorded against the unrealized appreciation on the portfolio, must be reclassified with net realized gains. There is no impact to our net earnings for this reclassification. The following table summarizes the impact of this reclassification on our investment gains and losses for the three and six months ended June 30, 2014.
 
 
Three Months Ended
 
Six Months Ended
 
 
 
June 30, 2014
 
June 30, 2014
 
Tax provision on net unrealized appreciation
 
$
212

 
$
12

 
Tax provision on net realized gains
 
(212
)
 
(212
)
 
Net impact to earnings from operations
 
$

 
$
(200
)
 
 
 
 
 
 
 

In order to qualify as a RIC, we must annually distribute in a timely manner to our shareholders at least 90% of our taxable ordinary income based on our tax fiscal year. Ordinary taxable income includes net short-term capital gains but excludes net long-term capital gains. A RIC is not subject to federal income tax on the portion of its taxable ordinary income and long-term capital gains that are distributed to its shareholders, including “deemed distributions.” As permitted by the Code, a RIC can designate dividends paid in the subsequent tax fiscal year as dividends of current year ordinary income and net long-term capital gains if those dividends are both declared by the extended due date of the RIC’s federal income tax return and paid to shareholders by the last day of the subsequent tax fiscal year. We intend to distribute sufficient dividends to eliminate taxable income for our current tax year. However, we may elect to not distribute sufficient dividends to eliminate all of our taxable income so long as we distribute at least 90% of our taxable ordinary income in order to maintain our qualification as a RIC. To the extent we maintain our qualification as a RIC but do not distribute all of our taxable income, we would be subject to income tax on such undistributed amounts. If we fail to satisfy the 90% distribution requirement or otherwise fail to qualify as a RIC in any tax fiscal year, we would be subject to income tax in such year on all of our taxable income, regardless of whether we made any distributions to our shareholders.
As a RIC, we are also subject to a nondeductible federal excise tax of 4% if we do not distribute at least 98% of our ordinary income, excluding net short-term capital gains, in any calendar year and 98.2% of our capital gains for each one-year period ending October 31, including any undistributed income from the prior excise tax year. For the three and six months ended June 30, 2014, we accrued federal excise tax of $30 and $30, respectively.
Income determined under GAAP differs from income determined under tax because of both temporary and permanent differences in income and expense recognition, including (i) unrealized gains and losses associated with debt investments marked to fair value for GAAP but the unrealized appreciation/depreciation is excluded from taxable income until realized or settled, (ii) temporary differences related to interest income and (iii) differences arising due to the taxation of CLO equity investments as either a Controlled Foreign Corporation ("CFC") or a Passive Foreign Investment Company ("PFIC").
As of June 30, 2014, the net unrealized appreciation for federal income tax purposes was $268 with aggregate gross unrealized appreciation and depreciation for federal tax purposes of $1,148 and $(880), respectively, based on a tax cost of $287,265.
We identify our major tax jurisdictions as federal and Maryland. During the period in which we were taxable as a C corporation, we were part of American Capital’s federal consolidated tax group, including its federal tax fiscal year ending


26

AMERICAN CAPITAL SENIOR FLOATING, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
JUNE 30, 2014
(in thousands, except share and per share amounts)


September 30, 2014, which remains subject to examination by the Internal Revenue Service (“IRS”).
ACSF Funding is a wholly-owned limited liability company and is treated as a disregarded entity for federal income tax purposes.
We recognize tax benefits of uncertain tax positions only when the position is more likely than not to be sustained assuming examination by tax authorities. We have analyzed our tax positions and have concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions taken on returns filed for open tax years or expected to be taken in our current year tax returns. We are not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next twelve months. A reconciliation is not provided as the beginning and ending amounts of unrecognized benefits are zero, with no interim additions, reductions or settlements.
Note 10. Financial Highlights
The following is a schedule of financial highlights:
 
 
 
 
 
 
Six Months Ended
 
 
 
June 30, 2014
(unaudited)
 
Per Share Data (1):
 
 
 
Gross proceeds from IPO
 
$
15.00

 
Net investment income
 
0.49

 
Net realized and unrealized gain on investments
 
0.01

 
Net increase in net assets resulting from operations
 
0.50

 
Capital contribution (2)
 
0.06

 
Accretion (6)
 
0.10

 
Offering costs related to public offering
 
(0.08
)
 
Dividends and distributions to shareholders
 
(0.46
)
 
Net asset value, end of period
 
$
15.12

 
Per share market value, end of period
 
$
14.00

 
Total return based on market value (3), (4)
 
(3.58
)%
 
Total return based on net asset value (3), (4)
 
4.13
 %
 
Ratios to Average Net Assets:
 
 
 
Net investment income (4)
 
3.50
 %
 
Operating expenses (4), (7)
 
1.12
 %
 
Interest and related expenses (4)
 
1.35
 %
 
Total expenses (7)
 
2.47
 %
 
Supplemental Data:
 
 
 
Net assets, end of period
 
$
151,189

 
Shares outstanding, end of period
 
10,000,100

 
Average debt outstanding
 
$
125,815

 
Asset coverage per unit, end of period (5)
 
$
2,181

 
Portfolio turnover ratio (4)
 
23.81
 %
 
 
(1)
Per share data for the six months ended June 30, 2014 presumes the issuance of 10 million shares of common stock on January 1, 2014 that were issued in the IPO which closed on January 22, 2014. There was no established public trading market for the stock prior to the pricing of the IPO.
(2)
Capital contribution from our Manager for amount of federal taxes due on the net built-in gain on investments as a result of tax conversion to a RIC.
(3)
Total return is based on the change in market price or net asset value per share during the period and takes into account dividends reinvested in accordance with the dividend reinvestment and stock purchase plan.
(4)
Not annualized for periods less than one year.


27

AMERICAN CAPITAL SENIOR FLOATING, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
JUNE 30, 2014
(in thousands, except share and per share amounts)


(5)
The asset coverage ratio for a class of senior securities representing indebtedness is calculated on our consolidated total assets, less all liabilities and indebtedness not represented by senior securities, divided by the senior securities representing indebtedness. This asset coverage ratio is multiplied by $1,000 to determine the asset coverage per unit.
(6)
The IPO issuance price of $15.00 per share was below the net asset value at that time. The amount reflects the immediate benefit to common shareholders at the time of the IPO for results of operations in 2013.
(7)
The ratio of operating expenses to average net assets and the ratio of total expenses to average net assets are shown net of the reimbursement for the expense cap. The ratio of operating expenses to average net assets and the ratio of total expenses to average net assets would be 1.52% and 2.87%, respectively, without the expense cap.
Note 11. Capital Transactions
The following table details the common share transactions that occurred during the three and six months ended June 30, 2014:
 
 
Three Months Ended
June 30, 2014
 
Six Months Ended
June 30, 2014
 
 
Shares
 
Amount
 
Shares
 
Amount
Common shares outstanding - beginning of period
 
10,000,100

 
$
149,805

 
100

 
$
1

Common shares issued in connection with initial public offering
 

 

 
10,000,000

 
150,000

Offering costs
 

 

 

 
(770
)
Contribution for taxes waived
 

 

 

 
574

Common shares outstanding - end of period
 
10,000,100

 
$
149,805

 
10,000,100

 
$
149,805

Offering costs associated with the IPO totaled $770 and were recorded as a reduction of the proceeds from the sale of common shares. In connection with the IPO, the underwriters received an underwriting discount and commission (sales load) of $7,952 that was paid by our Manager.
The table below details the dividends declared on our shares of common stock since the completion of our IPO:
Dividend Declaration Date
Ex-Dividend Date
Record Date
Payment Date
Per Share Amount
Total Amount
March 17, 2014
March 27, 2014
March 31, 2014
April 10, 2014
$0.18
$1,800
June 18, 2014
June 26, 2014
June 30, 2014
July 10, 2014
$0.28
$2,800
Note 12. Commitments and Contingencies
In the ordinary course of business, we may be a party to certain legal proceedings, including actions brought against us and others with respect to investment transactions. The outcomes of any such legal proceedings are uncertain and, as a result of these proceedings, the values of the investments to which they relate could decrease. We were not subject to any material litigation against us as of June 30, 2014.
We had an unfunded delayed draw first lien term loan commitment of $292 as of June 30, 2014 which we are obligated to fund at the request of the borrower.

Note 13. Subsequent Events
We have evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date the consolidated financial statements were issued. There have been no subsequent events that occurred during such period that would require disclosure in, or would be required to be recognized in, the consolidated financial statements as of and for the three and six months ended June 30, 2014.


28



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 our financial statements and notes thereto appearing elsewhere in this report.
Some of the statements in this report constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained herein involve risks and uncertainties, including statements as to:
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; and
the timing of cash flows, if any, from the operations of our portfolio companies.
We generally use words such as “anticipates,” “believes,” “expects,” “intends” and similar expressions to identify forward-looking statements. Our actual results could differ materially from those projected in the forward-looking statements for any reason, including any factors set forth in “Risk Factors” and elsewhere in this report.
We have based the forward-looking statements included in this report on information available to us on the date of this report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including any annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
Overview
American Capital Senior Floating, Ltd. (“ACSF”, “we”, "our" and "us"), a Maryland corporation organized in February 2013, is an externally managed, non-diversified closed-end investment management company. We have elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, for tax purposes we intend to elect to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).
On January 15, 2014, we priced our initial public offering, selling 10.0 million shares of common stock, at a price of $15.00 per share for net proceeds of $149.2 million. Our common stock is listed on the NASDAQ Global Select Market, where it trades under the symbol “ACSF”. We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 ("JOBS Act"), and intend to take advantage of the exemption for emerging growth companies allowing us to temporarily forgo the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002. We do not intend to take advantage of other disclosure or reporting exemptions for emerging growth companies under the JOBS Act.
Our investment activities are managed by American Capital ACSF Management, LLC (our "Manager"). Under our management agreement with our Manager, we have agreed to pay our Manager an annual base management fee of 0.8% of our total consolidated assets, excluding cash and cash equivalents and net unrealized appreciation or depreciation, at the end of the most recently completed fiscal quarter. There is no incentive compensation paid to our Manager. For the first two years following the IPO, our Manager has agreed that annual other operating expenses will generally not exceed 75 basis points of ACSF’s quarter end consolidated net assets, excluding unrealized gains or losses. Our Board of Directors, a majority of whom are independent of us, provides overall supervision of our activities, and our Manager supervises our day-to-day activities.
On November 14, 2013, we formed a wholly-owned consolidated financing subsidiary, ACSF Funding I, LLC, a Delaware limited liability company (“ACSF Funding”). On December 18, 2013, ACSF Funding entered into a two-year $140 million secured revolving credit facility with Bank of America, N.A., as agent (the “Credit Facility”). The Credit Facility is scheduled to mature on December 18, 2015 and generally bears interest at the London Interbank Offered Rate (“LIBOR”) plus 1.80%. The Credit Facility is secured by ACSF Funding's assets pursuant to a security agreement and contains customary financial and negative covenants and events of default. Advance rates vary on the type of collateral owned and can range up to 80%.
    


29



On October 15, 2013, we entered into a $200 million revolving credit facility (the "ACAM Facility") provided by American Capital Asset Management, LLC, the indirect parent of our Manager. Prior to the IPO, we used the ACAM Facility to purchase our initial investment portfolio and upon the closing of the IPO, we repaid the ACAM Facility in full plus accrued interest and terminated the ACAM Facility.
Investments    
Our investment objective is to provide attractive, risk-adjusted returns over the long-term primarily through current income while seeking to preserve our capital. We actively manage a leveraged portfolio composed primarily of diversified investments in first lien and second lien floating rate loans to large U.S. based companies (collectively, "Senior Secured Floating Rate Loans" or "Loans") which are commonly referred to as leveraged loans. S&P defines large-market loans as loans from issuers with earnings before interest, taxes, depreciation and amortization ("EBITDA") of greater than $50 million. Senior Secured Floating Rate Loans are typically collateralized by a company's assets and structured with first lien or second lien priority on collateral, providing for greater security and potential recovery in the event of default compared to other subordinated fixed-income products. We also invest opportunistically in equity tranches of collateralized loan obligations (“CLOs”) collateralized primarily by Loans and may invest in debt tranches of CLOs collateralized primarily by Loans. In addition, we may selectively invest in loans issued by middle market companies, mezzanine and unitranche loans and high yield bonds. Additionally, we may from time to time hold or invest in other equity investments and other debt or equity securities generally arising from a restructuring of Loan positions previously held by us. Under normal market conditions, we will invest at least 80% of our assets in Senior Secured Floating Rate Loans or CLOs that are pooled investment vehicles that invest primarily all of their assets in Loans.
Our level of investment activity can vary substantially from period to period depending on many factors, including the amount of debt and equity capital available to U.S. based large-market private companies, the level of merger and acquisition activity for such companies, 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” as defined by Section 55(a) of 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”. The definition of “eligible portfolio company” includes private operating companies and certain public companies whose securities are listed on a national securities exchange but whose market capitalization is less than $250 million, in each case organized under the laws of and with their principal place of business located in the United States. Investments in debt and equity tranches of CLOs are deemed nonqualified assets for BDC compliance purposes; therefore, under normal market conditions, we intend to limit our investments in CLOs to 20% of our portfolio.
Revenue
We generate revenue primarily in the form of interest income from the securities we hold and capital gains, if any, on investment securities that we may sell. Our debt investments generally have a stated term of three to seven years and typically bear interest at a floating rate usually determined on the basis of a benchmark LIBOR, commercial paper rate, or the prime rate. Interest on our debt investments is generally payable quarterly but may be paid monthly or semi-annually.
Expenses
We do not have any employees and do not pay our officers any cash or non-cash equity compensation. We will pay, or reimburse our Manager and its affiliates, for expenses related to our operations incurred on our behalf, excluding employment-related expenses of our and our Manager's officers and any employees of American Capital or the parent company of our Manager who provide services to us pursuant to the management agreement or to our Manager pursuant to the administrative services agreement. However, for the first full 24 months after the date of our IPO, our other operating expenses will be limited to an annual rate of 0.75% of our consolidated net assets, less net unrealized appreciation or depreciation, each as determined under GAAP at the end of the most recently completed fiscal quarter. For the purposes of the preceding operating expense limit, other operating expenses include both (i) our operating expenses reimbursed to our Manager and its affiliates for expenses related to our operations incurred on our behalf, and (ii) our operating expenses directly incurred by us excluding the management fee, interest costs, taxes and accrued costs and fees related to actual, pending or threatened litigation, each as determined under GAAP for the most recently completed fiscal quarter. Subsequent to the first full 24 months after the date of our IPO, there are no limits on the reimbursement to our Manager or its affiliates of such expenses related to our operations.
During periods of asset growth, we generally expect our general and administrative operating expenses to decline as a percentage of our total assets and increase during periods of asset declines. Interest expense and costs relating to future offerings of securities, among others, may also increase or reduce overall operating expenses based on portfolio performance, interest rate benchmarks, and offerings of our securities relative to comparative periods, among other factors.
Market Conditions
Economic and market conditions can impact our business and our investments in multiple ways, including the financial condition of the portfolio companies in which we invest, our investment returns, our funding costs, our access to the capital markets and our access to credit. Despite uncertainties regarding economic and market conditions, the new issue loan pipeline in the


30



leveraged loan market remains robust, with high quality first lien and second lien transactions supporting leveraged buyouts, strategic acquisitions, plant expansions, recapitalizations and refinancings for large to mid-sized borrowers. Similarly, the CLO equity pipeline also remains very healthy with a large backlog of managers raising capital for new investment vehicles.
We perform a fundamental credit analysis as we evaluate new investment opportunities and seek to invest in those opportunities that provide attractive risk-adjusted returns. Additionally, we actively manage our existing investment portfolio by investing in both the new issue and secondary loan markets as investment opportunities with better relative value present themselves. Our ability to invest in new opportunities may be constrained by our ability to raise additional equity capital, since as a BDC, subject to limited exceptions, we are generally not able to issue additional shares of our common stock at a price less than our current net asset value.
Portfolio Monitoring
We employ robust portfolio and risk management processes, which include monitoring market conditions and the performance of our investments on a daily basis. Additionally, we perform a comprehensive review and reevaluation of our investments on a quarterly basis. As part of this process, we review the investment thesis for each position, as well as financial performance, covenant compliance, other credit issues and the relative value of our positions to similar securities in the market. Positions that have deteriorated significantly from their investment thesis are placed on a list and monitored more frequently.
Portfolio and Investment Activity
As of June 30, 2014, our investment portfolio totaled $288 million and consisted of 108 Loan portfolio companies and 13 CLO equity investments that was invested 71% in first lien Loans, 12% in second lien Loans and 17% in CLO equity, measured at fair value. The portfolio had $1.3 million of unrealized appreciation as of June 30, 2014. Our Loan portfolio consisted of all floating rate investments with 99% having LIBOR floors ranging between 1.00% and 1.75%. The weighted-average LIBOR floor in our Loan portfolio was 1.04% as of June 30, 2014. The weighted-average yield at cost of our first lien Loans, second lien Loans and CLO equity investments was 4.8%, 7.9% and 11.6%, respectively, as of June 30, 2014.
During the three months ended June 30, 2014, we purchased Senior Secured Floating Rate Loans of 23 portfolio companies (20 new and 3 existing) for a total purchase price of $40.2 million with a weighted-average yield at cost of 5.8%. During the three months ended June 30, 2014, we purchased three CLO equity investments for an aggregate purchase price of $10.0 million with an average yield of 12.1%. Investment sales and repayments during the three months ended June 30, 2014 totaled $43.6 million, resulting in $0.1 million of net realized gains.
During the six months ended June 30, 2014, we purchased Senior Secured Floating Rate loans of 78 portfolio companies (61 new and 17 existing) for a total purchase price of $130.0 million with a weighted-average yield at cost of 5.5% . During the six months ended June 30, 2014, we purchased five CLO equity investments for an aggregate purchase price of $18.4 million with an average yield of 12.5%. Investment sales and repayments during the six months ended June 30, 2014 totaled $63.3 million, resulting in $0.3 million of net realized gains.
The average yield on our Loan portfolio during the three and six months ended June 30, 2014 was 5.2% and 5.2%, respectively. The average yield on our CLO investments during the three and six months ended June 30, 2014 was 13.6% and 14.0%, respectively. The decline in yield on our CLO portfolio to 11.6% at June 30, 2014 was a result of updates to the assumptions used to forecast cash flows used to calculate the effective interest yield on each CLO investment. The key assumptions that drove the change in yield related to reinvestment spreads and default rates.


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The portfolio was diversified across both issuers and industries with the average exposure to an individual obligor in our Loan portfolio of $2.2 million, or 0.8% of the total portfolio, as of June 30, 2014. The CLO investments were diversified across 13 structures with 12 different collateral managers and an average position size of $3.7 million, or 1.3% of the total portfolio. The following table shows the Loan portfolio composition by industry grouping at fair value as a percentage of total Loans as of June 30, 2014 and December 31, 2013. The investments in CLOs are excluded from the table below:

 
 
June 30, 2014
 
December 31, 2013
Health Care Providers & Services
 
12.1%
 
7.9%
Software
 
9.2%
 
11.7%
Hotels, Restaurants & Leisure
 
8.0%
 
8.4%
Media
 
6.3%
 
3.3%
Aerospace & Defense
 
5.7%
 
4.4%
Commercial Services & Supplies
 
5.2%
 
4.7%
IT Services
 
4.1%
 
4.0%
Insurance
 
3.1%
 
3.0%
Metals & Mining
 
2.9%
 
4.2%
Food & Staples Retailing
 
2.7%
 
3.6%
Pharmaceuticals
 
2.7%
 
1.5%
Diversified Consumer Services
 
2.3%
 
3.8%
Food Products
 
2.2%
 
2.5%
Independent Power and Renewable Electricity Producers
 
2.1%
 
1.2%
Machinery
 
2.0%
 
1.2%
Professional Services
 
2.0%
 
2.4%
Health Care Technology
 
2.0%
 
2.8%
Health Care Equipment & Supplies
 
2.0%
 
—%
Textiles, Apparel & Luxury Goods
 
1.8%
 
1.8%
Containers & Packaging
 
1.7%
 
1.2%
Chemicals
 
1.7%
 
4.1%
Building Products
 
1.7%
 
1.8%
Diversified Telecommunication Services
 
1.6%
 
2.3%
Oil, Gas & Consumable Fuels
 
1.5%
 
1.8%
Capital Markets
 
1.5%
 
2.1%
Transportation Infrastructure
 
1.3%
 
—%
Internet & Catalog Retail
 
1.3%
 
—%
Construction Materials
 
1.2%
 
1.8%
Construction & Engineering
 
1.2%
 
1.8%
Multiline Retail
 
0.4%
 
1.8%
Industrial Conglomerates
 
0.2%
 
1.0%
Household Durables
 
—%
 
1.8%
Specialty Retail
 
—%
 
1.8%
Other
 
6.3%
 
4.3%
Total
 
100.0%
 
100.0%



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As of June 30, 2014, approximately 80% of our Loan investment portfolio, at fair value, was comprised of Loans with a facility rating by S&P of at least "B" or higher. The approximately 20% of the Loan portfolio rated below B by S&P relates predominately to the second lien Loan investments. The following chart shows the S&P facility credit rating of our Loan portfolio at fair value as of June 30, 2014:


The components and key metrics of our portfolio as of June 30, 2014 were as follows:
($ in thousands)
 
 
 
 
 
 
 
 
Cost
 
Fair Market Value
 
Unrealized Appreciation
 
Asset Yield at Cost
Investment Portfolio:
 
 
 
 
 
 
 
First lien floating rate loans
$
203,526

 
$
204,396

 
$
870

 
4.83%
Second lien floating rate loans
34,951

 
35,404

 
453

 
7.87%
Total Senior Secured Floating Rate Loans
238,477

 
239,800

 
1,323

 
5.28%
CLO equity
47,708

 
47,733

 
25

 
11.57%
Total Investment Portfolio
$
286,185

 
$
287,533

 
$
1,348

 
6.33%
 
 
 
 
 
 
 
 
Loan Portfolio Statistics:
 
 
 
 
 
 
 
Number of portfolio companies
108

 
 
 
 
 
 
Number of industries
40

 
 
 
 
 
 
CLO Statistics:
 
 
 
 
 
 
 
Number of issuers
13

 
 
 
 
 
 
Number of collateral managers
12

 
 
 
 
 
 



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Results of Operations

Operating results for the three and six months ended June 30, 2014 were as follows:

 
 
Three Months Ended
 
Six Months Ended
($ in thousands except per share data)
 
June 30, 2014
 
June 30, 2014
Investment income:
 
 
 
 
First lien floating rate loans
 
$
2,433

 
$
4,697

Second lien floating rate loans
 
674

 
1,112

CLO equity
 
1,483

 
2,578

Total investment income
 
4,590

 
8,387

Expenses:
 
 
 
 
Interest and other debt related costs
 
781

 
1,869

Management fee
 
574

 
1,000

Other expenses (net)
 
278

 
555

Net expenses
 
1,633

 
3,424

Net investment income before tax
 
2,957

 
4,963

Income tax provision
 
(30
)
 
(109
)
Net investment income
 
2,927

 
4,854

Realized and unrealized gain on investments:
 
 
 
 
Net realized gain on investments
 
115

 
264

Net unrealized (depreciation) appreciation on investments
 
(193
)
 
51

Income tax provision
 

 
(200
)
Net realized and unrealized (loss) gain on investments
 
(78
)
 
115

Net increase in net assets resulting from operations
 
$
2,849

 
$
4,969

 
 
 
 
 
Net investment income per share
 
$
0.29

 
$
0.49

Earnings per share
 
$
0.28

 
$
0.50


Investment Income
Investment income for the three and six months ended June 30, 2014 was $4.6 million and $8.4 million, respectively. Interest generated from Loan investments totaled $3.1 million and $5.8 million for the three and six months ended June 30, 2014, respectively. Income from the CLO investments totaled $1.5 million and $2.6 million, for the three and six months ended June 30, 2014, respectively. The average yield on our Loan portfolio during the three and six months ended June 30, 2014 was 5.2% and 5.2%, respectively. The average yield on our CLO investments during the three and six months ended June 30, 2014 was 13.6% and 14.0%, respectively.

Net Expenses
Net expenses for the three months ended June 30, 2014 were $1.6 million, primarily comprised of interest and other debt related costs of $0.8 million, management fees of $0.6 million and other general and administrative expenses. Net expenses for the six months ended June 30, 2014 were $3.4 million, primarily comprised of interest and other debt related costs of $1.9 million, management fees of $1.0 million and other general and administrative expenses.
Interest and other debt related costs incurred from January 1, 2014 until January 22, 2014 (the closing date of the IPO) primarily related to interest expense on the ACAM Facility. There was $194.7 million outstanding on the ACAM Facility until the closing of the IPO at which time the ACAM Facility was repaid in full and terminated. The weighted-average interest rate on the ACAM Facility was 5.0%.
Interest and other debt related costs incurred following the closing date of the IPO through June 30, 2014 are related to borrowings under our Credit Facility. The Credit Facility generally bears interest at a spread of 1.80% over a chosen index (which


34



is typically one-month LIBOR). Included in other debt related costs are additional fees and expenses associated with the Credit Facility, including an unused commitment fee of 75 basis points on undrawn commitments and the amortization of debt financing costs.
For the three months ended June 30, 2014, interest expense, commitment fees and amortization of debt financing costs totaled $0.7 million, $0.02 million and $0.1 million, respectively. The average debt outstanding during the three months ended June 30, 2014 was $132.4 million with a weighted average interest rate of 2.00% and total average cost of funding, including amortization of debt financing costs and unfunded commitment fees, of 2.36%.
For the six months ended June 30, 2014, interest expense, commitment fees and amortization of debt financing costs totaled $1.6 million, $0.04 million and $0.2 million, respectively. The average debt outstanding during the six months ended June 30, 2014 was $125.8 million with a weighted average interest rate of 2.59% and total average cost of funding, including amortization of debt financing costs and unfunded commitment fees, of 2.99%.
Management fees were $0.6 million and $1.0 million for the three and six months ended June 30, 2014, respectively. The accrual for management fees commenced upon the receipt of the IPO proceeds, which occurred on January 22, 2014, and was prorated for the first quarter based on the number of days the management agreement was in effect.
Other operating expenses totaled $0.6 million for the three months ended June 30, 2014 and are comprised primarily of insurance premiums, Board of Director fees, professional fees and rent. However, as a result of the expense cap, $0.3 million of our expenses are reimbursable to us by our Manager. As a result, the net other operating expenses totaled $0.3 million for the three months ended June 30, 2014.
Other operating expenses totaled $1.1 million for the six months ended June 30, 2014 and are comprised primarily of insurance premiums, Board of Director fees, professional fees and rent. However, as a result of the expense cap, $0.5 million of our expenses are reimbursable to us by our Manager. As a result, the net other operating expenses totaled $0.6 million for the six months ended June 30, 2014.

Net Investment Income
Net investment income totaled $2.9 million and $4.9 million, or $0.29 and $0.49 per share, for the three and six months ended June 30, 2014, respectively.
Net Realized Gains / Losses
Sales and repayments of investments during the three and six months ended June 30, 2014 totaled $43.6 million and $63.3 million, respectively, and resulted in net realized gains of $0.1 million and $0.3 million, or $0.01 and $0.03 per share, respectively.
Net Unrealized Appreciation / Depreciation
As of June 30, 2014, the investment portfolio’s fair market value exceeded its cost basis by $1.3 million. The net unrealized (depreciation) appreciation on investments for the three and six months ended June 30, 2014 was $(0.2) million and $0.1 million, respectively. The net unrealized depreciation on investments for the quarter was driven by the reversal of previously recognized net unrealized appreciation of $0.3 million upon the exit or repayment of select investments. The net appreciation on the portfolio for the six months ended June 30, 2014 was primarily a result of appreciation on the portfolio purchased during the period in the primary market.
Taxes
Prior to the IPO, we were treated as a taxable C corporation whereby ordinary income earned on investments net of expenses, as well as investment gains recognized were subject to both federal and state income taxes.
We plan to elect to be treated as a RIC as defined in Subchapter M of the Code. As a RIC, we will generally not have to pay corporate-level federal and state income taxes on any net ordinary income or capital gains that we distribute to our shareholders. Additionally, as part of the IPO, we intend to make a "deemed sale election" whereby we will elect to treat our net unrealized gains at the IPO date as recognized in our final pre-IPO C corporation tax return. As a result of these intended elections, we will be required to distribute to our shareholders the residual after-tax income from the C corporation period, which amounted to $1.4 million or $0.14 per share.
Financial Condition, Liquidity and Capital Resources
Liquidity and capital resources arise primarily from our Credit Facility and cash flow from operations. In addition, we expect to use proceeds from any follow-on equity offerings of common stock and other supplementary financing mechanisms as additional sources of capital and liquidity.


35



In order to qualify as a RIC, we must annually distribute in a timely manner to our shareholders at least 90% of our taxable ordinary income. In addition, we must also distribute in a timely manner to our shareholders all of our taxable ordinary and capital income in order to not be subject to income taxes. Accordingly, our ability to retain earnings is limited.    
As a BDC, we are generally not able to issue or sell our common stock at a price below our net asset value per share, except (i) with the prior approval of a majority of our shareholders, (ii) in connection with a rights offering to our existing shareholders, or (iii) under such other circumstances as the SEC may permit. As of June 30, 2014, our net asset value was $15.12 per share and our closing market price was $14.00 per share.
On January 22, 2014, we closed our IPO of 10.0 million shares of common stock at $15.00 per share raising approximately $149.2 million in net proceeds. Using the proceeds from the IPO, plus borrowings from our Credit Facility, we repaid the ACAM Facility in the amount of $194.7 million. Following repayment, the ACAM Facility was terminated. In connection with the IPO, the underwriters received a underwriting discount and commission (sales load) of $8.0 million that was paid by our Manager.
As of June 30, 2014, we had $128.0 million in borrowings outstanding on our Credit Facility. The fair value of assets owned by ACSF Funding as of June 30, 2014 was $230.6 million and the borrowing base was $149.6 million. On a consolidated basis, as of June 30, 2014, we were leveraged at 0.85x debt to equity.
As a BDC, we are permitted to issue “senior securities”, as defined in the 1940 Act, in any amounts as long as immediately after such issuance our asset coverage is at least 200%, or equal to or greater than our asset coverage prior to such issuance, after taking into account the payment of debt with proceeds from such issuance. Asset coverage is defined in the 1940 Act as the ratio of the value of the total assets, less all liabilities and indebtedness not represented by senior securities, bears to the aggregate amount of senior securities representing indebtedness. However, if our asset coverage is below 200%, we may also borrow amounts up to 5% of our total assets for temporary purposes even if that would cause our asset coverage ratio to further decline. As of June 30, 2014, our asset coverage was 218%.
Dividends
Our Board of Directors determines dividends primarily based on estimates of taxable income, which may differ from GAAP income due to temporary and permanent differences in income and expense recognition and changes in unrealized appreciation and depreciation on investments. The specific tax characteristics will be reported to shareholders on Form 1099 after the end of the calendar year.
For the quarter ended June 30, 2014, our Board of Directors declared a $0.28 dividend per share. The dividend was paid on July 10, 2014 to common shareholders of record as of June 30, 2014, with an ex-dividend date of June 26, 2014. Since its January 2014 IPO, the Company has paid a total of $4.6 million in dividends, or $0.46 per share. We maintain an "opt out" dividend reinvestment and stock purchase plan for our common shareholders. As a result, if we declare a dividend, then shareholders' cash dividends will be automatically reinvested in additional shares of our common stock, unless they, or their nominees on their behalf, specifically "opt out" of the dividend reinvestment and stock purchase plan so as to receive cash dividends.
The table below details the dividends declared on our shares of common stock since the completion of our IPO:
Dividend Declaration Date
Ex-Dividend Date
Record Date
Payment Date
Per Share Amount
Total Amount
March 17, 2014
March 27, 2014
March 31, 2014
April 10, 2014
$0.18
$1,800
June 18, 2014
June 26, 2014
June 30, 2014
July 10, 2014
$0.28
$2,800
As of June 30, 2014, we have undistributed taxable income of $1.4 million or $0.14 per share.
Critical Accounting Policies
The preparation of consolidated financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. The following is a summary of our accounting policies that are most affected by judgments, estimates and assumptions, which relate to the estimation of fair value of portfolio investments and revenue recognition.
Valuation of Portfolio Investments
We value our investments in accordance with the 1940 Act and ASC Topic 820, Fair Value Measurements and Disclosures, ("ASC 820") as determined in good faith by our Board of Directors.
We undertake a multi-step valuation process to determine the fair value of our investments in accordance with ASC 820. The valuation process begins with the development of a preliminary valuation recommendation for each investment as determined in accordance with our valuation policy by a group of our Manager’s valuation, accounting and finance professionals, which is


36



independent of our Manager's investment team. To prepare the proposed valuation, the group reviews information provided by a nationally recognized independent pricing service and broker-dealers, and may consult with the investment team and other internal resources of our Manager and its affiliates. The preliminary valuation recommendations are then presented to the Investment Committee and reviewed and approved by our Audit and Compliance Committee. The valuation recommendations are then reviewed by our Board of Directors for final approval. There were no changes to our valuation techniques or the nature of the related inputs considered in the valuation process during the three and six months ended June 30, 2014.
ASC 820 provides a framework for measuring the fair value of assets and liabilities and provides guidance regarding a fair value hierarchy, which prioritizes information used to measure fair value and the effect of fair value measurements on earnings. When available, we base the fair value of our investments using unadjusted quoted prices in active markets. Where inputs for an asset or liability fall in more than one level in the fair value hierarchy, the investment is classified in its entirety based on the lowest level input that is significant to that investment's fair value measurement. We use judgment and consider factors specific to the investment in determining the significance of an input to a fair value measurement. Our policy is to recognize transfers in and out of levels as of the beginning of each reporting period. The three levels of the fair value hierarchy and investments that fall into each of the levels are described below:
Level 1: Inputs are unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. This may include valuations based on executed trades, broker quotations that constitute an executable price, and alternative pricing sources supported by observable inputs which, in each case, are either directly or indirectly observable for the asset in connection with market data at the measurement date.
Level 3: Inputs are unobservable and cannot be corroborated by observable market data. In certain cases, investments classified within Level 3 may include securities for which we have obtained indicative quotes from broker-dealers that do not necessarily represent prices the broker may be willing to trade on.
The valuation techniques used maximize the use of observable inputs and minimize the use of unobservable inputs. Our Loans are predominately valued based on evaluated prices from a nationally recognized independent pricing service approved by our Board of Directors or from third-party brokers who make markets in such debt investments. When possible, we make inquiries of third-party pricing sources to understand their use of significant inputs and assumptions. We review the third-party fair value estimates and perform procedures to validate their reasonableness, including an analysis of the range and dispersion of third-party estimates, frequency of pricing updates, comparison of recent trade activity for similar securities, and review for consistency with market conditions observed as of the measurement date.
There may be instances when independent or third-party pricing sources are not available, or cases where we believe that the third-party pricing sources do not provide sufficient evidence to support a market participant's view of the fair value of the debt investment being valued. These instances may result from an investment in a less liquid loan such as a middle market loan, a mezzanine loan or unitranche loan, or a loan to a company that has become financially distressed. In these instances, we may estimate the fair value based on a combination of a market yield valuation methodology and evaluated pricing discussed above, or solely based on a market yield valuation methodology. Under the market yield valuation methodology, we estimate the fair value based on a discounted cash flow technique. For these debt investments, the unobservable inputs used in the market yield valuation methodology to measure fair value reflect management's best estimate of assumptions that would be used by market participants when pricing the investment in a hypothetical transaction, including estimated remaining life, current market yield and interest rate spreads of similar loans and securities as of the measurement date. We will estimate the remaining life based on market data for the average life of similar loans. However, if we have information that the loan is expected to be repaid in the near term, we would use an estimated remaining life based on the expected repayment date. The average life to be used to estimate the fair value of our loans may be shorter than the legal maturity of the loans since many loans are prepaid prior to the maturity date. The interest rate spreads used to estimate the fair value of our loans is based on current interest rate spreads of similar loans. If there is a significant deterioration of the credit quality of a loan, we may consider other factors that a hypothetical market participant would use to estimate fair value, including the proceeds that would be received in a liquidation analysis.
We estimate the fair value of our CLO equity investments using a combination of third-party broker quotes, purchases or sales of the same or similar securities, and cash flow forecasts subject to assumptions that a market participant would use regarding the investments' underlying collateral including, but not limited to, assumptions of default and recovery rates, reinvestment spreads and prepayment rates. Cash flow forecasts are discounted using market participant's market yield assumptions that are derived from multiple sources including, but not limited to, third-party broker quotes, industry research reports and transactions of securities and indices with similar structures and risk characteristics. We weight the use of third-party broker quotes, if any, when determining fair value based on our understanding of the level of actual transactions used by the broker to develop the quote and whether the quote was an indicative price or binding offer, the depth and consistency of broker quotes and the correlation of changes in broker quotes with underlying performance and other market indices.


37



Investment Income
For debt investments, we record interest income on the accrual basis to the extent that such amounts are expected to be collected. Original issue discount ("OID") and purchased discounts and premiums are accreted/amortized into interest income using the effective interest method, where applicable. Loan origination fees are deferred and accreted into interest income using the effective interest method. We record prepayment premiums on loans and other investments as interest income when such amounts are received. We stop accruing interest on investments when it is determined that interest is no longer collectible. As of June 30, 2014 and December 31, 2013, we had no loans on non-accrual status.
Interest income on the CLO equity investments is recognized using the effective interest method as required by ASC Subtopic 325-40, Investments-Other, Beneficial Interests in Securitized Financial Assets ("ASC 325-40"). At the time of purchase, we estimate the future expected cash flows and determine the effective interest rate based on these estimated cash flows and our cost basis. Subsequent to the purchase on a quarterly basis, the estimated future cash flows are updated and a revised yield is calculated prospectively based on the current amortized cost of the investment as adjusted for credit impairments, if any.
  

Item 3. Quantitative and Qualitative Disclosure about Market Risk
We are subject to financial market risks, including changes in interest rates. As of June 30, 2014, all of our debt investments bore interest at floating interest rates, and we expect that our investment portfolio will in the future primarily include floating rate debt investments. The interest rates on our debt investments are usually based on a floating LIBOR, and the debt investments typically contain interest rate re-set provisions that adjust applicable interest rates to current rates on a periodic basis. As of June 30, 2014, 99% of the debt investments in our portfolio had interest rate floors between 1.00% and 1.75%, which, in the current interest rate environment where LIBOR is below 1%, has effectively converted those floating rate debt investments to fixed rate debt investments. In contrast, our Credit Facility has a floating interest rate provision with no LIBOR floor and therefore our cost of funds will fluctuate with changes in short-term interest rates.
Assuming no changes to our consolidated statement of assets and liabilities as of June 30, 2014, the following table shows the approximate annualized impact to the components of our results of operations from hypothetical base rate changes in interest rates to our Loan portfolio and debt financing.
($ in thousands except per share data)
Basis point increase (1)
 
Interest Income
 
Interest Expense
 
Net Increase (Decrease)
 
Net Increase (Decrease) per share
 
400
 
$
7,407

 
$
5,120

 
$
2,287

 
$
0.23

 
300
 
$
5,022

 
$
3,840

 
$
1,182

 
$
0.12

 
200
 
$
2,637

 
$
2,560

 
$
77

 
$
0.01

 
100
 
$
292

 
$
1,280

 
$
(988
)
 
$
(0.10
)
 
(1)     A decline in interest rates would not have a material impact on our consolidated financial statements.
Although management believes that this measure is indicative of our sensitivity to interest rates, it does not reflect any potential impact to the fair value of our investments as a result of changes to interest rates, nor does it adjust for potential changes in the credit market, credit quality, size and composition of the assets in our consolidated statements of assets and liabilities and other business developments that could affect the net increase/(decrease) in net assets resulting from operations or net investment income. Accordingly, no assurances can be given that actual results would not differ materially from those shown above.
The above sensitivity analysis does not consider the impact of rising interest rates on revenue from our CLO equity investments. The revenue recognized on our CLO equity investments is calculated using the effective interest method which incorporates a forward LIBOR curve in the projected cash flows. Any change to interest rates that is not in-line with the forward LIBOR curve used in the projections, in either the timing or magnitude of the change, will cause actual distributions to differ from the current projections and will impact the related revenue recognized from these investments. The CLO equity investments are levered structures that are collateralized primarily with first lien floating rate loans that may have LIBOR floors and levered primarily with floating rate debt that does not have a LIBOR floor. The residual cash flows available to the equity holders of the CLOs will decline as interest rates increase until interest rates surpass the LIBOR floors on the floating rate loans.



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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of June 30, 2014 (the end of the period covered by this report), we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended ("the "Exchange Act"). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of such possible controls and procedures.
Changes in Internal Control over Financial Reporting
There have been no changes in our "internal control over financial reporting" (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during our fiscal quarter ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION

Item 1. Legal Proceedings
From time to time, we may be a party to certain ordinary routine litigation incidental to the business including the enforcement of our rights under contracts with our portfolio companies. We are not currently subject to any material litigation nor, to our knowledge, is any material litigation threatened against us.

Item 1A. Risk Factors
There have been no material changes to the risk factors previously disclosed in the prospectus filed pursuant to Rule 497 on January 16, 2014 with the Securities and Exchange Commission in connection with our IPO.     

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.

Item 3. Defaults Upon Senior Securities
None.

Item 4. Mine Safety Disclosures
Not applicable.

Item 5. Other Information
None.



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Item 6. Exhibits
The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:
 
Exhibit
Number
  
Description
 
 
*3.1
 
American Capital Senior Floating, Ltd. Articles of Amendment and Restatement, incorporated herein by reference to Exhibit 3.1 to Form 10-Q (File No. 814-01025), filed May 15, 2014.
 
 
 
*3.2
 
American Capital Senior Floating, Ltd. Amended and Restated Bylaws, incorporated herein by reference to Exhibit 3.2 to Form 10-Q (File No. 814-01025), filed May 15, 2014.
 
 
 
*4.1
 
Instruments defining the rights of holders of securities: See Article VI of our Articles of Amendment and Restatement, incorporated herein by reference to Exhibit 3.1 to Form 10-Q (File No. 814-01025), filed May 15, 2014.
 
 
 
*4.2
 
Instruments defining the rights of holders of securities: See Article VII of our Amended and Restated Bylaws, incorporated herein by reference to Exhibit 3.2 to Form 10-Q (File No. 814-01025), filed May 15, 2014.
 
 
 
*4.3
 
Form of Certificate of Common Stock, incorporated herein by reference to Exhibit 2.d.3 to Amendment No. 1 to Form N-2 (Registration Statement No. 333-190357), filed December 20, 2013.
 
 
 
31.1
 
Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
 
Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.1
 
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.
 
 
* Previously filed
 
 


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





AMERICAN CAPITAL SENIOR FLOATING, LTD.


Date:
August 13, 2014

By:
/s/ JOHN R. ERICKSON

 


John R. Erickson
Executive Vice President and Chief Financial Officer






    



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