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EX-10.20 - EXHIBIT 10.20 - OHA Investment Corpa1020oha-secondamendmentto.htm
EX-32.2 - EXHIBIT 32.2 - OHA Investment Corpohai10-qq103312016ex32x2.htm
EX-31.2 - EXHIBIT 31.2 - OHA Investment Corpohai10-qq103312016ex31x2.htm
EX-32.1 - EXHIBIT 32.1 - OHA Investment Corpohai10-qq103312016ex32x1.htm
EX-31.1 - EXHIBIT 31.1 - OHA Investment Corpohai10-qq103312016ex31x1.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
or
¨      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _______________
 
Commission file number: 814-00672
 
 
 
 
 
OHA Investment Corporation
 
 
(Exact name of registrant as specified in its charter) 
 
 
 
 
Maryland
 
20-1371499
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
1114 Avenue of the Americas,
27th Floor
 
10036
New York, New York
 
(Zip Code)
(Address of principal executive
offices)
 
 
(212) 852-1900
(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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if 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 ý
 
As of May 9, 2016, there were 20,172,392 shares of the registrant’s common stock outstanding.




Table of Contents
 
 




PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
 
OHA INVESTMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts) 
 
 
March 31, 2016
 
December 31, 2015
 
 
(unaudited)
 
 
Assets
 
 

 
 

Investments in portfolio securities at fair value
 
 

 
 

Control investments (cost: $28,608 and $28,608, respectively)
 
$
1,000

 
$
1,000

Affiliate investments (cost: $18,784 and $18,647, respectively)
 
18,995

 
18,893

Non-affiliate investments (cost: $194,531 and $192,012, respectively)
 
143,851

 
154,817

Total portfolio investments (cost: $241,923 and $239,267, respectively)
 
163,846

 
174,710

Investments in U.S. Treasury Bills at fair value (cost: $35,000 and $34,997, respectively)
 
35,000

 
34,997

Total investments
 
198,846

 
209,707

Cash and cash equivalents
 
2,276

 
15,554

Accounts receivable and other current assets
 
10

 
517

Interest receivable
 
1,909

 
2,248

Due from broker
 
437

 

Deferred loan costs and other prepaid assets
 
259

 
451

Total current assets
 
4,891

 
18,770

Total assets
 
$
203,737

 
$
228,477

 
 
 
 
 
Liabilities
 
 

 
 

Current liabilities
 
 

 
 

Due to broker
 
$

 
$
5,226

Distributions payable
 
1,210

 
2,421

Accounts payable and accrued expenses
 
1,799

 
1,962

Management and incentive fees payable
 
930

 
1,713

Income taxes payable
 
92

 
75

Repurchase agreement
 
34,300

 
34,300

Short-term debt
 
67,500

 
72,000

Total current liabilities
 
105,831

 
117,697

Total liabilities
 
105,831

 
117,697

Commitments and contingencies  (Note 6)
 
 

 
 

Net assets
 
 

 
 

Common stock, $.001 par value, 250,000,000 shares authorized; 20,172,392 shares issued and outstanding for both periods
 
20

 
20

Paid-in capital in excess of par
 
241,985

 
241,985

Undistributed net investment loss
 
(5,322
)
 
(5,947
)
Undistributed net realized capital loss
 
(63,814
)
 
(63,838
)
Net unrealized depreciation on investments
 
(74,963
)
 
(61,440
)
Total net assets
 
97,906

 
110,780

Total liabilities and net assets
 
$
203,737

 
$
228,477

Net asset value per share
 
$
4.85

 
$
5.49

(See accompanying notes to consolidated financial statements)

1



OHA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 
 
For the three months ended March 31,
 
 
2016
 
2015
Investment income:
 
 

 
 

Interest income:
 
 

 
 

Affiliate investments
 
$
675

 
$
602

Non-affiliate investments
 
3,138

 
3,175

Dividend income:
 
 

 
 

Non-affiliate investments
 
1,313

 
988

Royalty income, net of amortization:
 
 

 
 

Control investments
 

 
13

Other income
 
31

 
38

Total investment income
 
5,157

 
4,816

Operating expenses:
 
 

 
 

Interest expense and bank fees
 
1,088

 
663

Management and incentive fees
 
930

 
678

Professional fees, net of legal fees of $0 and $287, respectively, related to ATP bankruptcy (See Note 6)
 
720

 
563

Other general and administrative expenses
 
567

 
721

Total operating expenses
 
3,305

 
2,625

Income tax provision, net
 
17

 
22

Net investment income
 
1,835

 
2,169

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

 
 

Control investments
 

 
(21
)
Non-affiliate investments
 
24

 

Total net realized capital gain (loss) on investments
 
24

 
(21
)
Net unrealized appreciation (depreciation) on investments
 
 

 
 

Control investments
 

 
(1,224
)
Affiliate investments
 
(35
)
 
368

Non-affiliate investments
 
(13,488
)
 
(3,177
)
Total net unrealized depreciation on investments
 
(13,523
)
 
(4,033
)
 
 
 
 
 
Net decrease in net assets resulting from operations
 
$
(11,664
)
 
$
(1,885
)
 
 
 
 
 
Net decrease in net assets resulting from operations per common share
 
$
(0.58
)
 
$
(0.09
)
 
 
 
 
 
Distributions declared per common share
 
$
0.06

 
$
0.12

Weighted average shares outstanding - basic and diluted
 
20,172

 
20,612

 (See accompanying notes to consolidated financial statements)

2



OHA INVESTMENT CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
(in thousands, except per share data)
(unaudited)
 
 
 
For the three months ended March 31,
 
 
2016
 
2015
Increase (decrease) in net assets from operations
 
 

 
 

Net investment income
 
$
1,835

 
$
2,169

Net realized capital gain (loss) on investments
 
24

 
(21
)
Net unrealized depreciation on investments
 
(13,523
)
 
(4,033
)
Net decrease in net assets resulting from operations
 
(11,664
)
 
(1,885
)
Distributions to common stockholders
 
 

 
 

Distributions from net investment income
 
(1,210
)
 
(2,465
)
Return of capital
 

 

Net decrease in net assets from distributions
 
(1,210
)
 
(2,465
)
Capital transactions
 
 

 
 

Acquisition of common stock under repurchase plan
 

 
(374
)
Net decrease in net assets from capital transactions
 

 
(374
)
Net decrease in net assets
 
(12,874
)
 
(4,724
)
Net assets, beginning of period
 
110,780

 
154,164

Net assets, end of period
 
$
97,906

 
$
149,440

Net asset value per common share at end of period
 
$
4.85

 
$
7.27

Common shares outstanding at end of period
 
20,172

 
20,544

 
(See accompanying notes to consolidated financial statements)

3



OHA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
 
For the three months ended March 31,
 
 
2016
 
2015
Cash flows from operating activities:
 
 

 
 

Net decrease in net assets resulting from operations
 
$
(11,664
)
 
$
(1,885
)
Adjustments to reconcile net decrease in net assets resulting from operations to net cash attributable to operating activities:
 
 

 
 

Payment-in-kind interest
 
(1,439
)
 
(118
)
Net amortization of premiums, discounts and fees
 
(62
)
 
(106
)
Net realized capital (gain) loss on investments
 
(24
)
 
21

Net unrealized depreciation on investments
 
13,523

 
4,033

Amortization of deferred loan costs
 
258

 
283

Purchase of investments in portfolio securities
 
(1,571
)
 
(21,108
)
Proceeds from redemption or sale of investments in portfolio securities
 
437

 
873

Purchase of investments in U.S. Treasury Bills
 
35,000

 
(30,601
)
Proceeds from redemption of investments in U.S. Treasury Bills
 
(35,003
)
 
30,600

Effects of changes in operating assets and liabilities:
 
 

 
 

Accounts receivable and other current assets
 
70

 
10

Interest receivable
 
339

 
(45
)
Prepaid assets
 
(66
)
 
1

Payables and accrued expenses
 
(6,155
)
 
220

Net cash attributable to operating activities
 
(6,357
)
 
(17,822
)
Cash flows from financing activities:
 
 

 
 

Borrowings under revolving credit facilities
 
8,500

 
80,000

Borrowings under repurchase agreement
 
34,300

 

Repayments on revolving credit facilities
 
(13,000
)
 
(60,000
)
Repayments on repurchase agreement
 
(34,300
)
 

Acquisition of common stock under repurchase plan
 

 
(374
)
Distributions to stockholders
 
(2,421
)
 
(3,299
)
Net cash attributable to financing activities
 
(6,921
)
 
16,327

Net change in cash and cash equivalents
 
(13,278
)
 
(1,495
)
Cash and cash equivalents, beginning of period
 
15,554

 
31,455

Cash and cash equivalents, end of period
 
$
2,276

 
$
29,960

 
(See accompanying notes to consolidated financial statements)
 

4



OHA INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2016
(in thousands, except share amounts and percentages)
(unaudited)
Portfolio Company
 
Industry
Segment
 
Investment(1)
 
Principal
 
Cost
 
Fair Value(2)
 
Control Investments - (More than 25% owned)
Contour Highwall Holdings, LLC
 
Coal Mining
 
Senior Secured Term Loan (12%, due 10/14/2015)(6)
 
$
10,757

 
$
10,778

 
$
1,000

Contour Highwall Holdings, LLC
 
Coal Mining
 
 Unsecured Promissory Note (6%, due 4/11/2016)(6)
 
800

 
800

 

Contour Highwall Holdings, LLC
 
Coal Mining
 
800 Membership Units representing 80% of the common equity(7)
 
 

 

 

Spirit Resources, LLC
 
Oil & Natural Gas
Production and Development
 
Tranche A - Senior Secured Term Loan (greater of 8% or LIBOR+4.0%, due
4/28/2015)(6)
 
4,657

 
4,621

 

Spirit Resources, LLC
 
Oil & Natural Gas
Production and Development
 
Tranche B - Senior Secured Term Loan (greater of 15% PIK or LIBOR+11.0%, due 10/28/2015)(6)
 
4,409

 
4,409

 

Spirit Resources, LLC
 
Oil & Natural Gas
Production and Development
 
80,000 Preferred Units representing 100% of the outstanding equity
 
 

 
8,000

 

Subtotal Control Investments - (More than 25% owned)
 
 

 
$
28,608

 
$
1,000

 
 
 
 
 
 
 
 
 
 
 
Affiliate Investments - (5% to 25% owned)
OCI Holdings, LLC
 
Home Health Services
 
Subordinated Note (LIBOR+ 12.0% cash with a 1% floor plus 3% PIK, due
8/15/2018)(8)
 
$
16,434

 
$
16,284

 
$
16,434

OCI Holdings, LLC
 
Home Health Services
 
OHA/OCI Investments, LLC Class A Units representing 20.8% diluted ownership of OCI Holdings, LLC
 
 

 
2,500

 
2,561

Subtotal Affiliate Investments - (5% to 25% owned)
 
 

 
$
18,784

 
$
18,995

 
 
 
 
 
 
 
 
 
 
 
Non-affiliate Investments - (Less than 5% owned)
Castex Energy 2005, LP
 
Oil & Natural Gas
Production and Development
 
Redeemable Preferred LP Units (current pay 8% cash or 10% PIK, due 7/1/2016)(9)
 
$
52,565

 
$
52,569

 
$
39,215

Appriss Holdings, Inc.
 
Information Services
 
Second Lien Term Loan (LIBOR+8.25% with a 1% floor, due 5/21/2021)
 
13,100

 
12,931

 
12,314

Kronos Incorporated
 
Software
 
Second Lien Term Loan
(LIBOR+8.50% with a 1.25% floor, due 4/30/2020)
(3)
 
$
12,000

 
$
12,138

 
$
11,985

ATP Oil & Gas Corporation/Bennu Oil & Gas, LLC
 
Oil & Natural Gas
Production and Development
 
Limited Term Royalty Interest (notional rate of 13.2%)(10)(11)
 
 

 
27,845

 
11,950

 
(See accompanying notes to consolidated financial statements)

5



OHA INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2016
(In thousands, except share amounts and percentages)
(Unaudited — Continued)
Portfolio Company
 
Industry Segment
 
Investment(1)
 
Principal
 
Cost
 
Fair Value(2)
 
 
 
 
 
 
 

 
 

 
 

Non-affiliate Investments - (Less than 5% owned) - Continued
WP Mustang (Electronic Funds Services, LLC)
 
Financial Services
 
Second Lien Term Loan (LIBOR+7.5% with a 1% floor, due 5/29/2022)(3)
 
10,000

 
9,848

 
9,875

Royal Holdings, Inc.
 
Chemicals
 
Second Lien Term Loan (LIBOR+7.5% with a 1% floor, due 6/19/23)(3)
 
$
10,000

 
$
9,927

 
$
9,550

KOVA International, Inc.
 
Medical Supplies Manufacturing and Distribution
 
Senior Subordinated Notes (12.75%, due 8/15/2018)
 
9,000

 
8,906

 
9,000

TIBCO Software, Inc.
 
Software
 
Senior Unsecured Notes
(11.38% due 12/1/2021)
(3)
 
10,100

 
9,718

 
8,838

Stardust Financial Holdings (Hanson)
 
Building Materials
 
Second Lien Term Loan (LIBOR+9.5% with a 1% floor, due 3/13/2023)(3)
 
7,050

 
6,709

 
6,874

Berlin Packaging
 
Packaging
 
Second Lien Term Loan
(LIBOR+6.75% with a 1% floor, due 10/1/2022)
(3)
 
7,205

 
6,855

 
6,809

Gramercy Park CLO Ltd.(5)
 
Financial Services
 
Subordinated Notes, Residual Interest (11.95%, based on cost, due 7/17/2023)(3)
 
9,000

 
6,142

 
4,455

Talos Production, LLC
 
Oil & Natural Gas
Production and Development
 
Senior Unsecured Notes (9.75%, due 2/15/2018)(3)
 
12,000

 
11,968

 
3,600

Shoreline Energy, LLC
 
Oil & Natural Gas Production and Development
 
Second Lien Term Loan (greater of LIBOR+9.25% with a 1.25% floor plus 2.0% PIK, or prime+8.25%, due 3/30/2019)(6)(12)
 
12,983

 
12,659

 
3,246

WASH Multifamily Acquisition, Inc.
 
Industrials - Laundry Equipment
 
Second Lien Term Loan (LIBOR+7.0% with a 1% floor, due 5/14/23)(3)
 
3,404

 
3,380

 
3,234

Synarc-BioCore Holdings, LLC
 
Healthcare
 
First Lien Senior Secured Notes (7.75% due 3/10/2021)
 
2,400

 
2,344

 
2,340

Coinamatic Canada, Inc.(5)
 
Industrials - Laundry Equipment
 
Second Lien Term Loan (LIBOR+7.0% with a 1% floor, due 5/14/23)(3)
 
596

 
592

 
566

Globe BG, LLC
 
Coal Production
 
Contingent earn-out related to July 2011 sale of royalty interests in Alden Resources, LLC(13)
 
 

 

 

Subtotal Non-affiliate Investments - (Less than 5% owned)
 
 

 
$
194,531

 
$
143,851

Subtotal Portfolio Investments (82.4% of total investments)
 
 

 
$
241,923

 
$
163,846

 
 
 
 
 
 
 
 
 
 
 
GOVERNMENT SECURITIES
U.S. Treasury Bills(4)
 
 
 
 
 
35,000

 
35,000

 
35,000

Subtotal Government Securities (17.6% of total investments)
 
 

 
$
35,000

 
$
35,000

 
 
 
 
 
 
 
 
 
 
 
TOTAL INVESTMENTS
 
$
276,923

 
$
198,846

 (See accompanying notes to consolidated financial statements)

6



OHA INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2016
(In thousands, except share amounts and percentages)
(Unaudited — Continued)

 
NOTES TO CONSOLIDATED SCHEDULE OF INVESTMENTS
 
(1) 
We pledged all of our portfolio investments, except our investments in U.S. Treasury Bills, as collateral for obligations under our Investment Facility. See Note 3 of Notes to Consolidated Financial Statements. Percentages represent interest rates in effect as of March 31, 2016, and due dates represent the contractual maturity dates. Warrants, common stock, units and earn-outs are non-income producing securities, unless otherwise stated.
(2) 
The Audit Committee recommends fair values of each asset for which market quotations are not readily available to our Board of Directors, which in good faith determines the final fair value for each investment. Fair value is determined using unobservable inputs (Level 3 hierarchy), unless otherwise stated. See Note 7 of Notes to Consolidated Financial Statements.
(3) 
Fair value is determined using prices with observable market inputs (Level 2 hierarchy). See Note 7 of Notes to Consolidated Financial Statements.
(4) 
Fair value is determined using prices for identical securities in active markets (Level 1 hierarchy). See Note 7 of Notes to Consolidated Financial Statements.
(5) 
We have determined that this investment is not a “qualifying asset” under Section 55(a) of the Investment Company Act of 1940, or 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. The status of these assets under the 1940 Act is subject to change. We monitor the status of these assets on an ongoing basis.
(6) 
Investment on non-accrual status.
(7) 
The fair value of our Contour Highwall Holdings, LLC, or Contour, membership units also includes any value attributable to our ownership of 8,000 shares of common stock of Bundy Auger Mining, Inc., an affiliate of Contour.
(8) 
Effective December 31, 2015, we executed a fourth amendment to our note purchase and security agreement with OCI Holdings, LLC, or OCI, to waive several defaults and amend covenant limits in exchange for increases in OCI's interest to LIBOR+12% cash with a 1% floor, plus 3% PIK. Also, default interest of $0.1 million was added to the principal balance.
(9) 
Preferred unit holders have a put right starting on July 1, 2016 and Castex has 90 days from the receipt of a put notice to redeem. Upon redemption, we are due the outstanding face amount of $50 million, any unpaid and accrued dividends, plus an option to elect to receive either: a) a cash payment resulting in a total 12% return or make-whole (inclusive of the 8% cash distributions), or b) our pro rata share of 2% of the outstanding regular limited partner interests in Castex Energy 2005, LP, or Castex (0.67% net to us). If not redeemed within 90 days of the receipt of a put notice, the make-whole steps up to 16.5% since inception, OHAI will be granted board observation rights and other covenants would apply.  Further, if the preferred unit holders are not redeemed within one year from the originally scheduled put closing date (90 days after our notice), Castex and the limited partners must use commonly reasonable efforts to enter into a 12% dollar denominated production payment with a 3 year term. If such production payment is not granted within 90 days, Castex must use all available resources to repay preferred interests and the preferred return steps up to 25% from that point forward. Amounts shown for principal and cost include PIK dividends that have been added to the principal balance.
(10) 
Effective July 1, 2015, ATP was placed on non-accrual status based on estimated future production payments and income is recognized to the extent cash received.
(11) 
For more information on ATP, refer to the discussion of the ATP litigation in Note 6 to the Consolidated Financial Statements.
(12) 
Effective June 24, 2015, we executed a third amendment to our credit agreement with Shoreline Energy, LLC, or Shoreline, to amend certain covenant limits in exchange for increases in Shoreline's interest to the greater of LIBOR+9.25% with a 1.25% floor or prime+8.25% with a 1.25% floor, effective after March 31, 2015. The third amendment also included the addition of 0.50% payment-in-kind, or PIK, interest effective after June 30, 2015. Effective September 23, 2015, we executed a fourth amendment to our credit agreement with Shoreline to increase PIK interest to 1.75%. Effective October 22, 2015, we executed a fifth amendment to our credit agreement with Shoreline which included an addition of 0.25% PIK, four quarters of deferred amortization beginning in Q4 2015, and amendments to the leverage and minimum interest coverage ratios.

7



(13) 
Contingent payment of up to $6.8 million is dependent upon Alden Resources, LLC’s achievement of certain sales volume and operating efficiency levels during the three-year period ended July 2014. The reporting and review mechanism to conclude the ultimate value of the earn-out has not yet been completed. Globe BG, LLC has informally advised us that the company’s relative cost of production has not improved since July 2011.

(See accompanying notes to consolidated financial statements)

8



OHA INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2015
(In thousands, except share amounts and percentages)
(Unaudited)
Portfolio Company
 
Industry
Segment
 
Investment(1)
 
Principal
 
Cost
 
Fair Value(2)
 
Control Investments - (More than 25% owned)
Contour Highwall Holdings, LLC
 
Coal Mining
 
Senior Secured Term Loan (12%, due 10/14/2015)(6)
 
$
10,757

 
$
10,778

 
$
1,000

Contour Highwall Holdings, LLC
 
Coal Mining
 
 Unsecured Promissory Note (6%, due 4/11/2016)(6)
 
800

 
800

 

Contour Highwall Holdings, LLC
 
Coal Mining
 
800 Membership Units representing 80% of the common equity(7)
 


 

 

Spirit Resources, LLC
 
Oil & Natural Gas
Production and Development
 
Tranche A - Senior Secured Term Loan (greater of 8% or LIBOR+4.0%, due
4/28/2015)(6)
 
4,657

 
4,621

 

Spirit Resources, LLC
 
Oil & Natural Gas
Production and Development
 
Tranche B - Senior Secured Term Loan (greater of 15% PIK or LIBOR+11.0%, due 10/28/2015)(6)
 
4,409

 
4,409

 

Spirit Resources, LLC
 
Oil & Natural Gas
Production and Development
 
80,000 Preferred Units representing 100% of the outstanding equity
 
 

 
8,000

 

Subtotal Control Investments - (More than 25% owned)
 
 

 
$
28,608

 
$
1,000

 
 
 
 
 
 
 
 
 
 
 
Affiliate Investments - (5% to 25% owned)
OCI Holdings, LLC
 
Home Health Services
 
Subordinated Note (LIBOR+ 12.0% cash with a 1% floor plus 3% PIK, due
8/15/2018)(8)(9)
 
$
16,310

 
$
16,147

 
$
16,310

OCI Holdings, LLC
 
Home Health Services
 
OHA/OCI Investments, LLC Class A Units representing 20.8% diluted ownership of OCI Holdings, LLC
 
 

 
2,500

 
2,583

Subtotal Affiliate Investments - (5% to 25% owned)
 
 

 
$
18,647

 
$
18,893

 
 
 
 
 
 
 
 
 
 
 
Non-affiliate Investments - (Less than 5% owned)
Castex Energy 2005, LP
 
Oil & Natural Gas
Production and Development
 
Redeemable Preferred LP Units (current pay 8% cash or 10% PIK, due 7/1/2016)(10)
 
$
51,265

 
$
51,273

 
$
43,939

Appriss Holdings, Inc.
 
Information Services
 
Second Lien Term Loan (LIBOR+8.25% with a 1% floor, due 5/21/2021)
 
13,100

 
12,925

 
12,314

Kronos Incorporated
 
Software
 
Second Lien Term Loan
(LIBOR+8.50% with a 1.25% floor, due 4/30/2020)(3)
 
$
12,000

 
$
12,145

 
$
11,985

ATP Oil & Gas Corporation/Bennu Oil & Gas, LLC
 
Oil & Natural Gas
Production and Development
 
Limited Term Royalty Interest (notional rate of 13.2%)(11)(12)
 
 
 
27,709

 
11,845

WP Mustang (Electronic Funds Services, LLC)
 
Financial Services
 
Second Lien Term Loan (LIBOR+7.5% with a 1% floor, due 5/29/2022)(3)
 
10,000

 
9,843

 
10,038

(See accompanying notes to consolidated financial statements)

9



CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2015
(In Thousands, Except Share Amounts and Percentages)
(Continued)
Portfolio Company
 
Industry Segment
 
Investment(1)
 
Principal
 
Cost
 
Fair Value(2)
 
 
 
 
 
 
 

 
 

 
 

Non-affiliate Investments - (Less than 5% owned) - Continued
Royal Holdings, Inc.
 
Chemicals
 
Second Lien Term Loan (LIBOR+7.5% with a 1% floor, due 6/19/23)(3)
 
10,000

 
9,926

 
9,850

Shoreline Energy, LLC
 
Oil & Natural Gas Production and Development
 
Second Lien Term Loan (greater of LIBOR+9.25% with a 1.25% floor plus 2.0% PIK, or prime+8.25%, due 3/30/2019)(13)
 
12,918

 
12,640

 
9,040

TIBCO Software, Inc.
 
Software
 
Senior Unsecured Notes
(11.38% due 12/1/2021)(3)
 
10,100

 
9,707

 
8,446

KOVA International, Inc.
 
Medical Supplies Manufacturing and Distribution
 
Senior Subordinated Notes (12.75%, due 8/15/2018)
 
9,000

 
8,898

 
7,920

Stardust Financial Holdings (Hanson)
 
Building Materials
 
Second Lien Term Loan (LIBOR+9.5% with a 1% floor, due 3/13/2023)(3)
 
7,500

 
7,114

 
7,238

Gramercy Park CLO Ltd.(5)
 
Financial Services
 
Subordinated Notes, Residual Interest (11.95%, based on cost, due 7/17/2023)(3)
 
9,000

 
6,327

 
5,659

Berlin Packaging
 
Packaging
 
Second Lien Term Loan
(LIBOR+6.75% with a 1% floor, due 10/1/2022)(3)
 
5,500

 
5,226

 
5,253

Talos Production, LLC
 
Oil & Natural Gas
Production and Development
 
Senior Unsecured Notes (9.75%, due 2/15/2018)(3)
 
12,000

 
11,965

 
5,160

WASH Multifamily Acquisition, Inc.
 
Industrials - Laundry Equipment
 
Second Lien Term Loan (LIBOR+7.0% with a 1% floor, due 5/14/23)(3)
 
3,404

 
3,380

 
3,225

Synarc-BioCore Holdings, LLC
 
Healthcare
 
First Lien Senior Secured Notes (7.75% due 3/10/2021)
 
2,400

 
2,342

 
2,340

Coinamatic Canada, Inc(5)
 
Industrials - Laundry Equipment
 
Second Lien Term Loan (LIBOR+7.0% with a 1% floor, due 5/14/23)(3)
 
596

 
592

 
565

Globe BG, LLC
 
Coal Production
 
Contingent earn-out related to July 2011 sale of royalty interests in Alden Resources, LLC(14)
 
 
 

 

 
 
 
 
 
 
 
 
 
 
 
Subtotal Non-affiliate Investments - (Less than 5% owned)
 
 

 
192,012

 
154,817

Subtotal Portfolio Investments (83.3% of total investments)
 
 

 
239,267

 
174,710

 
 
 
 
 
 
 

 
 

 
 

GOVERNMENT SECURITIES
U.S. Treasury Bills(4)
 
 
 
 
 
35,000

 
34,997

 
34,997

Subtotal Government Securities (16.7% of total investments)
 
 

 
34,997

 
34,997

 
 
 
 
 
 
 
 
 
 
 
TOTAL INVESTMENTS
 
274,264

 
209,707

 
(See accompanying notes to consolidated financial statements)

10




OHA INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2015
(Continued)
 
NOTES TO CONSOLIDATED SCHEDULE OF INVESTMENTS
 
(1) 
We pledged all of our portfolio investments, except our investments in U.S. Treasury Bills, as collateral for obligations under our Investment Facility. See Note 3 of Notes to Consolidated Financial Statements. Percentages represent interest rates in effect as of December 31, 2015, and due dates represent the contractual maturity dates. Warrants, common stock, units and earn-outs are non-income producing securities, unless otherwise stated.
(2) 
The Audit Committee recommends fair values of each asset to our Board of Directors, which in good faith determines the final fair value for each investment. Fair value is determined using unobservable inputs (Level 3 hierarchy), unless otherwise stated. See Note 7 of Notes to Consolidated Financial Statements.
(3) 
Fair value is determined using prices with observable market inputs (Level 2 hierarchy). See Note 7 of Notes to Consolidated Financial Statements.
(4) 
Fair value is determined using prices for identical securities in active markets (Level 1 hierarchy). See Note 7 of Notes to Consolidated Financial Statements.
(5) 
We have determined that this investment is not a “qualifying asset” under Section 55(a) of the Investment Company Act of 1940, or 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. The status of these assets under the 1940 Act is subject to change. We monitor the status of these assets on an ongoing basis.
(6) 
Investment on non-accrual status.
(7) 
The fair value of our Contour Highwall Holdings, LLC, or Contour, membership units also includes any value attributable to our ownership of 8,000 shares of common stock of Bundy Auger Mining, Inc., an affiliate of Contour.
(8) 
Effective July 9, 2014, we executed a third amendment to our note purchase and security agreement with OCI Holdings, LLC, or OCI, to amend certain covenant limits in exchange for increases in OCI’s interest to LIBOR+11% cash with a 1% floor, plus 3% payment-in-kind, or PIK.
(9) 
Effective December 31, 2015, we executed a fourth amendment to our note purchase and security agreement with OCI Holdings, LLC, or OCI, to waive several defaults and amend covenant limits in exchange for increases in OCI's interest to LIBOR+12% cash with a 1% floor, plus 3% PIK. Also, default interest of $0.1 million was added to the principal balance.
(10) 
Preferred unit holders have a put right starting on July 1, 2016 and Castex has 90 days from the receipt of a put notice to redeem. Upon redemption, we are due the outstanding face amount of $50 million, any unpaid and accrued dividends, plus an option to elect to receive either: a) a cash payment resulting in a total 12% return or make-whole (inclusive of the 8% cash distributions), or b) our pro rata share of 2% of the outstanding regular limited partner interests in Castex Energy 2005, LP, or Castex (0.67% net to us). If not redeemed within 90 days of the receipt of a put notice, the make-whole steps up to 16.5% since inception, OHAI will be granted board observation rights and other covenants would apply.  Further, if the preferred unit holders are not redeemed within one year from the originally scheduled put closing date (90 days after our notice), Castex and the limited partners must use commonly reasonable efforts to enter into a 12% dollar denominated production payment with a 3 year term. If such production payment is not granted within 90 days, Castex must use all available resources to repay preferred interests and the preferred return steps up to 25% from that point forward. Amounts shown for principal and cost include PIK dividends that have been added to the principal balance.
(11) 
Effective July 1, 2015, ATP was placed on non-accrual status based on estimated future production payments and income is recognized to the extent cash received.
(12) 
For more information on ATP, refer to the discussion of the ATP litigation in Note 6 to the Consolidated Financial Statements.
(13) 
Effective June 24, 2015, we executed a third amendment to our credit agreement with Shoreline Energy, LLC, or Shoreline, to amend certain covenant limits in exchange for increases in Shoreline's interest to the greater of LIBOR+9.25% with a 1.25% floor or prime+8.25% with a 1.25% floor, effective after March 31, 2015. The third amendment also included the addition of 0.50% payment-in-kind, or PIK, interest effective after June 30, 2015. Effective September 23, 2015, we executed a fourth amendment to our credit agreement with Shoreline to increase PIK interest to 1.75%. Effective October 22, 2015, we executed a fifth amendment to our credit agreement with Shoreline which included an addition of 0.25% PIK, four quarters of deferred amortization beginning in Q4 2015, and amendments to the leverage and minimum interest coverage ratios.

11



(14) 
Contingent payment of up to $6.8 million is dependent upon Alden Resources, LLC’s achievement of certain sales volume and operating efficiency levels during the three-year period ended July 2014. The reporting and review mechanism to conclude the ultimate value of the earn-out has not yet been completed. Globe BG, LLC has informally advised us that the company’s relative cost of production has not improved since July 2011.
(See accompanying notes to consolidated financial statements)

12



OHA INVESTMENT CORPORATION
CONSOLIDATED FINANCIAL HIGHLIGHTS
(unaudited)
 
For the three months ended March 31,
Per Share Data(1)
2016
 
2015
 
 
 
 
Net asset value, beginning of period
$
5.49

 
$
7.48

Net investment income
0.09

 
0.11

Net realized and unrealized loss on investments(2)
(0.67
)
 
(0.20
)
Net decrease in net assets resulting from operations
(0.58
)
 
(0.09
)
Distributions to common stockholders
 

 
 

Distributions from net investment income
(0.06
)
 
(0.12
)
Net decrease in net assets from distributions
(0.06
)
 
(0.12
)
Net asset value, end of period
$
4.85

 
$
7.27

 
 
 
 
Market value, beginning of period
$
3.80

 
$
4.69

Market value, end of period
$
3.39

 
$
5.27

Market value return(3)
0.2
 %
 
14.9
 %
Net asset value return(3)
(0.8
)%
 
(0.6
)%
 
 
 
 
Ratios and Supplemental Data
 

 
 

($ and shares in thousands)
 

 
 

Net assets, end of period
$
97,906

 
$
149,440

Average net assets
$
107,679

 
$
153,219

Common shares outstanding, end of period
20,172

 
20,544

Total operating expenses/average net assets(4)(5)
12.3
 %
 
6.8
 %
Net investment income/average net assets(4)
6.9
 %
 
5.7
 %
Portfolio turnover rate
0.4
 %
 
0.5
 %
Net decrease in net assets resulting from operations/average net assets(4)
(43.6
)%
 
(5.0
)%
 
 
 
 
Expense Ratios (as a percentage of average net assets)(4)
 

 
 

Interest expense and bank fees
4.1
 %
 
1.7
 %
Management and incentive fees
3.5
 %
 
1.7
 %
Other operating expenses(5)
4.7
 %
 
3.4
 %
Total operating expenses(5)
12.3
 %
 
6.8
 %
 
(1) 
Per share data is based on weighted average number of common shares outstanding for the period.
(2) 
May include a balancing amount necessary to reconcile the change in net asset value per share with other per share information presented. This amount may not agree with the aggregate gains and losses for the period because the difference in the net asset value at the beginning and end of the period may not equal the per share changes of the line items disclosed.
(3) 
Return calculations assume reinvestment of distributions and are not annualized.
(4) 
Annualized.
(5) 
Net of legal fee reimbursements of $0 million and $0.3 million for the three months ended March 31, 2016 and 2015, respectively. Excluding these legal fee reimbursements, other operating expenses and total operating expenses ratios would have been 4.7% and 12.3% and 4.3% and 7.7%, respectively, for the three months ended March 31, 2016 and 2015. See Note 6 of Notes to Consolidated Financial Statements.

(See accompanying notes to consolidated financial statements)

13



OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(unaudited)

Note 1: Organization and Recent Developments
 
These consolidated financial statements present the financial position, results of operations and cash flows of OHA Investment Corporation and its consolidated subsidiaries (collectively “we,” “us,” “our” and “OHAI”). We are a specialty finance company that was organized in July 2004 as a Maryland corporation. Our investment objective is to generate both current income and capital appreciation primarily through debt investments with certain equity components. We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company, or a BDC, under the Investment Company Act of 1940, or the 1940 Act. For federal income tax purposes we operate so as to be treated as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. We have several direct and indirect subsidiaries that are single-member limited liability companies and wholly-owned limited partnerships established to hold certain portfolio investments or provide services to us in accordance with specific rules prescribed for a company operating as a RIC. We consolidate the financial results of our wholly-owned subsidiaries for financial reporting purposes, and we do not consolidate the financial results of our portfolio companies.
 
On September 30, 2014, our stockholders approved the appointment of Oak Hill Advisors, L.P., or OHA, as our new investment advisor, replacing NGP Investment Advisor, LP, which had been our investment advisor since our inception. In connection with this change in investment adviser, we changed our name from NGP Capital Resources Company to OHA Investment Corporation. OHA is a registered investment adviser under the Investment Advisers Act of 1940, as amended, or the Advisers Act. OHA acts as our investment advisor and administrator pursuant to an investment advisory agreement and an administration agreement, respectively, each dated as of September 30, 2014, which we refer to as the Investment Advisory Agreement and the Administration Agreement, respectively. See Note 4.
 
Note 2: Basis of Presentation
 
These interim unaudited consolidated financial statements include the accounts of OHAI and its consolidated subsidiaries. We eliminate all significant intercompany accounts and transactions upon consolidation. Certain prior period amounts have been reclassified to conform to current period presentation.
 
We prepare the interim consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. We omit certain information and footnote disclosures normally included in audited financial statements prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, pursuant to such rules and regulations. We believe we include all adjustments, which are of a normal recurring nature, so that these financial statements fairly present our financial position, results of operations and cash flows. Interim results are not necessarily indicative of results for a full year or any other interim period. You should read these unaudited consolidated financial statements in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2015.
 
Preparing interim consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes thereto, including the estimated fair values of our investment portfolio discussed in Note 7. Although we believe our estimates and assumptions are reasonable, actual results could differ materially from these estimates.
 
Distributions
 
We record distributions to stockholders on the ex-dividend date. We currently intend that our distributions each year will be sufficient to maintain our status as a RIC for federal income tax purposes and to eliminate federal excise tax liability. We currently intend to make distributions to stockholders on a quarterly basis so that substantially all of our net taxable income is distributed on an annual basis. We also intend to make distributions of net realized capital gains, if any, at least annually. However, we may in the future decide to retain such capital gains for investment and designate such retained amounts as deemed distributions. Each quarter, we estimate our annual taxable earnings. The Board of Directors considers this estimate and determines the distribution amount, if any. We generally declare our distributions each quarter and pay them shortly thereafter. The following table summarizes our recent distribution history:

14


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2016
(unaudited)

Declaration Date
 
Per Share
Amount
 
Record Date
 
Payment Date
March 18, 2014
 
$
0.16

 
March 31, 2014
 
April 7, 2014
June 10, 2014
 
0.16

 
June 30, 2014
 
July 7, 2014
September 11, 2014
 
0.16

 
September 30, 2014
 
October 7, 2014
December 17, 2014
 
0.16

 
December 31, 2014
 
January 9, 2015
March 3, 2015
 
0.12

 
March 31, 2015
 
April 8, 2015
June 10, 2015
 
0.12

 
June 30, 2015
 
July 9, 2015
September 17, 2015
 
0.12

 
September 30, 2015
 
October 7, 2015
December 11, 2015
 
0.12

 
December 31, 2015
 
January 8, 2016
March 15, 2016
 
0.06

 
March 31, 2016
 
April 8, 2016

Note 3: Credit Facilities and Borrowings
 
We are party to the Third Amended and Restated Revolving Credit Agreement (the “Investment Facility”), dated May 23, 2013, as amended. On September 29, 2014, we amended the Investment Facility to permit the appointment of OHA as our investment advisor. On May 9, 2016, we amended the Investment Facility to extend its maturity date from May 23, 2016 to July 29, 2016 (the “Extension”). As of March 31, 2016, the size of the Investment Facility was $72.0 million and the outstanding principal balance was $67.5 million. The Extension reduced the size of the Investment Facility from $72.0 million to $54.0 million, reflecting the outstanding principal balance on May 9, 2016.
As of March 31, 2016 and December 31, 2015, the total amount outstanding under the Investment Facility was $67.5 million and $72.0 million, respectively. Substantially all of our assets, except our investments in U.S. Treasury Bills, are pledged as collateral for the obligations under the Investment Facility. The Investment Facility bears interest, at our option, at either (i) LIBOR plus 325 to 475 basis points, or (ii) the base rate plus 225 to 375 basis points, both based on our amounts outstanding. As of March 31, 2016, the average interest rate on our outstanding balance of $67.5 million was 5.19%, and an additional $4.5 million was available for borrowing under the Investment Facility. Under the Extension, there are no amounts currently available for future borrowing. The Extension requires that we use cash proceeds from any returns of capital on our portfolio investments (net of commissions and other transaction costs, fees and expenses and taxes) to prepay our debt obligations under the Investment Facility (excluding returns of capital in an amount that we determine to be necessary for us to distribute in order to maintain our status as a regulated investment company under the Internal Revenue Code), and those amounts cannot be re-borrowed under the Investment Facility.
Under the Extension, we are permitted to accrue but are prohibited from paying management or incentive fees (excluding reimbursements to OHA for costs and expenses, or indemnification payments owed to OHA) to OHA under our Investment Advisory Agreement or Administration Agreement.
The total outstanding principal amount of our debt obligations under our Investment Facility will be due and payable on July 29, 2016. We are currently in the process of negotiating a new investment facility, which we expect to have in place prior to that date. However, if we do not have a new investment facility in place prior to that date, or if we are unable to further extend our existing Investment Facility, we will consider a number of actions in order to increase our liquidity to levels sufficient to meet our debt obligations under the existing Investment Facility and any other anticipated cash needs through December 31, 2016. These actions include: refinancing our debt obligations with other lenders, disposing of certain portfolio investments, and reducing other controllable cash outflows.
We believe we are able to take such actions in a manner that would enable us to meet our debt obligations and other cash needs through December 31, 2016. However, failure to successfully execute our liquidity plans or otherwise address our liquidity needs may have a material adverse effect on our business and financial position, and may materially affect our ability to continue as a going concern.
We were party to a $30.0 million Treasury Secured Revolving Credit Agreement, or the Treasury Facility, dated March 31, 2011, as amended, with SunTrust Bank as administrative agent, that could only be used to purchase U.S. Treasury Bills. Proceeds from the Treasury Facility facilitated the growth of our investment portfolio and provided flexibility in the sizing of our portfolio investments. On September 24, 2014, we entered into a fifth amendment to the Treasury Facility, reduced the size

15


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2016
(unaudited)

of the Treasury Facility to $30.0 million and permitted the appointment of OHA as our investment advisor. Borrowings under the Treasury Facility bear interest, at our option, at either (i) LIBOR plus 150 basis points or (ii) the base rate plus 50 basis points. The Treasury Facility matured on September 24, 2015 and was not renewed.

The Investment Facility contains and the Treasury Facility did contain affirmative and reporting covenants and certain financial ratio and restrictive covenants. We have complied with these covenants throughout 2015 and the three months ended March 31, 2016, and had no existing defaults or events of default under either facility. The most restrictive covenants, with terms as defined in the credit agreements, are (these restrictive covenants apply to both the Investment Facility and the Treasury Facility, unless otherwise noted):
 
maintaining a ratio of net asset value to consolidated total indebtedness (excluding net hedging liabilities) of not less than 2.25:1.0,
maintaining a ratio of net asset value to consolidated total indebtedness (including net hedging liabilities) of not less than 2.0:1.0,
maintaining a ratio of EBITDA (excluding revenue from cash collateral) to interest expense (excluding interest on loans under the Treasury Facility) of not less than 3.0:1.0, and
maintaining a ratio of collateral to the aggregate principal amount of loans under the Treasury Facility of not less than 1.02:1.0.

On March 30, 2016, we purchased $35.0 million of U.S. Treasury bills and contemporaneously entered into a repurchase arrangement with Wells Fargo Securities, LLC, or WFS, to finance such purchase. Under the repurchase arrangement, we transferred $35.0 million of U.S. Treasury bills and $0.7 million of cash to WFS as collateral under the repurchase agreement. We repaid the amount borrowed under the repurchase agreement, and WFS returned to us the $0.7 million cash collateral, net of a $3,700 financing fee, upon maturity of the U.S. Treasury bills on April 4, 2016. We account for the transfer of the U.S. Treasury bills under the repurchase agreement as a secured borrowing. As a result, the U.S. Treasury bills are recorded on our books as investments in U.S. Treasury bills, and the amount borrowed under the repurchase agreement is recorded as short-term debt at March 31, 2016.

Note 4: Investment Management
 
Investment Advisory Agreement
 
On September 30, 2014, we entered into the Investment Advisory Agreement with OHA, an investment adviser registered under the Advisers Act pursuant to which OHA replaced NGP Investment Advisor, LP as our investment advisor. The initial term of the Investment Advisory Agreement is until September 30, 2016, and subsequently for successive one-year renewals, provided such continuation is annually approved by our Board of Directors, a majority of whom are not “interested” persons (as defined in the 1940 Act) of us. Pursuant to the Investment Advisory Agreement, OHA implements our business strategy on a day-to-day basis and performs certain services for us, subject to the supervision of our Board of Directors. Under the Investment Advisory Agreement, we pay OHA a fee consisting of two components — a base management fee and an incentive fee.
 
Base Management Fee: The base management fee is paid quarterly in arrears, and is calculated by multiplying the average value of our total assets (excluding cash, cash equivalents and U.S. Treasury Bills that are purchased with borrowed funds solely for the purpose of satisfying quarter-end diversification requirements related to our election to be taxed as a RIC under the Code), as of the end of the two immediately prior fiscal quarters, by a rate of 1.75% per annum, with a 0.25% reduction in this 1.75% annual rate for the first year following September 30, 2014. For the three months ended March 31, 2016 and 2015, we incurred $0.8 million and $0.7 million, respectively, in management fees.
 
Incentive Fee: The incentive fee consists of two parts. The first part, the investment income incentive fee, is calculated and payable quarterly in arrears based on our pre-incentive fee net investment income for the fiscal quarter for which the fee is being calculated. Pre-incentive fee net investment income means interest income, dividend income, royalty payments, net profits interest payments, and any other income (including any other fees, such as commitment, origination, syndication, structuring, diligence, monitoring and consulting fees or other fees that we receive from portfolio companies) accrued during the fiscal quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under the Administration Agreement, and any interest expense and distributions paid on any issued and outstanding preferred stock, but

16


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2016
(unaudited)

excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kind interest and zero coupon securities), accrued income that we have not yet received in cash. Accordingly, we may pay an incentive fee based partly on accrued investment income, the collection of which is uncertain or deferred. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses, or unrealized capital appreciation or depreciation. Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets (defined as total assets less liabilities at the end of the immediately preceding fiscal quarter) is compared to a “hurdle rate” of 1.75% per quarter (7% annualized). OHA receives no incentive fee for any fiscal quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate. OHA receives an incentive fee equal to 100% of our pre-incentive fee net investment income for any fiscal quarter in which our pre-incentive fee net investment income exceeds the hurdle rate but is less than 2.1875% (8.75% annualized) of net assets (also referred to as the “catch up” provision) plus 20% of our pre-incentive fee net investment income for such fiscal quarter greater than 2.1875% (8.75% annualized) of net assets. For the three months ended March 31, 2016, we incurred $0.1 million of incentive fees and did not incur any incentive fees for the three months ended March 31, 2015.
 
The second part of the incentive fee, the capital gains fee, is determined and payable in arrears as of the end of each fiscal year (or, upon termination of the Investment Advisory Agreement, as of the termination date). The capital gains fee is equal to 20% of our cumulative aggregate realized capital gains from September 30, 2014 through the end of that fiscal year, computed net of our cumulative aggregate realized capital losses and cumulative aggregate unrealized depreciation on investments for the same time period. The aggregate amount of any previously paid capital gains incentive fees to OHA is subtracted from the capital gains incentive fee calculated. If such amount is negative, then there is no capital gains fee for such year. For the purposes of the capital gains fee, any gains and losses associated with our investment portfolio as of September 30, 2014 shall be excluded from the capital gains fee calculation. We have not incurred any capital gains fees since the Investment Advisory Agreement went into effect on September 30, 2014.
 
The Investment Advisory Agreement may be terminated at any time, without the payment of any penalty, by a vote of our Board of Directors or a vote of the holders of at least a majority of our outstanding voting securities (within the meaning of the 1940 Act) on 60 days’ written notice to OHA, and would automatically terminate in the event of its “assignment” (within the meaning of the 1940 Act). OHA may terminate the Investment Advisory Agreement without penalty by providing us at least than 60 days’ written notice.
 
Administration Agreement
 
On September 30, 2014, we entered into the Administration Agreement with OHA pursuant to which OHA replaced NGP Administration, LLC as our administrator and furnishes us with certain administrative services, personnel and facilities. The Administration Agreement has an initial term ending on September 30, 2016. Payments under the Administration Agreement are equal to our allocable portion of OHA’s overhead in performing its obligations under the Administration Agreement, including all administrative services necessary for our operation and the conduct of our business. The aggregate amount of certain costs and expenses payable by us under the Investment Advisory Agreement and the Administration Agreement for the period from October 1, 2014 to September 30, 2015 shall not exceed $2.5 million, or the Cap; provided that interest expense and bank fees, management and incentive fees, legal and professional fees, insurance expenses, taxes and costs related to the change in investment advisor are not subject to the Cap. The Administration Agreement may be terminated at any time, without penalty, by a vote of our Board of Directors or by OHA upon 60 days’ written notice to the other party.
 
Prior to the September 30, 2014 appointment of OHA as our administrator, we had a similar administration agreement with our previous administrator, NGP Administration, LLC, with similar provisions as the Administration Agreement, except that under the previous administration agreement, (i) there was no Cap on expenses payable by us, and (ii) a portion of compensation costs of investment professionals and certain other costs were allocated to us that are not allocable to us under the Administration Agreement.
 
We owed $0.05 million and $0.2 million to OHA under the Administration Agreement as of March 31, 2016 and December 31, 2015, respectively, for expenses incurred on our behalf for the final month of the respective quarterly period. We include these amounts in accounts payable and accrued expenses on our consolidated balance sheets.
 
Note 5: Federal Income Taxes
 

17


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2016
(unaudited)

We operate so as to qualify, for tax purposes, as a RIC under Subchapter M of Chapter 1 of the Code. As a RIC, we are generally not subject to corporate-level U.S. federal income taxes on the portion of our investment company taxable income and net capital gain (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) that we distribute to our stockholders. To qualify as a RIC, we are required, among other things, to distribute to our stockholders each year at least 90% of investment company taxable income, as defined by the Code, and to meet certain asset-diversification requirements.
 
Certain of our wholly-owned subsidiaries, or Taxable Subsidiaries, have elected to be taxed as corporations for federal income tax purposes. The Taxable Subsidiaries hold certain of our portfolio investments and are consolidated for financial reporting purposes, but not for income tax reporting purposes. These Taxable Subsidiaries permit us to hold equity investments in portfolio companies that are “pass through” entities for tax purposes, in order to comply with the “source-of-income” requirements that must be satisfied to maintain our qualification as a RIC. The Taxable Subsidiaries may generate net income tax expense or benefit, which is reflected on our consolidated statements of operations.
 
Note 6: Commitments and Contingencies
 
As of March 31, 2016, we had investments in, or commitments to fund investments to, 19 portfolio company totaling $241.9 million. As of December 31, 2015, we had investments in or commitments to fund investments to 19 portfolio company totaling $239.3 million.

We have continuing obligations under the Investment Advisory Agreement and the Administration Agreement with OHA. See Note 4. The agreements provide that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or the reckless disregard of its duties and obligations, OHA and its officers, managers, agents, employees, controlling persons, members and any other person or entity affiliated with OHA will be entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of services under the agreements or otherwise as our investment advisor or administrator. The agreements also provide that OHA and its affiliates will not be liable to us or any stockholder for any error of judgment, mistake of law, any loss or damage with respect to any of our investments or any action taken or omitted to be taken by OHA in connection with the performance of any of its duties or obligations under the agreements or otherwise as investment advisor or administrator to us, except to the extent specified in Section 36(b) of the 1940 Act concerning loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services. In the normal course of business, we enter into a variety of undertakings containing a variety of representations that may expose us to some risk of loss. We do not expect significant losses, if any, from such undertakings.
 
Legal Proceedings
 
From time to time, we are involved in various legal proceedings arising in the normal course of business. While we cannot predict the outcome of these proceedings with certainty, we do not believe that an adverse result in any pending legal proceeding, other than those described below, individually or in the aggregate, would be material to our business, financial condition or cash flows.
 
ATP Litigation. On August 17, 2012, ATP Oil & Gas Corporation, or ATP, filed a petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of Texas. Prior to the bankruptcy filing, we purchased limited term overriding royalty interests, or ORRIs, in certain offshore oil and gas producing properties operated by ATP (generally, the Gomez and Telemark properties). Credit Suisse, AG, or CS, and The Bank of New York Mellon Trust Company, N.A., or BONY, which held mortgages on ATP’s interests in the Gomez and Telemark properties at the time of the conveyances, executed certain Acts of Subordination of their liens in favor of OHAI. On August 23, 2012, on a motion filed by ATP, the bankruptcy judge presiding over ATP’s case signed an order (Bankr. Dkt. No. 191) requiring ATP to pay amounts received after August 17, 2012 to those parties it believes are entitled to receive them, including the ORRI holders, provided that the ORRI holders execute a disgorgement agreement providing for the repayment of any amounts that the bankruptcy court later finds to have been inappropriately paid. We executed the disgorgement agreement and began receiving monthly distributions in September 2012 from ATP of our share of production proceeds received by ATP after August 17, 2012.

On October 17, 2012, we filed a lawsuit against ATP styled: OHA Investment Corporation v. ATP Oil & Gas Corporation, Adv. Proc. No. 12-03443, in the U.S. Bankruptcy Court for the Southern District of Texas, seeking a declaration

18


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2016
(unaudited)

that the ORRIs are our property and not property of ATP and that the conveyance and purchase and sale documents are not executory contracts that may be rejected in order to remove or recharacterize our interests in the properties (the “Adversary Proceeding”). ATP filed an answer and counterclaim in which it claimed, among other things, that the ORRIs were a financing agreement and not a real property interest and that ATP was entitled to disgorge from us any and all royalties paid since the date of ATP’s bankruptcy filing. The United States, on behalf of the Department of the Interior, intervened arguing that the underlying leases are unexpired leases of real property or executory contracts (and not real property conveyances) and are subject to rejection by ATP. BONY, the secondary lien holder, intervened, arguing, among other things, that the ORRIs are a financing agreement and not a real property interest. Also, certain service companies claiming statutory liens or privileges intervened for the purpose of establishing that their alleged statutory liens and privileges are superior to our rights in the ORRIs and asserting related claims for disgorgement of royalties paid to us by ATP. The issues in the Adversary Proceeding were bifurcated such that the issues of (i) whether the conveyances and transactions between us and ATP constituted outright transfers of ownership and (ii) whether the conveyances are executory contracts or leases that ATP may reject, would be tried first as “Phase 1” of the proceeding. And, any additional claims, including the service company statutory lien claims and related issues, would be decided later in “Phase 2.” Phase 1 of the litigation proceeded into the discovery stage and dispositive motion practice.

In connection with an auction and various proceedings in the bankruptcy case, CS, as administrative and collateral agent to those lenders who are parties to that certain Senior Secured Super Priority Priming Debtor in Possession Credit Agreement dated August 29, 2012, or the DIP Lenders, submitted a Credit Bid - or bid based on a reduction in the amount of ATP’s outstanding indebtedness to CS - to purchase the Telemark properties and certain other assets. On October 17, 2013, the bankruptcy court entered its Final Sale Order approving the sale (Bankr. Dkt. No. 2706) to Bennu Oil & Gas, LLC, or Bennu, a newly formed company owned by the DIP Lenders. The assets purchased included claims asserted by ATP in our pending Adversary Proceeding.
 
On May 20, 2014, Bennu substituted into the Adversary Proceeding for ATP with respect to any claims that relate to assets purchased from ATP. And, on June 26, 2014, the bankruptcy court entered an order converting ATP’s bankruptcy case to a case under Chapter 7 of the U.S. Bankruptcy Code. Rodney D. Tow was appointed as Chapter 7 Trustee of ATP’s bankruptcy estate.

Subsequently, a series of disputes arose in the main bankruptcy case and the Adversary Proceeding between us, Bennu, and the Trustee regarding who owned and/or held the right to prosecute and finally resolve the claims that were asserted by ATP against us. Based on certain rulings of the bankruptcy court in connection with those disputes (see, Adv. Dkt. No. 236) and a settlement with Bennu, we and Bennu filed, on April 30, 2015, an Expedited Joint Motion to Enter Agreed Judgment (Adv. Dkt. No. 251), seeking entry of an Agreed Judgment determining that, among other things, the ORRIs are a real property interest and a “production payment” within the meaning of Sections 101(42A) and 541(b) of the United States Bankruptcy Code, and that the ORRIs are not and never were property of ATP’s bankruptcy estate. In connection with the Joint Motion, we entered into a Settlement and Release Agreement with Bennu pursuant to which, in exchange for the Agreed Judgment, we agreed to withdraw and/or release Bennu from certain claims primarily relating to our claim for breach of the Acts of Subordination which were executed by CS in connection with the conveyance of the ORRIs. Based on an Objection filed by the Trustee to the Joint Motion to Enter Agreed Judgment (Adv. Dkt. No. 253), the Court abated the Motion, pending further submission by us and Bennu.

     On October 14, 2015, we entered into a Stipulation of Settlement and Release with the Trustee, Bennu and CS, as agent to the DIP Lenders (Adv. Dkt. No. 270, 271). Pursuant to the Stipulation, in exchange for a cash payment of $335,000 and a $3.0 million reduction/credit on the outstanding indebtedness owed by ATP to CS, the Trustee agreed (i) to dismiss any and all claims against us with prejudice, (ii) to release us from any and all claims of any nature; and (iii), among other things, that he shall not contest that the ORRIs are a real property interest and a “production payment” within the meaning of Sections 101(42A) and 541(b) of the United States Bankruptcy Code, and that the ORRIs are not and never were property of ATP’s bankruptcy estate. The Trustee is deemed to have transferred to CS any rights he holds in claims arising under section 549 of the Bankruptcy Code, and CS and the DIP Lenders, in turn, released us from such claims. In exchange for the agreements of the Trustee and CS, we agreed to prosecute a motion to dismiss our claims against the Trustee without prejudice. Our separate Settlement and Release Agreement with Bennu remains in effect, and we released CS and the DIP Lenders from any claims relating to the ORRIs and our transaction documents, including the Acts of Subordination. On December 14, 2015, the Court entered its order approving the Stipulation, and it dismissed the Trustee’s claims with prejudice. On December 16, 2015, we filed a Motion to Dismiss Claims Against ATP Without Prejudice, and our Joint Motion for Agreed Judgment was reset for

19


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2016
(unaudited)

hearing. On February 4, 2016, our Motion for Agreed Judgment was granted, and an Agreed Final Judgment [Adv. Dkt. No. 276] was entered determining that, among other things, the ORRIs are a real property interest and a “production payment” within the meaning of Sections 101(42A) and 541(b) of the United States Bankruptcy Code. Likewise, our Motion to Dismiss Claims Against ATP Without Prejudice was granted. The Agreed Judgment resolved Phase 1 of the Adversary Proceeding. It does not address any disputes between us and Bennu with respect to the proper calculation of the investment balance under the terms of the ORRIs, including our legal fees, default interest, or the claims asserted by the statutory lien claimants.

On February 3, 2016, we filed our Amended Motion to Dismiss the Complaints in Intervention Filed by the Statutory Lien Claimants [Adv. Dkt. No. 274]. And, the court entered a related Case Management Order on February 4, 2016 [Adv. Dkt. No. 277]. The Amended Motion to Dismiss asserts, among other things, that under the terms of the applicable Louisiana Oil Well Lien Statute, the alleged privileges/statutory liens of the intervenors cannot attach to hydrocarbons owned by or amounts due to holders of overriding royalty interests. We also filed a Motion to Withdraw the Reference of the Phase II Claims from the Bankruptcy Court to the District Court [Adv. Dkt. No. 278]. The statutory lien claimants filed responses to the Amended Motion to Dismiss and the Motion to Withdraw the Reference. On March 24, 2016, the court conducted a hearing on our Amended Motion to Dismiss and Motion to Withdraw the Reference. At the conclusion of the hearing, the court estimated that it would take approximately six weeks for the court to issue a ruling.

The lawsuit is pending and is in the initial stages of Phase II. As of March 31, 2016, our unrecovered investment was $29.3 million, and we had received aggregate royalty payments of $35.9 million since the date of ATP’s bankruptcy filing. As of March 31, 2016, we had incurred legal and consulting fees totaling $5.5 million in connection with the enforcement of our rights under the ORRIs. On various occasions, we have provided notice that such legal expenses will be added to our unrecovered investment balance to the extent they are not reimbursed. To date, we have not received any payments on account of legal expenses aside from our receipt of regular monthly production payments. As a result, we add our legal expenses to the unrecovered investment balance in accordance with our transaction documents. As of March 31, 2016, $5.3 million of the $5.5 million in legal and consulting fees have been added to, and are thus included in, the unrecovered investment balance under the terms of our transaction documents. The remaining amounts of legal and consulting fees, totaling $25 thousand and $261 thousand as of March 31, 2016 and December 31, 2015, respectively, are included in accounts receivable and other current assets on our consolidated balance sheets and are, thus, not included in the unrecovered investment balance as of such dates.
    
Through March 31, 2016, we received post-petition royalty payments from the Gomez properties and the Telemark properties in the amount of $8.3 million and $27.6 million, respectively. It is estimated that the statutory lien claims asserted by the intervenors in the Adversary Proceeding against our ORRIs are in the principal amount of approximately $35.2 million. At this time, we estimate that there are potential statutory lien claims (including the claims of the intervenors in the Adversary Proceeding, without regard to the validity of such claims) in the principal amount of approximately $54.2 million. We have or will assert that we have viable defenses with respect to all of the claims of the statutory lien claimants or any other claim which seeks to avoid or disgorge any pre-petition or post-petition royalty payment which we received in respect of the Telemark or Gomez properties. In the event we do not prevail on our defenses to the statutory lien claims or any other claim seeking to avoid or disgorge pre-petition or post-petition royalty payments, we contend that, pursuant to the terms of our transaction documents, we are entitled to include any amounts disgorged on account of any such claims into the unrecovered investment balance of our ORRIs. Moreover, to the extent we do not prevail on our defenses to any action brought by the holder of a statutory lien claim, we contend that we would be permitted to seek contribution from other ORRI and net profits interest holders with respect to any disgorged amounts.

However, in the event our defenses to the claims of the statutory lien claimants are unsuccessful or we otherwise become liable for disgorgement of any pre-petition or post-petition royalty payments which we have received from either the Gomez or Telemark properties, the remaining oil and gas reserves associated with the Telemark properties may be insufficient to provide for a full recovery on our investment. In the event that it is determined that we are not entitled to include amounts disgorged on account of statutory lien claims or other claims, if any, into the unrecovered investment balance of our ORRIs, any disgorged amounts will result in a failure to achieve our anticipated return and/or a loss on our investment.

While we intend to vigorously defend our legal positions in the Adversary Proceeding, there can be no assurance that we will ultimately prevail in any or all of these matters.

Note 7: Fair Value
 

20


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2016
(unaudited)

Our investments consisted of the following as of March 31, 2016 and December 31, 2015:
 
 
 
March 31, 2016
 
December 31, 2015
(Dollar amounts in thousands)
 
Cost
 
% of total
 
Fair Value
 
% of total
 
Cost
 
% of total
 
Fair Value
 
% of total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Portfolio investments
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

First lien secured debt
 
$
22,152

 
8.0
%
 
$
3,340

 
1.8
%
 
$
22,150

 
8.1
%
 
$
3,340

 
1.7
%
Second lien debt
 
75,039

 
27.1
%
 
64,453

 
32.4
%
 
73,791

 
26.9
%
 
69,508

 
33.1
%
Subordinated debt
 
47,676

 
17.2
%
 
37,872

 
19.0
%
 
47,517

 
17.3
%
 
37,836

 
18.0
%
Limited term royalties
 
27,845

 
10.1
%
 
11,950

 
6.0
%
 
27,709

 
10.1
%
 
11,845

 
5.6
%
Redeemable preferred units
 
52,569

 
19.0
%
 
39,215

 
19.7
%
 
51,273

 
18.7
%
 
43,939

 
21.0
%
CLO residual interests
 
6,142

 
2.2
%
 
4,455

 
2.2
%
 
6,327

 
2.3
%
 
5,659

 
2.7
%
Equity securities
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Membership and partnership units
 
10,500

 
3.8
%
 
2,561

 
1.3
%
 
10,500

 
3.8
%
 
2,583

 
1.2
%
Total equity securities
 
10,500

 
3.8
%
 
2,561

 
1.3
%
 
10,500

 
3.8
%
 
2,583

 
1.2
%
Total portfolio investments
 
241,923

 
87.4
%
 
163,846

 
82.4
%
 
239,267

 
87.2
%
 
174,710

 
83.3
%
Government securities
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury Bills
 
35,000

 
12.6
%
 
35,000

 
17.6
%
 
34,997

 
12.8
%
 
34,997

 
16.7
%
Total investments
 
$
276,923

 
100.0
%
 
$
198,846

 
100.0
%
 
$
274,264

 
100.0
%
 
$
209,707

 
100.0
%
 
We account for all of the assets in our investment portfolio at fair value, following the provisions of the Financial Accounting Standards Board Accounting Standards Codification Fair Value Measurements and Disclosures, or ASC 820. ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements.
 
On a quarterly basis, the investment team of our investment advisor prepares fair value recommendations for all of the assets in our portfolio in accordance with ASC 820 and presents them to the Audit Committee of our Board of Directors. The Audit Committee recommends fair values of each asset for which market quotations are not readily available to our Board of Directors, which in good faith determines the final fair value for each investment.
 
Investment Team Valuation. The investment professionals of our investment advisor prepare fair value recommendations for each investment.

Investment Team Valuation Documentation. The investment team documents and discusses its preliminary fair value recommendations with the investment committee and senior management of our investment advisor.

Third Party Valuation Activity. We may, at our discretion, retain an independent valuation firm to review any or all of the valuation analyses and fair value recommendations provided by the investment team of our investment advisor. Since December 31, 2014, our general practice is that we have an independent valuation firm review all Level 3 investments (those whose value is determined using significant unobservable inputs) with recommended fair values in excess of $10 million on a quarterly basis, and review all Level 3 investments with recommended fair values greater than zero at least annually to provide positive assurance on our valuations.

Presentation to Audit Committee. Our investment advisor and senior management present the valuation analyses and fair value recommendations to the Audit Committee of our Board of Directors.

Board of Directors and Audit Committee. The Board of Directors and the Audit Committee review and discuss the valuation analyses and fair value recommendations provided by the investment team of our investment advisor and the independent valuation firm, if applicable.


21


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2016
(unaudited)

Final Valuation Determination. Our Board of Directors discusses the fair values recommended by the Audit Committee and determines the fair value of each investment in our portfolio for which market quotations are not readily available, in good faith, based on the input of the investment team of our investment advisor, our Audit Committee and the independent valuation firm, if applicable.

ASC 820 defines fair value as the price that a seller would receive for an asset or pay to transfer a liability in an orderly transaction between independent, knowledgeable and willing market participants at the measurement date. The fair value definition focuses on exit price in the principal, or most advantageous, market and prioritizes the use of observable market inputs over unobservable entity-specific inputs. In accordance with ASC 820, we categorize our investments based on the inputs to our valuation methodologies as follows:
 
Level 1 — Quoted unadjusted prices for identical instruments in active markets to which we have access at the date of measurement.

Level 2  — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers.

Level 3 — Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect our own assumptions regarding what market participants would use to price the asset or liability based on the best available information.

Fair value accounting classifies financial assets and liabilities in their entirety based on the lowest level of input that is significant to the estimated fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment that may affect the valuation of assets and liabilities and their placement within the fair value hierarchy levels. We did not have any liabilities measured at fair value at March 31, 2016 or December 31, 2015.
 
We record investments in securities for which market quotations are readily available at such market quotations in our financial statements as of the valuation date. For investments in securities for which market quotations are unavailable, or which have various degrees of trading restrictions, the investment team of our investment advisor prepares valuation analyses and fair value estimates, using the most recently available financial statements, forecasts and, when applicable, comparable transaction data. These valuation analyses rely on estimates of the asset values and enterprise values of portfolio companies issuing securities.
The methodologies for determining asset valuations include estimates based on: the liquidation or sale value of a portfolio company’s assets, the discounted value of expected future net cash flows from the assets and third party valuations of a portfolio company’s assets, such as asset appraisal reports, futures prices and engineering reserve reports of oil and natural gas properties. The investment team of our investment advisor considers some or all of the above valuation methods to determine the estimated asset value of a portfolio company.
The methodologies for determining enterprise valuations include estimates based on: valuations of comparable companies, recent sales of comparable companies, the value of recent investments in the equity securities of a portfolio company and on the methodologies used for asset valuations. The investment team of our investment advisor considers some or all of the above valuation methods to determine the estimated enterprise value of a portfolio company.
The methodologies for determining estimated current market values of comparable securities include estimates based on: recent initial offerings of comparable securities of public and private companies; recent secondary market sales of comparable securities of public and private companies; current market implied interest rates for comparable securities in general; and current market implied interest rates for non-comparable securities in general, with adjustments for such elements as size of issue, terms, and liquidity. The investment team of our investment advisor considers some or all of the above valuation methods to determine the estimated current market value of a comparable security.
For some of our securities, quoted prices in active markets for identical assets (Level 1 valuation inputs) or other significant observable inputs, including quoted prices of similar securities, interest rates, prepayments, credit risk, etc. (Level 2 valuation inputs) are readily available from independent sources and are used to value such securities. For other securities, there

22


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2016
(unaudited)

will be no readily available Level 1 or Level 2 pricing information, and therefore significant unobservable inputs (Level 3 valuation inputs), including the assumptions of OHA, must be relied upon in determining fair value for these securities.
If prices or quotes for securities are either not readily available, or a price or quote is deemed not reflective of the security’s fair market value, we employ a fair valuation technique for that security. In determining the fair value of a security, we may take into consideration (either individually or in combination) the financial condition and operating results of the underlying portfolio company, nature of the investment, restrictions on marketability, liquidity, market conditions, earnings multiple analyses using comparable companies, discounted cash flow analyses, appraisals, and other factors we deem appropriate.

Due to the inherent uncertainty in the valuation process, the fair values of our investments may differ materially from the values that would have been used had a ready market for the securities existed. Additionally, changes in the market environment, portfolio company performance and other events that may occur over the lives of the investments may cause the gains or losses ultimately realized on our investments to be materially different than the valuations currently assigned.
 
We occasionally have investments in our portfolio that contain payment-in-kind, or PIK, interest or dividend provisions. We compute PIK interest income or PIK dividend income at the contractual rate specified in each investment agreement, and we add that amount to the principal balance of the investment. For investments with PIK interest or PIK dividends, we calculate our income accruals on the principal balance plus any PIK amounts. If the portfolio company’s projected cash flows, further supported by estimated total enterprise value, are not sufficient to cover the contractual principal and interest or dividend amounts, as applicable, we do not accrue PIK interest income or PIK dividend income on the investment. To maintain our RIC status, we must pay out this non-cash income to stockholders in the form of distributions, even though we have not yet collected the cash. We recorded net PIK interest income of $0.1 million and $0.1 million in the three months ended March 31, 2016 and 2015, respectively. We recorded PIK dividend income from our investment in Castex Energy 2005, LP, of $1.3 million for the three months ended March 31, 2016, and did not record any PIK dividend income in the three months ended March 31, 2015.


23


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2016
(unaudited)

The following tables set forth the fair value of our investments by level within the fair value hierarchy as of March 31, 2016 and December 31, 2015 (in thousands):
 
March 31, 2016
 
Total
 
Level 1
 
Level 2
 
Level 3
Portfolio investments
 
 

 
 

 
 

 
 

Control investments
 
 

 
 

 
 

 
 

First lien secured debt
 
$
1,000

 
$

 
$

 
$
1,000

Total control investments
 
1,000

 

 

 
1,000

Affiliate investments
 
 
 
 
 
 
 
 
Subordinated debt
 
16,434

 

 

 
16,434

Equity securities
 
2,561

 

 

 
2,561

Total affiliate investments
 
18,995

 

 

 
18,995

Non-affiliate investments
 
 
 
 
 
 
 
 
First lien secured debt
 
2,340

 

 

 
2,340

Second lien debt
 
64,453

 

 
48,893

 
15,560

Subordinated debt
 
21,438

 

 
12,438

 
9,000

Limited term royalties
 
11,950

 

 

 
11,950

Redeemable preferred units
 
39,215

 

 

 
39,215

CLO residual interests
 
4,455

 

 
4,455

 

Total non-affiliate investments
 
143,851

 

 
65,786

 
78,065

Total portfolio investments
 
163,846

 

 
65,786

 
98,060

Government securities
 
 
 
 
 
 
 
 
U.S. Treasury Bills
 
35,000

 
35,000

 

 

Total investments
 
$
198,846

 
$
35,000

 
$
65,786

 
$
98,060

 
December 31, 2015
 
Total
 
Level 1
 
Level 2
 
Level 3
Portfolio investments
 
 

 
 

 
 

 
 

Control investments
 
 

 
 

 
 

 
 

First lien secured debt
 
$
1,000

 
$

 
$

 
$
1,000

Total control investments
 
1,000

 

 

 
1,000

Affiliate investments
 
 

 
 

 
 

 
 

Subordinated debt
 
16,310

 

 

 
16,310

Equity securities
 
2,583

 

 

 
2,583

Total affiliate investments
 
18,893

 

 

 
18,893

Non-affiliate investments
 
 

 
 

 
 

 
 

First lien secured debt
 
2,340

 

 

 
2,340

Second lien debt
 
69,508

 

 
48,154

 
21,354

Subordinated debt
 
21,526

 

 
13,606

 
7,920

Limited term royalties
 
11,845

 

 

 
11,845

Redeemable preferred units
 
43,939

 

 

 
43,939

CLO residual interests
 
5,659

 

 
5,659

 

Total non-affiliate investments
 
154,817

 

 
67,419

 
87,398

Total portfolio investments
 
174,710

 

 
67,419

 
107,291

Government securities
 
 

 
 

 
 

 
 

U.S. Treasury Bills
 
34,997

 
34,997

 

 

Total investments
 
$
209,707

 
$
34,997

 
$
67,419

 
$
107,291


24


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2016
(unaudited)


The following tables present roll-forwards of the changes in fair value for all investments for which we determine fair value using unobservable (Level 3) factors for the periods indicated (in thousands):
 
 
First
Lien Secured
Debt and
Limited Term
Royalties
 
Second
Lien Debt
 
Subordinated
Debt and
Redeemable
Preferred Units
 
Equity
Securities
 
Total
Investments
 
 
 
 
 
 
 
 
 
 
 
For the three months ended March 31, 2016
 
 
 
 
 
 
 
 
Fair value at December 31, 2015
 
$
15,185

 
$
21,354

 
$
68,169

 
$
2,583

 
$
107,291

Total gains, (losses) and amortization:
 
 

 
 

 
 

 
 

 
 

Net unrealized gains (losses)
 
(33
)
 
(5,819
)
 
(4,961
)
 
(22
)
 
(10,835
)
Net amortization of premiums, discounts and fees
 
2

 
10

 
17

 

 
29

New investments, repayments and settlements, net:
 
 

 
 

 
 

 
 

 
 
PIK
 
136

 
15

 
1,424

 

 
1,575

Fair value at March 31, 2016
 
$
15,290

 
$
15,560

 
$
64,649

 
$
2,561

 
$
98,060

 
 
 
 
 
 
 
 
 
 
 
Net change in unrealized gains (losses) from investments still held as of reporting date:
March 31, 2016
 
$
(33
)
 
$
(5,819
)
 
$
(4,961
)
 
$
(22
)
 
$
(10,835
)
March 31, 2015
 
(3,098
)
 
55

 
113

 
380

 
(2,550
)
 
 
 
First
Lien Secured
Debt and
Limited Term
Royalties
 
Second
Lien Debt
 
Subordinated
Debt and
Redeemable
Preferred Units
 
Equity
Securities
 
Total
Investments
 
 
 
 
 
 
 
 
 
 
 
For the three months ended March 31, 2015
 
 
 
 
 
 
 
 
Fair value at December 31, 2014
 
$
34,970

 
$
21,835

 
$
79,606

 
$
2,147

 
$
138,558

Total gains, (losses) and amortization:
 
 

 
 

 
 

 
 

 
 

Net unrealized gains (losses)
 
(3,109
)
 
54

 
113

 
322

 
(2,620
)
Net amortization of premiums, discounts and fees
 
57

 
22

 
16

 

 
95

New investments, repayments and settlements, net:
 
 

 
 

 
 

 
 

 
 
New investments
 

 
18,513

 
440

 

 
18,953

PIK
 

 

 
118

 

 
118

Repayments and settlements
 
(700
)
 
(195
)
 

 

 
(895
)
Fair value at March 31, 2015
 
$
31,218

 
$
40,229

 
$
80,293

 
$
2,469

 
$
154,209

 
 
 
 
 
 
 
 
 
 
 
 
During both the three month periods ended March 31, 2016 and 2015, none of our investments in portfolio companies changed among the categories of Control Investments, Affiliate Investments and Non-Affiliate Investments, and there were no transfers among Levels 3, 2 or 1.

We present net unrealized gains (losses) on our consolidated statements of operations as “Net unrealized appreciation (depreciation) on investments.”


25


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2016
(unaudited)

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 March 31, 2016 (dollars in thousands):
 
Type of Investment
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range of Inputs
 
Weighted Average
 
 
 
 
 
 
 
 
 
 
 
Non-Energy Investments:
 
 
 
 
 
 
 
 
 
 
First lien secured debt
 
$
2,340

 
Market comparables
 
Market yields
 
8.3%
 
8.3%
 
 
 
 
 
 
 
 
 
 
 
Second lien debt
 
12,314

 
Market comparables
 
Market yields
 
11.2%
 
11.2%
 
 
 
 
 
 
 
 
 
 
 
Subordinated Debt
 
25,434

 
Market comparables
 
Market yields
 
13.4% - 17.2%
 
15.9%
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
2,561

 
Market comparables
 
EBITDA multiples
 
5.25x
 
5.25x
 
 
42,649

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy Investments:
 
 
 
 
 
 
 
 
 
 
First lien secured debt and limited term royalties
 
12,950

 
Discounted cash flow
 
Discount rate
 
31.9%
 
31.9%
 
 
 
 
 
 
 
 
 
 
 
Second lien debt
 
3,246

 
Market comparables
 
Market yields
 
N/A
 
N/A
 
 
 
 
 
 
Reserve multiples
 
$6.60-$9.00(1)
 
$7.80
 
 
 
 
 
 
Production multiples
 
$24.00-$36.00(2)
 
$30.00
 
 
 
 
 
 
 
 
 
 
 
Redeemable preferred units
 
39,215

 
Discounted cash flow
 
Discount rate
 
165.7%
 
165.7%
 
 
55,411

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Level 3 investments
 
$
98,060

 
 
 
 
 
 
 
 
________________________________________

(1) 
Based on recent comparable transactions involving similar assets, expressed as price per unit of equivalent barrel of oil in proved reserves.
(2) 
Based on recent comparable transactions involving similar assets, expressed as price per daily production of equivalent barrel of oil in proved reserves.

Note 8: Common Stock
 
On October 31, 2011, our Board of Directors approved a stock repurchase plan, pursuant to which we may, from time to time, repurchase up to $10.0 million of our common stock in the open market at prices not to exceed the net asset value of our shares. During 2012 and 2013, we repurchased an aggregate of 1,129,014 shares of our common stock in the open market at an average price of $6.71 per share, totaling $7.6 million, in accordance with the stock repurchase plan. These repurchases were made at approximate discounts to our most recently published net asset value of 30%, 26% and 28% in May and November 2012 and May 2013, respectively.

In March 2015, our Board of Directors authorized the Company to repurchase up to the remaining $2.4 million available to be repurchased under this plan. As of July 14, 2015, we completed the stock repurchases under the stock repurchase plan. During 2015, we repurchased a total of 444,030 shares for $2.4 million at a weighted average price of $5.46

26


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2016
(unaudited)

per share, a 27% discount to net asset value at December 31, 2014. Repurchases initiated after March 31, 2015 were made pursuant to a plan executed in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934.

27



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
You should read the following analysis of our financial condition and results of operations in conjunction with management’s discussion and analysis contained in our 2015 Annual Report on Form 10-K, as well as our consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q. The terms “we,” “us,” “our” and “OHAI” refer to OHA Investment Corporation and its consolidated subsidiaries. The term "OHA" refers to Oak Hill Advisors, L.P., our investment adviser.
 
Forward-Looking Statements
 
Certain statements in this Quarterly Report on Form 10-Q that relate to estimates or expectations of our future performance or financial condition may constitute “forward-looking statements.” These forward-looking statements are subject to various risks and uncertainties, which could cause actual results and conditions to differ materially from those projected, including, but not limited to:
 
uncertainties associated with the timing and likelihood of investment transaction closings;
changes in interest rates;
the future operating results of our portfolio companies and their ability to achieve their objectives;
changes in regional, national or international economic conditions and their impact on the industries in which we invest;
disruptions in the credit and capital markets;
changes in the conditions of the industries in which we invest;
the adequacy of our cash resources and working capital;
the timing of cash flows, if any, from the operations of our portfolio companies;
the ability of OHA to locate suitable investments for us and to monitor and administer our investments;
the negotiation of a new credit facility to replace our investment facility;
other factors enumerated in our filings with the Securities and Exchange Commission, or the SEC;
further decrease in oil and gas prices for an extended period causing further losses in E&P holdings; and
effects of current and pending legislation.
We may use words such as “anticipates,” “believes,” “intends,” “plans,” “expects,” “projects,” “estimates,” “will,” “should,” “may” and similar expressions to identify forward-looking statements. These forward-looking statements are subject to various risks and uncertainties. Certain factors could cause actual results and conditions to differ materially from those projected and our historical experience. You should not place undue reliance on such forward-looking statements, which speak only as of the date they are made. We undertake no obligation to update our forward-looking statements made herein, unless required by law.

Overview
 
We are a specialty finance company designed to provide our investors with current income and capital appreciation. We focus primarily on providing creative direct lending solutions to middle market private companies across industry sectors. Our investment objective is to generate both current income and capital appreciation primarily through debt investments, some of which include equity components. Our investment activities are managed by OHA and supervised by our Board of Directors, the majority of whose members are independent of OHA and its affiliates.
 
OHA (and its affiliated investment advisors and predecessor firms) continues to build on its over 20-year history of investing in various asset classes and believes that its past success is a reflection of the firm’s consistent investment philosophy, strategy and process. As our investment advisor, OHA seeks to expand our portfolio’s exposure to a broader range of industries beyond energy, focusing on the middle market. OHA believes that middle market companies are generally less able to secure financing from public financial markets than larger companies and thus offer better return opportunities for firms able to originate and structure these investments, along with conducting the necessary diligence to appropriately evaluate these opportunities.
 

28



OHA expects that most of our new investments will be in senior and junior secured, unsecured and subordinated debt securities in U.S. private and small public middle market companies with maturities ranging from three to seven years. However, OHA seeks to identify attractive investments throughout the capital structure and thus may invest in equity, distressed debt, residual interests of collateralized loan obligation funds, or CLOs, and other assets. We may invest in newly issued securities and acquire investments in the secondary market. We do not currently intend to invest in mortgage-related structured products.
 
On September 30, 2014, our stockholders approved the appointment of OHA as our investment advisor, replacing NGP Investment Advisor, LP, which had been our investment advisor since our inception. In connection with this change in investment advisor, we changed our name from NGP Capital Resources Company to OHA Investment Corporation, or OHAI. OHA is a registered investment adviser under the Investment Advisers Act of 1940, or the Advisers Act. OHA acts as our investment advisor and administrator pursuant to an investment advisory agreement and an administration agreement, respectively, each dated as of September 30, 2014, which we refer to as the Investment Advisory Agreement and the Administration Agreement, respectively.
 
The aggregate fair value of our investment portfolio at March 31, 2016 was $163.8 million, with such value comprised of 17 active portfolio investments compared to 10 active portfolio investments at September 30, 2014. Under our previous investment advisor, we focused our investments primarily on small and mid-size companies engaged in the upstream sector of the energy industry, which includes businesses that find, develop and extract energy resources, such as natural gas, crude oil and coal. Consequently, a significant portion of our current investment portfolio value is comprised of debt securities and other investments in upstream exploration and production companies engaged in the acquisition, development and production of oil and natural gas properties in and along the Gulf Coast, and in the state and federal waters of the Gulf of Mexico.
 
Part of our current investment approach is to reduce our portfolio concentration in the energy industry and to diversify our portfolio with investments in debt securities of U.S. private and small public middle market companies across various industry sectors. The concentration of our investment portfolio in the energy sector decreased to 36% at March 31, 2016 from 74% at September 30, 2014, on a fair value basis.
 
Our historical focus and current concentration in the energy sector causes our portfolio to be particularly influenced by commodity prices for oil and natural gas, which declined dramatically during the fourth quarter of 2014 and remain significantly lower than they have been in recent years. Further decline in commodity prices or increased volatility in the energy markets, particularly in North America, may further significantly affect the business, financial condition, results of operations and cash flows of our energy-related portfolio companies and their ability to meet financial commitments, which would negatively impact the fair values of our energy-related investments in such companies and, in turn, our net asset value. These factors may also extend the holding period for such investments, thus impacting our ability to reduce the concentration of energy investments in our portfolio.
 
Our level of investment activity can and does vary substantially from period to period depending on many factors. Some of these factors are the amount of debt and equity capital available to middle market companies, the level of acquisition and divestiture activity for such companies, the general economic environment and the competitive environment for the types of investments we make, and our own ability to raise capital to fund our investments, both through the issuance of debt and equity securities. If a substantial portion of our investment portfolio were to be realized in the near term, no assurance can be given that OHA will be able to source sufficient appropriate investments for us to timely replace the investment income from the realized investments.
 
Portfolio and Investment Activity
 
In January 2016, we purchased a $1.7 million second lien term loan to Berlin Packaging, or Berlin, adding to our $5.5 million position that was previously acquired in December 2015. The $1.7 million Berlin loan was purchased at a 5.0% discount, earns interest payable in cash at a rate of 7.75% per annum (LIBOR+6.75% with a 1.0% floor) and matures in October 2022.

In March 2016, we sold $0.5 million of the second lien term loan of Stardust Financial Holdings, Inc., an affiliate of Hanson Building Products, at a price of 97.0 price, resulting in a realized capital gain of $24 thousand or $0.00 per share.
  
In 2011 and 2012, we purchased from ATP Oil & Gas Corporation, or ATP, limited-term overriding royalty interests, or ORRIs, in certain offshore oil and gas producing properties operated by ATP in the Gulf of Mexico, including $25.0 million paid on July 3, 2012. Under this arrangement, we purchased the right to portions (ranging from 5.0% to 10.8%) of the monthly production proceeds from the various oil and gas properties subject to the ORRIs in ATP’s Gomez and Telemark properties.

29



The terms of the ORRIs provide that they will terminate after we receive production payments that equal a defined sum calculated (generally) based on our investment in the ORRIs plus a time-value factor at a rate of 13.2% per annum. On August 17, 2012, ATP filed for protection under Chapter 11 of the U.S. Bankruptcy Code. For more information, please refer to the discussion of the ATP Litigation under the heading “Legal Proceedings” in Note 6 to our interim consolidated financial statements. As of March 31, 2016, our unrecovered investment was $29.3 million, and we had received aggregate production payments of $35.9 million subject to a disgorgement agreement. In addition, as of March 31, 2016, we had incurred legal and consulting fees totaling $5.5 million in connection with the enforcement of our rights under the ORRIs. On various occasions, we have provided notice that such legal expenses will be added to our unrecovered investment balance to the extent they are not reimbursed. To date, we have not received any payments on account of legal expenses aside from our receipt of regular monthly production payments. We add our legal expenses to the unrecovered investment balance in accordance with our transaction documents. As of March 31, 2016, $5.3 million of the $5.5 million in legal and consulting fees have been added to, and are thus included in, the unrecovered investment balance under the terms of our transaction documents. The remaining amounts of legal and consulting fees, totaling $25 thousand and $261 thousand as of March 31, 2016 and December 31, 2015, respectively, are included in accounts receivable and other current assets on our consolidated balance sheets and are, thus, not included in the unrecovered investment balance as of such dates.

The table below shows our portfolio investments by type for the periods indicated. We compute yields on investments using interest rates as of the balance sheet date and include amortization of original issue discount and market premium or discount, royalty income and other similar investment income, weighted by their respective costs when averaged. Such weighted average yields are not necessarily indicative of expected total returns on a portfolio.
 
 
 
March 31, 2016
 
December 31, 2015
 
 
Weighted
Average
Yields
 
 
 
 
 
Weighted
Average
Yields
 
 
 
 
 
 
 
Percentage of Portfolio
 
 
Percentage of Portfolio
 
 
 
Cost
 
Fair Value
 
 
Cost
 
Fair Value
First lien secured debt
 
8.4
%
 
9.3
%
 
2.1
%
 
8.3
%
 
9.3
%
 
1.9
%
Second lien debt
 
9.2
%
 
31.0
%
 
39.3
%
 
10.0
%
 
30.8
%
 
39.8
%
Subordinated debt
 
13.3
%
 
19.7
%
 
23.1
%
 
13.3
%
 
19.9
%
 
21.7
%
Limited term royalties
 
7.8
%
 
11.5
%
 
7.3
%
 
11.8
%
 
11.6
%
 
6.8
%
Redeemable preferred units
 
10.0
%
 
21.7
%
 
23.9
%
 
10.0
%
 
21.4
%
 
25.1
%
CLO residual interests (1)
 
13.6
%
 
2.5
%
 
2.7
%
 
13.3
%
 
2.6
%
 
3.2
%
Equity securities
 
 

 
 

 
 

 
 

 
 

 
 

Membership and partnership units
 
%
 
4.3
%
 
1.6
%
 
%
 
4.4
%
 
1.5
%
Total equity securities
 
%
 
4.3
%
 
1.6
%
 
%
 
4.4
%
 
1.5
%
Total portfolio investments
 
10.3
%
 
100.0
%
 
100.0
%
 
11.0
%
 
100.0
%
 
100.0
%
 
(1) Yields from investments in CLO residual interests represent the implied internal rate of return calculation expected from cash flows.
 
As of March 31, 2016 and December 31, 2015, the total fair value of our portfolio investments was $163.8 million and $174.7 million, respectively. Of those fair value totals, approximately $98.1 million, or 59.8%, as of March 31, 2016, and $107.3 million, or 61.4%, as of December 31, 2015 are determined using significant unobservable (i.e., Level 3) inputs.
 
Results of Operations

Investment Income

Investment income includes interest on our investments, dividend income and royalty income. Dividend income is income we from certain of our equity investments. Royalty income is net of amortization that we receive in connection with certain of our investments. These fees are recognized as earned.

30



Investment Income
 
For the three months ended March 31,
 (in thousands)
 
2016
 
2015
 
 
 
 
 
Interest income
 
$
3,813

 
$
3,777

Dividend income
 
1,313

 
988

Royalty income, net of amortization, and other
 
31

 
51

Total investment income
 
$
5,157

 
$
4,816


For the three months ended March 31, 2016, investment income increased by $0.3 million compared to the same period of prior year, primarily as a result of an increase in average portfolio investment balance of $35.2 million, partially offset by a decline in the weighted average investment income yield of 8.1% in the 2016 period from 9.3% in the 2015 period.
 
Operating expenses include interest expense and our allocable portion of operating expenses incurred on our behalf by our investment advisor and our administrator. Other general and administrative expenses include our allocated share of employee, facilities, and stockholder services incurred by our administrator.
Operating Expenses
 
For the three months ended March 31,
 (in thousands)
 
2016
 
2015
 
 
 
 
 
Interest expense and bank fees
 
$
1,088

 
$
663

Management and incentive fees
 
930

 
678

Professional fees
 
720

 
563

Other general and administrative expenses
 
567

 
721

Total operating expenses
 
$
3,305

 
$
2,625


For the three months ended March 31, 2016, operating expenses increased from the comparable prior period. Interest expense and bank fees increased during the 2016 period compared to the same period in 2015, primarily due to an increase in weighted average debt outstanding on our investment facility of $37.9 million and higher interest rates in the 2016 period compared to 2015. Management fees were higher in the current period primarily as a result of higher total assets subject to base management fee under the Investment Advisory Agreement with OHA and expiration of the 0.25% reduction in the base management fee rate through September 30, 2015. Professional fees increased during the 2016 period compared to the same period in 2015, primarily due to higher legal and audit fees. Other general and administrative expenses decreased during the 2016 period as compared to the same period in 2015, primarily due to a decrease in employee related expenses.

Under the Investment Advisory Agreement, the investment income incentive fee is calculated quarterly at a rate of 20% of quarterly net investment income above a “hurdle rate” of 1.75% per quarter (7% annualized) with a “catch up” provision. For the three months ended March 31, 2016 we incurred $100,000 and did not incur any incentives fees for the three months ended March 31, 2015.

Net Investment Income
 
For the three months ended March 31,
 (in thousands)
 
2016
 
2015
 
 
 
 
 
Net investment income
 
$
1,835

 
$
2,169

Net investment income per common share
 
$
0.09

 
$
0.11


During the three month period ended March 31, 2016, the decrease in net investment income compared to the three month period ended March 31, 2015 was driven by higher operating expenses, partially offset by an increase in investment income in 2016.

Net Realized Gains and Losses


31



Net realized gains and losses is the difference between the net proceeds received from dispositions of portfolio investments and their stated costs. Realized losses may also be recorded in connection with our determination that certain investments are considered worthless securities and/or meet the conditions for loss recognition per the applicable tax rules.
Net Realized Gains and Losses
 
For the three months ended March 31,
 (in thousands)
 
2016
 
2015
 
 
 
 
 
Net realized gains and losses
 
$
24

 
$
(21
)
Net realized gains and losses per common share
 
$

 
$


For the three months ended March 31, 2016, we realized capital gains related to the sale of a $0.5 million principal amount of our Hanson investment. In the comparable 2015 period, we realized capital losses related to our investment in DeanLake LP equity units.

Net Unrealized Appreciation (Depreciation) on Investments

Net unrealized appreciation or depreciation is the net change in the fair value of our investments during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.
Net Unrealized Appreciation (Depreciation) on Investments
 
For the three months ended March 31,
 (in thousands)
 
2016
 
2015
 
 
 
 
 
Control investments
 
$

 
$
(1,224
)
Affiliate investments
 
(35
)
 
368

Non-affiliate investments
 
(13,488
)
 
(3,177
)
Net unrealized appreciation (depreciation) on investments
 
$
(13,523
)
 
$
(4,033
)
Net unrealized appreciation (depreciation) on investments per common share
 
$
(0.67
)
 
$
(0.20
)

Control Investments

For the three months ended March 31, 2016, there was no change in value of our control investments. In the comparable 2015 period, we recognized net unrealized depreciation of $1.2 million which was primarily due to a decrease in the fair value of our Contour and Spirit investments of $0.4 million and $0.8 million, respectively.

Affiliate Investments

For the three months ended March 31, 2016, the increase in net unrealized depreciation on our affiliate investments was attributable to a decrease in the fair value of our investment in OCI. In the comparable 2015 period, we recognized net unrealized appreciation of $0.4 million, primarily due to an increase in the estimated fair value of our investment in OCI.

Non-Affiliate Investments

For the three months ended March 31, 2016, the increase in net unrealized depreciation on our non-affiliate investments was primarily due to a decrease in the fair value of our investments in Castex of $6.0 million, Shoreline of $5.8 million, Talos of $1.6 million, Gramercy of $1.0 million and other investments totaling a net $0.1 million. This was partially offset by an increase in fair value of our investment in KOVA of $1.1 million. In the comparable 2015 period, we recognized net unrealized depreciation of $3.2 million primarily due to a decrease in the estimated fair value of our investments in the ATP of $2.4 million and Talos of $2.5 million. This was partially offset by increases in fair value of our investments in Castex of $0.6 million, Gramercy of $0.6 million and a net increase of $0.5 million in other investments.


32



Net Decrease in Net Assets Resulting from Operations
 
For the three months ended March 31,
(in thousands)
 
2016
 
2015
 
 
 
 
 
Net decrease in net assets resulting from operations
 
$
(11,664
)
 
$
(1,885
)
Net decrease in net assets resulting from operations per common share
 
$
(0.58
)
 
$
(0.09
)

For the three months ended March 31, 2016, the net decrease in net assets results from operations compared to the three months ended March 31, 2015 is primarily attributable to the $9.5 million decrease in unrealized losses on our investments, which is described above.

Financial Condition, Liquidity and Capital Resources

At March 31, 2016, we had cash and cash equivalents totaling $2.3 million.

During the three months ended March 31, 2016, our increase of net cash used in operating activities is primarily due to higher net purchases of portfolio investments. Purchases of portfolio investments totaled $1.6 million as compared to $21.1 million in the comparable 2015 period.

Proceeds from the realization of portfolio investments totaled $0.4 million during the three months ended March 31, 2016, compared to $0.9 million during the comparable 2015 period.

During the three months ended March 31, 2016, we had net cash outflows from operations of $5.2 million, excluding net purchases and redemptions of portfolio investments, compared to $2.4 million net cash inflows during the comparable period of 2015. The lower amount of cash generated from operations during the three months ended March 31, 2016 was primarily attributable to timing differences involving normal operational activity between the two periods and fluctuations in realized and unrealized gains (losses) on our portfolio investments.
  
Our increase of net cash used by financing activities is primarily due to borrowing and distribution activity. At March 31, 2016, the amount outstanding under our $72.0 million Third Amended and Restated Revolving Credit Agreement, or the Investment Facility, was $67.5 million, and there was $4.5 million available for borrowing. On March 30, 2016, we purchased $35.0 million of U.S. Treasury bills and contemporaneously entered into a repurchase arrangement with Wells Fargo to finance such purchase. Under the repurchase arrangement, we transferred $35.0 million of U.S. Treasury bills and $0.7 million of cash to Wells Fargo as collateral under the repurchase agreement. See Note 3 to our interim consolidated financial statements.

During the three months ended March 31, 2016, we paid cash distributions totaling $2.4 million, or $0.12 share, to our common stockholders. In March 2016, we declared a first quarter distribution totaling $1.2 million, or $0.06 per share, which was paid in April 2016. We currently intend to continue to distribute, out of assets legally available for distribution and as determined by our Board of Directors, in the form of quarterly distributions, a minimum of 90% of our annual investment company taxable income to our stockholders.
  
Credit Facilities and Borrowings
 
We are party to the Third Amended and Restated Revolving Credit Agreement (the “Investment Facility”), dated May 23, 2013, as amended. On September 29, 2014, we amended the Investment Facility to permit the appointment of OHA as our investment advisor. On May 9, 2016, we amended the Investment Facility to extend its maturity date from May 23, 2016 to July 29, 2016 (the “Extension”). As of March 31, 2016, the size of the Investment Facility was $72.0 million and the outstanding principal balance was $67.5 million. The Extension reduced the size of the Investment Facility from $72.0 million to $54.0 million, reflecting the outstanding principal balance on May 9, 2016.
As of March 31, 2016 and December 31, 2015, the total amount outstanding under the Investment Facility was $67.5 million and $72.0 million, respectively. Substantially all of our assets, except our investments in U.S. Treasury Bills, are pledged as collateral for the obligations under the Investment Facility. The Investment Facility bears interest, at our option, at either (i) LIBOR plus 325 to 475 basis points, or (ii) the base rate plus 225 to 375 basis points, both based on our amounts outstanding. As of March 31, 2016, the average interest rate on our outstanding balance of $67.5 million was 5.19%, and an additional $4.5 million was available for borrowing under the Investment Facility. Under the Extension, there are no amounts currently available for future borrowing. The Extension requires that we use cash proceeds from any returns of capital on our portfolio investments (net of commissions and other transaction costs, fees and expenses and taxes) to prepay our debt

33



obligations under the Investment Facility (excluding returns of capital in an amount that we determine to be necessary for us to distribute in order to maintain our status as a regulated investment company under the Internal Revenue Code), and those amounts cannot be re-borrowed under the Investment Facility.
Under the Extension, we are permitted to accrue but are prohibited from paying management or incentive fees (excluding reimbursements to OHA for costs and expenses, or indemnification payments owed to OHA) to OHA under our Investment Advisory Agreement or Administration Agreement.
The total outstanding principal amount of our debt obligations under our Investment Facility will be due and payable on July 29, 2016. We are currently in the process of negotiating a new investment facility, which we expect to have in place prior to that date. However, if we do not have a new investment facility in place prior to that date, or if we are unable to further extend our existing Investment Facility, we will consider a number of actions in order to increase our liquidity to levels sufficient to meet our debt obligations under the existing Investment Facility and any other anticipated cash needs through December 31, 2016. These actions include: refinancing our debt obligations with other lenders, disposing of certain portfolio investments, and reducing other controllable cash outflows.
We believe we are able to take such actions in a manner that would enable us to meet our debt obligations and other cash needs through December 31, 2016. However, failure to successfully execute our liquidity plans or otherwise address our liquidity needs may have a material adverse effect on our business and financial position, and may materially affect our ability to continue as a going concern.
On March 30, 2016, we purchased $35.0 million of U.S. Treasury bills and contemporaneously entered into a repurchase arrangement with Wells Fargo Securities, LLC, or WFS, to finance such purchase. Under the repurchase arrangement, we transferred $35.0 million of U.S. Treasury bills and $0.7 million of cash to WFS as collateral under the repurchase agreement. We repaid the amount borrowed under the repurchase agreement, and WFS returned to us the $0.7 million cash collateral, net of a $3,700 financing fee, upon maturity of the U.S. Treasury bills on April 4, 2016. We account for the transfer of the U.S. Treasury bills under the repurchase agreement as a secured borrowing. As a result, the U.S. Treasury bills are recorded on our books as investments in U.S. Treasury bills, and the amount borrowed under the repurchase agreement is recorded as short-term debt at March 31, 2016.
 
We had a $30.0 million Treasury Facility that could only be used to purchase U.S. Treasury Bills. Proceeds from the Treasury Facility facilitated the growth of our investment portfolio and provided flexibility in the sizing of our portfolio investments. This facility expired on September 24, 2015.
 
The Investment Facility contains and the Treasury Facility did contain affirmative and reporting covenants and certain financial ratio and restrictive covenants. We have complied with these covenants throughout 2016 and 2015 and had no existing defaults or events of default under either facility. The most restrictive covenants, with terms as defined in the credit agreements, are:
 
maintaining a ratio of net asset value to consolidated total indebtedness (excluding net hedging liabilities) of not less than 2.25:1.0,
maintaining a ratio of net asset value to consolidated total indebtedness (including net hedging liabilities) of not less than 2.0:1.0,
maintaining a ratio of EBITDA (excluding revenue from cash collateral) to interest expense (excluding interest on loans under the Treasury Facility) of not less than 3.0:1.0, and
maintaining a ratio of collateral to the aggregate principal amount of borrowings under the Treasury Facility of not less than 1.02:1.0.

Distributions
 
We have elected to operate our business to be taxed as a RIC for federal income tax purposes. As a RIC, we generally are not required to pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that we distribute to our stockholders as distributions. To maintain our RIC status, we must meet specific source-of-income and asset diversification requirements and distribute annually an amount equal to at least 90% of our “investment company taxable income” (which generally consists of ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses) and net tax-exempt interest. In order to avoid certain excise taxes imposed on RICs, we must distribute during each calendar year an amount at least equal to the sum of (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our capital gain net income (i.e., realized capital gains in excess of realized capital losses) for the one-year period ended on October 31 of that calendar year, and (3) 100% of any ordinary income or capital gain net income not

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distributed in prior years and on which we did not pay corporate-level federal income taxes. We currently intend to make sufficient distributions to satisfy the annual distribution requirement and to avoid the excise taxes.
 
We determine the tax characteristics of our distributions to stockholders as of the end of the fiscal year, based on the taxable income for the full year and distributions paid during the year. Taxable income available for distribution differs from consolidated net investment income under GAAP due to (i) temporary and permanent differences in income and expense recognition, (ii) capital gains and losses, (iii) activity at taxable subsidiaries, and (iv) the timing and period of recognition regarding distributions declared in December of one year and paid in January of the following year. We (or the applicable withholding agent) report the tax characteristics of distributions paid annually to each stockholder on Form 1099-DIV after the end of the year.
 
We may not achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings when applicable to us as a BDC under the 1940 Act and due to provisions in our Investment Facility. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of our status as a RIC. We cannot assure stockholders that they will receive any distributions or distributions at any specific level.

Portfolio Credit Quality
 
At March 31, 2016, most of our portfolio investments were in negotiated, and often illiquid, securities of middle market businesses, with a concentration in the energy industry. As of March 31, 2016, we had certain investments related to four portfolio companies on non-accrual status with an aggregate cost and fair value of $69.1 million and $16.2 million, respectively. Our investments in Contour and Spirit were placed on non-accrual status during the fourth quarter of 2014. Effective July 1, 2015, ATP was placed on non-accrual status based on estimated future production payments and income is recognized to the extent cash received. In March 2016 Shoreline management indicated that they will not be making their April 2016 interest payment and as a result we placed our investment in Shoreline on non-accrual status. Our portfolio investments at fair value were approximately 67.7% and 73.0% of the related cost basis as of March 31, 2016 and December 31, 2015, respectively.
 
 Non-accruing and non-income producing investments
 
March 31, 2016
 
December 31, 2015
(in thousands)
 
Cost
 
Fair Value
 
Cost
 
Fair Value
 
 
 
 
 
 
 
 
 
Non-accruing investments
 
 

 
 

 
 

 
 

ATP Oil & Gas Corporation/Bennu Oil & Gas, LLC (non-accrual July 2015)
 
$
27,845

 
$
11,950

 
$
27,709

 
$
11,845

Shoreline Energy, LLC (non-accrual January 2016)
 
12,659

 
3,246

 

 

Contour Highwall Holdings, LLC (non-accrual October 2014)
 
11,578

 
1,000

 
11,578

 
1,000

Spirit Resources, LLC - Tranche A (non-accrual November 2014)
 
4,621

 

 
4,621

 

Spirit Resources, LLC - Tranche B (non-accrual March 2014)
 
4,409

 

 
4,409

 

Total non-accruing investments
 
61,112

 
16,196

 
48,317

 
12,845

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-income producing investments
 
 

 
 

 
 

 
 

OHA/OCI Investments, LLC Class A Units
 
2,500

 
2,561

 
2,500

 
2,583

Spirit Resources, LLC preferred units
 
8,000

 

 
8,000

 

Total non-income producing investments
 
10,500

 
2,561

 
10,500

 
2,583

Total non-accruing and non-income producing investments
 
$
71,612

 
$
18,757

 
$
58,817

 
$
15,428

 
Contractual Obligations and Off-Balance Sheet Arrangements
 
The following table summarizes our contractual payment obligations at March 31, 2016 (in thousands):

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Revolving credit facilities(1)
 
Total
 
Less than
1 Year
 
1-3 Years
 
3-5 Years
 
More than
5 Years
Investment Facility
 
$
67,500

 
$
67,500

 
$

 
$

 
$

Repurchase Agreement
 
34,300

 
34,300

 

 

 

Total
 
$
101,800

 
$
101,800

 
$

 
$

 
$

(1) Excludes accrued interest amounts.
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
There have been no material changes from the information provided in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2015.
 
Item 4. Controls and Procedures
 
Disclosure Controls and Procedures
 
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act), designed to ensure that information required to be disclosed in our reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosures.

In connection with the preparation of this Quarterly Report on Form 10-Q, as of the end of the fiscal period covered by this Quarterly Report on Form 10-Q (March 31, 2016), we performed an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(b) and 15d-15(b) of the Exchange Act. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of March 31, 2016, our disclosure controls and procedures were effective in providing reasonable assurance (i) that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and (ii) that such information is accumulated and communicated to management in a manner that allows timely decisions regarding required disclosure.
 
Changes in Internal Control over Financial Reporting
 
No changes in internal control over financial reporting occurred during the quarter ended March 31, 2016 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act).
 

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PART II – OTHER INFORMATION
 
Item 1. Legal Proceedings
 
The information set forth under the heading “Legal Proceedings” in Note 6 to our interim consolidated financial statements is incorporated herein by reference.
 
Item 1A. Risk Factors
 
During the three months ended March 31, 2016, there were no material changes to the risk factors disclosed under Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
The information set forth in Note 8 to our interim consolidated financial statements is incorporated herein by reference. There were no shares of common stock repurchased during the first quarter of 2016.
 
Item 3. Defaults Upon Senior Securities
 
None.

Item 4. Mine Safety Disclosures
 
N/A

Item 5. Other Information
 
None.

Item 6. Exhibits
 
See “Index to Exhibits” following the signature page for a description of the exhibits furnished as part of this Quarterly Report on Form 10-Q.
 


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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.
 
 
 
OHA INVESTMENT CORPORATION
 
 
 
 
Date:
May 10, 2016
By:
/s/ STEVEN T. WAYNE
 
 
 
Steven T. Wayne
 
 
 
President and Chief Executive Officer
 
 
 
 
Date:
May 10, 2016
By:
/s/ CORY E. GILBERT
 
 
 
Cory E. Gilbert
 
 
 
Chief Financial Officer and Treasurer
 


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Index to Exhibits
 
Exhibit No.
 
Exhibit
 
 
 
10.20*
 
Second Amendment to the Third Amendment and Restated Revolving Credit Agreement dated as of May 9, 2016, between Registrant, the lenders from time to time party thereto and SunTrust Bank, as administrative agent
31.1*
 
Certification required by Rule 13a-14(a)/15d-14(a) by the Chief Executive Officer
31.2*
 
Certification required by Rule 13a-14(a)/15d-14(a) by the Chief Financial Officer
32.1**
 
Section 1350 Certification by the Chief Executive Officer
32.2**
 
Section 1350 Certification by the Chief Financial Officer
____________
*Filed herewith.
**Furnished herewith.



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