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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period ended September 30, 2017

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 814-00712

BLACKROCK CAPITAL INVESTMENT CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   20-2725151

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

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

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

 

 

      

 

Formerly known as BlackRock Kelso Capital Corporation

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  ☑     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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

Smaller reporting company ☐    Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

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

The number of shares of the Registrant’s common stock, $.001 par value per share, outstanding at November 8, 2017 was 73,171,799.

 

 

 


Table of Contents

BLACKROCK CAPITAL INVESTMENT CORPORATION

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2017

Table of Contents

 

   

INDEX

   PAGE NO.  

PART I.

  FINANCIAL INFORMATION      3  

Item 1.

  CONSOLIDATED FINANCIAL INFORMATION      3  
 

Consolidated Statements of Assets and Liabilities as of September  30, 2017 and December 31, 2016 (unaudited)

     3  
 

Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016 (unaudited)

     4  
 

Consolidated Statements of Changes in Net Assets for the nine months ended September 30, 2017 and 2016 (unaudited)

     6  
 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 (unaudited)

     7  
 

Consolidated Schedules of Investments as of September  30, 2017 and December 31, 2016 (unaudited)

     8  
  Notes to Consolidated Financial Statements (unaudited)      24  

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     54  

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      65  

Item 4.

  Controls and Procedures      66  

PART II.

  OTHER INFORMATION      67  

Item 1.

  Legal Proceedings      67  

Item 1A.

  Risk Factors      67  

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      67  

Item 3.

  Defaults Upon Senior Securities      68  

Item 4.

  Mine Safety Disclosures      68  

Item 5.

  Other Information      68  

Item 6.

  Exhibits      68  

SIGNATURES

     69  

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

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

Item 1. Consolidated Financial Statements

BlackRock Capital Investment Corporation

Consolidated Statements of Assets and Liabilities

(Unaudited)

 

     September 30,
2017
    December 31,
2016
 

Assets

    

Investments at fair value:

    

Non-controlled, non-affiliated investments (cost of $401,425,876 and $586,176,755)

   $ 359,235,751     $ 512,308,390  

Non-controlled, affiliated investments (cost of $169,685,526 and $112,640,458)

     189,763,171       109,342,171  

Controlled investments (cost of $318,562,249 and $322,768,014)

     284,855,827       309,472,929  
  

 

 

   

 

 

 

Total investments at fair value (cost of $889,673,651 and $1,021,585,227)

     833,854,749       931,123,490  

Cash and cash equivalents

     4,919,845       10,707,834  

Receivable for investments sold

     1,534,194       449,578  

Interest, dividends and fees receivable

     11,287,584       10,750,723  

Prepaid expenses and other assets

     3,445,086       4,035,866  
  

 

 

   

 

 

 

Total Assets

   $    855,041,458     $    957,067,491  
  

 

 

   

 

 

 

Liabilities

    

Debt (net of deferred financing costs of $4,537,926 and $1,054,266)

   $ 246,142,078     $ 335,667,906  

Interest payable

     2,555,811       3,041,680  

Distributions payable

     13,149,409       15,262,010  

Deferred tax liability (See Note 2)

     5,257,916       —    

Base management fees payable

     3,993,673       4,860,614  

Accrued administrative services

     318,686       —    

Other accrued expenses and payables

     2,145,898       1,914,912  
  

 

 

   

 

 

 

Total Liabilities

     273,563,471       360,747,122  
  

 

 

   

 

 

 

Net Assets

    

Common stock, par value $.001 per share, 200,000,000 common shares authorized, 77,604,226 and 77,228,207 issued and 73,052,261 and 72,676,242 outstanding

     77,604       77,228  

Paid-in capital in excess of par

     884,286,013       877,300,709  

Undistributed / (Distributions in excess of) net investment income

     (6,773,637     (7,965,655

Accumulated net realized loss on investments and extinguishment of debt

     (197,419,370     (144,527,577

Net unrealized appreciation (depreciation), net of tax

     (62,389,802     (92,261,515

Treasury stock at cost, 4,551,965 and 4,551,965 shares held

     (36,302,821     (36,302,821
  

 

 

   

 

 

 

Total Net Assets

     581,477,987       596,320,369  
  

 

 

   

 

 

 

Total Liabilities and Net Assets

   $ 855,041,458     $ 957,067,491  
  

 

 

   

 

 

 

Net Asset Value Per Share

   $ 7.96     $ 8.21  

 

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

 


 

3


Table of Contents

BlackRock Capital Investment Corporation

Consolidated Statements of Operations

(Unaudited)

 

     Three months
ended
September 30, 2017
    Three months
ended
September 30, 2016
    Nine months
ended
September 30, 2017
    Nine months
ended
September 30, 2016
 

Investment Income:

        

Cash interest income:

        

Non-controlled, non-affiliated investments

   $ 9,312,179     $ 15,212,159     $ 32,845,636     $ 55,010,376  

Non-controlled, affiliated investments

     2,598,036       1,253,797       7,585,744       3,885,738  

Controlled investments

     4,979,940       5,259,605       14,595,478       14,388,693  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cash interest income

     16,890,155       21,725,561       55,026,858       73,284,807  
  

 

 

   

 

 

   

 

 

   

 

 

 

PIK interest income:

        

Non-controlled, non-affiliated investments

     146,950       1,927,154       3,137,866       5,608,632  

Non-controlled, affiliated investments

     952,864       —         3,067,974       —    

Controlled investments

     143,484       —         1,319,917       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total PIK interest income

     1,243,298       1,927,154       7,525,757       5,608,632  
  

 

 

   

 

 

   

 

 

   

 

 

 

Fee income

        

Non-controlled, non-affiliated investments

     164,464       356,760       505,141       5,221,054  

Non-controlled, affiliated investments

     —         —         349,916       —    

Controlled investments

     —         167,950       25,000       237,372  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total fee income

     164,464       524,710       880,057       5,458,426  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividend income:

        

Non-controlled, non-affiliated investments

     —         —         404,780       —    

Controlled investments

     2,849,738       955,933       6,358,240       2,153,954  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cash dividend income

     2,849,738       955,933       6,763,020       2,153,954  
  

 

 

   

 

 

   

 

 

   

 

 

 

PIK dividend income:

        

Non-controlled, non-affiliated investments

     —         188,017       65,944       586,219  

Non-controlled, affiliated investments

     1,613,379       608,970       2,079,524       1,691,344  

Controlled investments

     —         208,729       —         621,649  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total PIK dividend income

     1,613,379       1,005,716       2,145,468       2,899,212  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income

     —         —         590,429       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     22,761,034       26,139,074       72,931,589       89,405,031  
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Legal settlement

     —         17,500,000       —         17,500,000  

Base management fees

     3,993,673       5,188,115       12,656,877       16,600,294  

Interest and credit facility fees

     4,808,533       3,831,364       14,056,698       12,641,384  

Incentive management fees (See Note 3)

     1,493,619       —         5,076,662       —    

Professional fees

     323,949       575,000       1,681,342       1,679,000  

Administrative services

     292,767       281,099       924,226       1,037,039  

Director fees

     157,500       160,250       475,249       521,750  

Investment advisor expenses

     87,504       87,500       262,505       262,500  

Other

     957,192       646,737       2,300,180       2,208,862  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses, before incentive management fee waiver

     12,114,737       28,270,065       37,433,739       52,450,829  

Incentive management fee waiver (See Note 3)

     (1,493,619     —         (5,076,662     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses, net of incentive management fee waiver

     10,621,118       28,270,065       32,357,077       52,450,829  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Investment Income (Loss)

     12,139,916       (2,130,991     40,574,512       36,954,202  
  

 

 

   

 

 

   

 

 

   

 

 

 

Realized and Unrealized Gain (Loss):

        

Net realized gain (loss):

        

Non-controlled, non-affiliated investments

     28,990       (25,059,103     (53,954,609     (55,998,664

Controlled investments

     —         (1,532,024     2,375,535       (1,532,024
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gain (loss)

     28,990       (26,591,127     (51,579,074     (57,530,688
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation (depreciation) on:

        

Non-controlled, non-affiliated investments

     (22,325,607     (1,887,748     31,678,241       (53,904,719

 

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

 


 

4


Table of Contents

BlackRock Capital Investment Corporation

Consolidated Statements of Operations—(Continued)

(Unaudited)

 

     Three months
ended
September 30, 2017
    Three months
ended
September 30, 2016
    Nine months
ended
September 30, 2017
    Nine months
ended
September 30, 2016
 

Non-controlled, affiliated investments

     19,838,552       (5,478,931     23,375,933       (2,268,111

Controlled investments

     (17,130,664     (2,909,601     (20,411,338     (10,413,153

Foreign currency translation

     268,222       (74,783     486,793       360,432  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation (depreciation)

     (19,349,497     (10,351,063     35,129,629       (66,225,551
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gain (loss) before taxes

     (19,320,507     (36,942,190     (16,449,445     (123,756,239
  

 

 

   

 

 

   

 

 

   

 

 

 

Deferred taxes (See Note 2)

     (5,257,916     —       (5,257,916     —  

Net realized and unrealized gain (loss) after taxes

     (24,578,423     (36,942,190 )     (21,707,361     (123,756,239
  

 

 

   

 

 

   

 

 

   

 

 

 

Realized losses on extinguishment of debt (See Note 7)

     (1,312,719     —       (1,312,719     —  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Increase (Decrease) in Net Assets Resulting from Operations

   $ (13,751,226   $ (39,073,181   $ 17,554,432     $ (86,802,037
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Investment Income Per Share—basic

   $ 0.17     $ (0.03   $ 0.56     $ 0.51  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (Loss) Per Share—basic

   $ (0.19   $ (0.54   $ 0.24     $ (1.19
  

 

 

   

 

 

   

 

 

   

 

 

 

Average Shares Outstanding—basic

     73,049,648       72,554,128       72,928,772       72,786,313  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Investment Income Per Share—diluted

   $ 0.16     $ (0.03   $ 0.54     $ 0.51  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (Loss) Per Share—diluted

   $ (0.19   $ (0.54   $ 0.24     $ (1.19
  

 

 

   

 

 

   

 

 

   

 

 

 

Average Shares Outstanding—diluted

     73,049,648       72,554,128       72,928,772       72,786,313  
  

 

 

   

 

 

   

 

 

   

 

 

 

Distributions Declared Per Share

   $ 0.18     $ 0.21     $ 0.54     $ 0.63  

 

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

 


 

5


Table of Contents

BlackRock Capital Investment Corporation

Consolidated Statements of Changes in Net Assets

(Unaudited)

 

     Nine months
ended
September 30, 2017
    Nine months
ended
September 30, 2016
 

Net Increase (Decrease) in Net Assets Resulting from Operations:

    

Net investment income (loss)

   $ 40,574,512     $ 36,954,202  

Net realized gain (loss)

     (51,579,074     (57,530,688

Net change in unrealized appreciation (depreciation) before taxes

     35,129,629       (66,225,551

Deferred taxes

     (5,257,916     —  

Realized losses on extinguishment of debt

     (1,312,719     —  
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

     17,554,432       (86,802,037
  

 

 

   

 

 

 

Distributions to Stockholders from:

    

Net investment income

     (39,382,540     (45,745,052
  

 

 

   

 

 

 

Capital Share Transactions:

    

Reinvestment of distributions

     2,648,095       3,003,346  

Issuance of convertible notes

     4,337,631       —    

Purchases of treasury stock

     —         (16,093,205
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from capital share transactions

     6,985,726       (13,089,859
  

 

 

   

 

 

 

Total Increase (Decrease) in Net Assets

     (14,842,382     (145,636,948

Net assets at beginning of period

     596,320,369       753,752,615  
  

 

 

   

 

 

 

Net assets at end of period

   $ 581,477,987     $ 608,115,667  
  

 

 

   

 

 

 

Capital Share Activity:

    

Shares issued from reinvestment of distributions

     376,019       359,010  

Shares from purchases of treasury stock

     —         (1,904,064
  

 

 

   

 

 

 

Net increase (decrease) in shares outstanding

     376,019       (1,545,054
  

 

 

   

 

 

 

 

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

 


 

6


Table of Contents

BlackRock Capital Investment Corporation

Consolidated Statements of Cash Flows

(Unaudited)

 

     Nine months
ended
September 30, 2017
    Nine months
ended
September 30, 2016
 

Operating Activities:

    

Net increase (decrease) in net assets resulting from operations

   $ 17,554,432     $ (86,802,037

Adjustments to reconcile net increase (decrease) in net assets resulting from operations:

    

PIK interest and dividends

     (9,671,225     (8,507,844

Net amortization on investments

     (2,182,675     (4,044,323

Amortization of debt issuance costs

     1,558,547       1,239,907  

Net change in unrealized (appreciation) depreciation on investments before taxes

     (34,642,836     66,585,983  

Net change in unrealized (appreciation) depreciation on foreign currency translation

     (486,793     (360,432

Deferred taxes

     5,257,916       —    

Net realized (gain) loss on investments

     51,579,074       57,530,688  

Realized losses on extinguishment of debt

     1,312,719       —    

Changes in operating assets:

    

Purchase of investments

     (168,848,829     (208,521,443

Proceeds from disposition of investments

     262,067,895       267,906,627  

Change in receivable for investments sold

     (165,939     906,965  

Change in interest, dividends and fees receivable

     (2,001,407     1,919,340  

Change in prepaid expenses and other assets

     590,780       (2,170,164

Changes in operating liabilities:

    

Change in payable for investments purchased

     —         88,789  

Change in interest payable

     (485,869     (6,728,032

Change in base management fees payable

     (866,941     (798,339

Change in accrued administrative services

     318,686       (219,917

Change in legal settlement payable

     —         17,500,000  

Change in other accrued expenses and payables

     230,986       540,873  
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     121,118,521       96,066,641  
  

 

 

   

 

 

 

Financing Activities:

    

Distributions paid in cash

     (38,847,047     (43,066,163

Proceeds from debt

     313,393,993       369,595,846  

Repayments of debt

     (405,791,087     (412,000,000

Issuance of convertible notes

     4,337,631       —    

Purchases of treasury stock

     —         (16,093,205
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (126,906,510     (101,563,522
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (5,787,989     (5,496,881

Cash and cash equivalents, beginning of period

     10,707,834       12,414,200  
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 4,919,845     $ 6,917,319  
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information and non-cash activities:

    

Cash paid during period for:

    

Interest

   $ 11,640,832     $ 17,241,620  

Taxes

   $ 145,456     $ 315,557  

Non-cash activities:

    

Interest and dividends receivable—PIK

   $ 1,464,546     $ 559,860  

Distributions reinvested

   $ 2,648,095     $ 3,003,346  

 

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

 


 

7


Table of Contents

BlackRock Capital Investment Corporation

Consolidated Schedules of Investments

September 30, 2017

(Unaudited)

 

Portfolio Company(u)   Industry   Interest Rate     Maturity    

Principal

Amount or

Number of

Shares/Units

    Cost(a)    

Fair

Value(b)

 

Senior Secured Notes—10.5%

         

Advanced Lighting Technologies, Inc., First Lien(d)(j)(s)

  Capital

Equipment

   

12.52% (5.25%
Cash / 7.25%
PIK)
 
 
 
    6/1/19     $ 21,813,063     $ 5,162,151     $ 2,181,306  

AGY Holding Corp., Second Lien(f)(j)

  Chemicals,

Plastics, &

Rubber

    11.00%       11/15/18       21,762,500       21,542,798       21,653,688  

Wink Holdco, Inc., Second Lien(j)

  Insurance    

11.33% (L +
1000, 1.00%
Floor)
 
 
 
    9/30/22       37,500,000       36,923,397       37,500,000  
         

 

 

   

 

 

 

Total Senior Secured Notes

            63,628,346       61,334,994  
         

 

 

   

 

 

 

Unsecured Debt—18.3%

           

CB-HDT Holdings, Inc.(d)(g)(j)

  Aerospace &

Defense

    12.00% PIK       12/15/19       4,743,794       4,743,794       4,743,794  

Gordon Brothers Finance Company(g)(q)

  Finance    

12.23% (L +
1100, 1.00%
Floor)
 
 
 
    10/31/21       86,635,515       86,635,515       86,635,515  

SVP Worldwide Ltd.(d)(h)(k)(s)(t)

  Consumer

Goods: Durable

   

18.00% (2.50%
Cash / 13.50%
PIK)
 
 
 
    6/27/18       62,657,907       57,657,319       15,037,898  
         

 

 

   

 

 

 

Total Unsecured Debt

            149,036,628       106,417,207  
         

 

 

   

 

 

 

Subordinated Debt—5.1%

           

First Boston Construction Holdings, LLC(d)(g)(k)

  Finance     12.00%       12/31/20       29,600,000       29,600,000       29,600,000  
         

 

 

   

 

 

 

Total Subordinated Debt

            29,600,000       29,600,000  
         

 

 

   

 

 

 

 

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

 


 

8


Table of Contents

BlackRock Capital Investment Corporation

Consolidated Schedules of Investments—(Continued)

September 30, 2017

(Unaudited)

 

Portfolio Company(u)   Industry   Interest Rate   Maturity  

Principal

Amount or

Number of

Shares/Units

    Cost(a)    

Fair

Value(b)

 

Senior Secured Loans—74.8%(e)

         

AGY Holding Corp., First Lien(f)

  Chemicals,

Plastics, &

Rubber

  12.00%   9/15/18   $ 24,021,390     $ 24,021,390     $ 24,021,390  

Bankruptcy Management Solutions, Inc., Revolver

  Services:

Business

  6.74% (L+
550)
  3/31/22     1,000,000       1,000,000       1,000,000  

Bankruptcy Management Solutions, Inc., First Lien

  Services:

Business

  6.74% (L+
550)
  3/31/22     16,915,000       16,915,000       16,915,000  

GSE Environmental, Inc., First Lien

  Environmental

Industries

  11.31% (L +
1000, 1.00%
Floor)
  8/11/21     36,536,471       36,536,471       36,536,471  

JLL Pioneer Inc., Second Lien

  Construction &

Building

  9.80% (L +
850, 1.00%
Floor)
  12/31/20     20,000,000       20,000,000       20,000,000  

K2 Pure Solutions Nocal, L.P., First Lien

  Chemicals,

Plastics, &

Rubber

  10.24% (L +
900, 1.00%
Floor)
  2/19/21     13,000,000       12,900,478       13,000,000  

Liberty Tire Recycling Holdco, LLC, First Lien

  Environmental

Industries

  9.34% (L +
800, 1.00%
Floor)
  7/7/20     19,550,000       19,116,285       19,550,000  

Loar Group Inc., Second Lien

  Aerospace &

Defense

  10.48% (L +
925, 1.00%
Floor)
  7/12/22     15,000,000       14,778,458       15,000,000  

MBS Group Holdings Inc., First Lien(d)(g)

  Services:

Business

  9.00% Cash   6/30/20     40,910,000       40,910,000       22,909,600  

Midwest Physician Administrative Services, LLC, Second Lien

  Healthcare &

Pharmaceuticals

  8.32% (L +
700, 0.75%
Floor)
  8/15/25     15,000,000       14,852,058       14,852,058  

Paragon Films, Inc., Second Lien

  Containers,

Packaging, &

Glass

  11.32% (L +
1000, 1.00%
Floor)
  6/9/23     20,000,000       20,000,000       20,000,000  

Pomeroy Group LLC, Second Lien

  Services:

Business

  11.64% (L +
1000, 1.00%
Floor)
  11/30/22     27,500,000       27,112,336       27,500,000  

Pre-Paid Legal Services, Inc., Second Lien

  Services:

Consumer

  10.25% (L +
900, 1.25%
Floor)
  7/1/20     32,000,000       31,852,679       32,000,000  

Red Apple Stores Inc., Second Lien(g)(h)(k)

  Retail   10.00%   7/24/20     23,050,000       23,050,000       15,443,500  

Sur La Table, Inc., First Lien

  Retail   12.00%   7/28/20     30,000,000       30,000,000       30,000,000  

 

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

 


 

9


Table of Contents

BlackRock Capital Investment Corporation

Consolidated Schedules of Investments—(Continued)

September 30, 2017

(Unaudited)

 

Portfolio Company(u)   Industry   Interest Rate   Maturity  

Principal

Amount or

Number of

Shares/Units

    Cost(a)    

Fair

Value(b)

 

Tri-Anim Health Services, Inc., et al., Second Lien

  Healthcare &

Pharmaceuticals

  10.74% (L +
950, 1.00%
Floor)
  7/28/22   $ 25,000,000     $ 24,628,766     $ 25,000,000  

U.S. Well Services, LLC, Revolver(f)

  Energy: Oil &

Gas

  7.24% (L +
600, 1.00%
Floor)
  2/2/22     6,970,267       6,970,267       6,970,267  

U.S. Well Services, LLC, First Lien(d)(f)

  Energy: Oil &

Gas

  12.24% (L +
1100, 1.00%
Floor PIK)
  2/2/22     31,484,720       31,484,720       31,484,720  

Vertellus Holdings LLC, First Lien(f)

  Chemicals,

Plastics, &

Rubber

  10.24% (L +
900, 1.00%
Floor)
  4/30/18     22,461,298       22,461,298       22,348,991  

Vertellus Holdings LLC, Second Lien(f)

  Chemicals,

Plastics, &

Rubber

  13.24% (L +
1200, 1.00%
Floor)
  10/29/21     15,109,890       15,109,890       14,807,692  

Westmoreland Resource Partners, LP (Oxford Mining Company, LLC), First Lien(d)

  Metals &

Mining

  12.82% (L +
850, 0.75%
Floor Cash /
3.00% PIK)
  12/31/18     26,409,164       26,409,164       25,748,934  
         

 

 

   

 

 

 

Total Senior Secured Loans

            460,109,260       435,088,623  
         

 

 

   

 

 

 

Preferred Stock—10.3%

       

Advanced Lighting Technologies, Inc.(c)(j)

  Capital
Equipment
        931       —         —    

Advantage Insurance Inc.(f)(j)

  Insurance   8.00% PIK       750,000       10,155,957       9,660,000  

CB-HDT Holdings, Inc., Series L(c)(g)

  Aerospace &

Defense

        1,500,000       15,000,000       15,000,000  

Gordon Brothers Finance Company(g)(q)

  Finance   13.50%       20,497       20,497,135       20,497,135  

KAGY Holding Company, Inc. (AGY Holding Corp.)(f)

  Chemicals,

Plastics, &

Rubber

  20.00% PIK       22,960       9,596,974       14,492,670  

Red Apple Stores Inc.(c)(g)(h)(k)

  Retail         6,806,383       —         —    
         

 

 

   

 

 

 

Total Preferred Stock

            55,250,066       59,649,805  
         

 

 

   

 

 

 

Common Stock—3.1%(c)

       

CB-HDT Holdings, Inc., Series A(g)

  Aerospace &

Defense

        744,723       7,447,230       7,229,602  

Gordon Brothers Finance Company(g)(q)

  Finance         10,598       10,598,300       10,598,300  

 

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

 


 

10


Table of Contents

BlackRock Capital Investment Corporation

Consolidated Schedules of Investments—(Continued)

September 30, 2017

(Unaudited)

 

Portfolio Company(u)   Industry   Interest Rate     Maturity    

Principal

Amount or

Number of

Shares/Units

    Cost(a)    

Fair

Value(b)

 

KAGY Holding Company, Inc. (AGY Holding Corp.)(f)

  Chemicals,

Plastics, &

Rubber

        3,131,292     $ —       $ —    

MBS Group Holdings Inc.(g)(p)

  Services:

Business

        8,500       1,000       —    

Red Apple Stores Inc.(g)(h)(i)(k)

  Retail         8,756,859       7,006,091       —    
         

 

 

   

 

 

 

Total Common Stock

            25,052,621       17,827,902  
         

 

 

   

 

 

 

Limited Partnership/Limited Liability Company Interests—21.3%

 

     

BCIC Senior Loan Partners, LLC(g)(j)(k)(r)

  Finance         65,673,184       65,673,184       65,016,452  

ECI Cayman Holdings, LP(c)(h)(j)(k)

  High Tech

Industries

        3,189       1,299,542       3,316,628  

ETX Energy, LLC(c)(f)(o)

  Energy: Oil &

Gas

        51,119       —         —    

ETX Energy Management Company, LLC(c)(f)

  Energy: Oil &

Gas

        53,815       —         —    

First Boston Construction Holdings, LLC(c)(g)(k)

  Finance         7,400,000       7,400,000       7,181,929  

Higginbotham Investment Holdings, LLC(c)

  Insurance         1,163       239,245       1,930,580  

Loar Group LLC(c)

  Aerospace &

Defense

        1,500,000       1,500,000       2,161,389  

Marsico Holdings, LLC(c)(j)

  Finance         91,445       1,848,077       5,487  

U.S. Well Services, LLC, Class A(c)(f)(j)(l)

  Energy: Oil &

Gas

        19,582,356       11,980,712       28,376,826  

U.S. Well Services, LLC, Class B(c)(f)(j)(l)

  Energy: Oil &

Gas

        7,157,374       4,378,964       2,052,680  

U.S. Well Services, LLC, Class D(c)(f)(j)(l)

  Energy: Oil &

Gas

        8,085       4,946       1,685,456  

V Global Holdings LLC(c)(f)(n)

  Chemicals,

Plastics, &

Rubber

        12,087,912       11,977,610       12,208,791  

Westward Dough Holdings, LLC, Class D(c)(m)

  Beverage, Food,

& Tobacco

        114,706       —         —    
         

 

 

   

 

 

 

Total Limited Partnership/Limited Liability Company Interests

 

      106,302,280       123,936,218  
         

 

 

   

 

 

 

Equity Warrants/Options—0.0%(c)

         

Facet Investment, Inc.

  Healthcare &

Pharmaceuticals

      expire 1/18/21       1,978       250,000       —    

 

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

 


 

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Table of Contents

BlackRock Capital Investment Corporation

Consolidated Schedules of Investments—(Continued)

September 30, 2017

(Unaudited)

 

Portfolio Company(u)   Industry   Interest Rate     Maturity    

Principal

Amount or

Number of

Shares/Units

    Cost(a)    

Fair

Value(b)

 

Marsico Parent Superholdco, LLC(j)

  Finance       expire 12/14/19       455     $ 444,450     $ —    
         

 

 

   

 

 

 

Total Equity Warrants/Options

          694,450       —    
         

 

 

   

 

 

 

TOTAL INVESTMENTS—143.4%

        $ 889,673,651       833,854,749  
         

 

 

   

OTHER ASSETS & LIABILITIES (NET)—(43.4%)

 

        (252,376,762
           

 

 

 

NET ASSETS—100.0%

          $ 581,477,987  
           

 

 

 

 

(a) Represents amortized cost for fixed income securities and cost for preferred and common stock, limited partnership/limited liability company interests and equity warrants/options.
(b) Fair value is determined by or under the direction of the Company’s Board of Directors. See Note 2 for further details.
(c) Non-income producing equity securities at September 30, 2017.
(d) Interest may be paid in cash or payment-in-kind (“PIK”), or a combination thereof which is generally at the option of the borrower. PIK earned is included in the cost basis of the security. PIK represented approximately 12.0% of interest income earned for the nine months ended September 30, 2017. In accordance with the Company’s policy, PIK may be recorded on an effective yield basis.
(e) Approximately 79% of the senior secured loans in the Company’s portfolio bear interest at a floating rate that may be determined by reference to the London Interbank Offered Rate (LIBOR) or other base rate (commonly the Federal Funds Rate or the Prime Rate), at the borrower’s option. In addition, 95% of such senior secured loans have floors of 0.75% to 1.25%. The borrower under a senior secured loan generally has the option to select from interest reset periods of one, two, three or six months and may alter that selection at the end of any reset period. The stated interest rate represents the weighted average interest rate at September 30, 2017 of all contracts within the specified loan facility.
(f) Transaction and other information for “non-controlled, affiliated” investments under the Investment Company Act of 1940, whereby the Company owns 5% or more (but not more than 25%) of the portfolio company’s outstanding voting securities, is presented in a separate table in Consolidated Schedules of Investments.
(g) Transaction and other information for “controlled” investments under the Investment Company Act of 1940, whereby the Company owns more than 25% of the portfolio company’s outstanding voting securities, is presented in a separate table in Consolidated Schedules of Investments.
(h) Non-U.S. company or principal place of business outside the U.S.
(i) Original purchase denominated in Canadian dollars.
(j) Security is exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. In the aggregate, these securities represent 30.3% of the Company’s net assets at September 30, 2017.
(k) Investments that the Company has determined are not “qualifying assets” under Section 55(a) of the 1940 Act. Under the 1940 Act, we may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets. The status of these assets under the 1940 Act may be subject to change. The Company monitors the status of these assets on an ongoing basis.
(l) The Company is the sole stockholder of BKC ASW Blocker, Inc., a consolidated subsidiary, which is the beneficiary of 5% or more (but not more than 25%) of the voting securities of U.S. Well Services, LLC and thus a non-controlled, affiliated investment.
(m) The Company is the sole stockholder of BKC ASW Blocker, Inc., a consolidated subsidiary, which is the beneficiary of less than 5% of the voting securities of Westward Dough Holdings, LLC and thus a non-controlled, non-affiliated investment.
(n) The Company is the sole stockholder of BKC ASW Blocker, Inc., a consolidated subsidiary, which is the beneficiary of 5% or more (but not more than 25%) of the voting securities of V Global Holdings LLC and thus a non-controlled, affiliated investment.
(o) The Company is the sole stockholder of BKC ASW Blocker, Inc., a consolidated subsidiary, which is the beneficiary of 5% or more (but not more than 25%) of the voting securities of ETX Energy, LLC and thus a non-controlled, affiliated investment.
(p) The Company is the sole stockholder of BCIC-MBS, LLC, a consolidated subsidiary, which is the beneficiary of more than 25% of the voting securities of MBS Group Holdings Inc. and thus a controlled investment.

 

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

 


 

12


Table of Contents

BlackRock Capital Investment Corporation

Consolidated Schedules of Investments—(Continued)

September 30, 2017

(Unaudited)

 

(q) This investment is deemed significant under Regulation S-X Rule 4-08(g). Gordon Brothers Finance Company commenced operations on October 31, 2014. The summarized financial information of Gordon Brothers Finance Company for the three and nine months ended September 30, 2017 and 2016 is shown below:

 

     September 30, 2017      December 31, 2016  

($ in millions)

     

Total assets

   $ 486.3      $ 412.8  

Total senior debt

   $ 319.8      $ 248.9  

 

     Three months
ended
September 30, 2017
    Three months
ended
September 30, 2016
    Nine months
ended
September 30, 2017
    Nine months
ended
September 30, 2016
 

Total revenue

   $ 12.4     $ 9.0     $ 33.7     $ 21.6  

Net change in owners’ equity resulting from operations

   $ (0.8   $ (0.6   $ (5.4   $ (6.1

Net change in owners’ equity resulting from operations, excluding origination costs, realized & unrealized on foreign currency, unrealized-available for sale assets & provision for loan loss

   $ 1.0     $ (0.7   $ (1.9   $ (3.6

Provision for loan loss reserves

   $ 0.3     $ 0.0     $ 0.8     $ 0.5  

Note:   Balance sheet amounts are as of period end

 

     

 

(r) This investment is deemed significant under Regulation S-X Rule 4-08(g). BCIC Senior Loan Partners, LLC was formed on June 23, 2016. See Note 5 for summarized financial information of BCIC Senior Loan Partners, LLC for the three and nine months ended September 30, 2017 and the period June 23, 2016 through September 30, 2016.
(s) Non-accrual status at September 30, 2017 and therefore non-income producing. At September 30, 2017, the aggregate fair value and amortized cost on non-accrual status represents 2.7% and 8.9% of the Company’s debt investments, respectively.
(t) All-in rate includes default interest.
(u) Unless otherwise indicated, all investments are considered Level 3 in accordance with ASC Topic 820 (See Note 10).

 

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

 


 

13


Table of Contents

BlackRock Capital Investment Corporation

Consolidated Schedules of Investments—(Continued)

September 30, 2017

(Unaudited)

 

                                 

Nine Months Ended September 30, 2017

 
Non-controlled, Affiliated Investments  

Fair Value at

December 31,

2016

   

Gross

Additions

(Cost)*

   

Gross

Reductions

(Cost)**

   

Net

Unrealized

Appreciation
(Depreciation)
before Taxes

   

Fair Value at

September 30,

2017

   

Net

Realized

Gain (Loss)

   

Interest

Income

   

Fee

Income

   

Dividend

Income

 

Advantage Insurance Inc.

                 

Preferred Stock

  $ 8,130,000     $ 573,380     $ —       $ 956,620     $ 9,660,000     $ —       $ —       $ —       $ 573,378  
AGY Holding Corp.:                  

Senior Secured Note

    21,109,625       145,933       —         398,130       21,653,688       —         1,947,990       —         —    

Senior Secured Loan

    24,021,390       —         —         —         24,021,390       —         2,185,946       —         —    

KAGY Holding Company, Inc. (AGY Holding Corp.):

                 

Preferred Stock

    6,422,056       1,506,145       —         6,564,469       14,492,670       —         —         —         1,506,146  

Common Stock

    —         —         —         —               —         —         —         —    

ETX Energy, LLC

                 

Limited Liability Co. Interest

    —         —         —         —               —         —         —         —    

ETX Energy Management Company, LLC

                 

Limited Liability Co. Interest

    —         —         —         —               —         —         —         —    

U.S. Well Services, LLC:

                 

Revolver

    —         6,970,267       —         —         6,970,267 †      —         246,330       349,916       —    

Senior Secured Loan

    —         31,484,720       —         —         31,484,720 †      —         3,067,974       —         —    

Limited Liability Co. Interest, Class A

    —         11,980,712       —         16,396,114       28,376,826 †      —         —         —         —    

Limited Liability Co. Interest, Class B

    —         4,378,964       —         (2,326,284     2,052,680 †      —         —         —         —    

Limited Liability Co. Interest, Class D

    —         4,946       —         1,680,510       1,685,456 †      —         —         —         —    

Vertellus Holdings LLC:

                 

Senior Secured Loan, First Lien

    22,461,298       —         —         (112,307     22,348,991       —         1,711,588       —         —    

Senior Secured Loan, Second Lien

    15,109,890       —         —         (302,198     14,807,692       —         1,493,890       —         —    

V Global Holdings LLC

                 

Limited Liability Co. Interest

    12,087,912       —         —         120,879       12,208,791       —         —         —         —    
 

 

 

 

Totals

  $ 109,342,171     $ 57,045,067     $ —       $ 23,375,933     $ 189,763,171     $ —       $ 10,653,718     $ 349,916     $ 2,079,524  
 

 

 

 

 

  * Gross additions include increases in the cost basis of investments resulting from new portfolio investments, PIK interest or dividends, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.
  ** Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category.
  Investment moved into the non-controlled, affiliated category from the non-controlled, non-affiliated category during the period.

The aggregate fair value of non-controlled, affiliated investments at September 30, 2017 represents 32.6% of the Company’s net assets.

 

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

 


 

14


Table of Contents

BlackRock Capital Investment Corporation

Consolidated Schedules of Investments—(Continued)

September 30, 2017

(Unaudited)

 

                                 

Nine Months Ended September 30, 2017

 
Controlled Investments  

Fair Value at

December 31,

2016

   

Gross

Additions

(Cost)*

   

Gross

Reductions

(Cost)**

   

Net

Unrealized

Appreciation
(Depreciation)
before Taxes

   

Fair Value at

September 30,

2017

   

Net

Realized

Gain (Loss)

   

Interest

Income

   

Fee

Income

   

Dividend

Income

 

Bankruptcy Management Solutions, Inc.:

                 

Senior Secured Loan, First Lien, A

  $ 736,685     $ 3,806     $ (736,685   $ (3,806   $ †    $ —       $ 12,002     $ 25,000     $ —    

Senior Secured Loan, First Lien, B

    11,271,747       623,357       (11,271,747     (623,357     —  †      —         818,420       —         —    

Common Stock

    19,586,856       —         (16,654,505     (2,932,351     —  †      3,369,690       —         —         —    

Warrants

    117,358       —         (1,186,138     1,068,780       —  †      (994,155     —         —         —    

BCIC Senior Loan Partners, LLC

                 

Limited Liability Co. Interest

    41,675,575       23,147,088       —         193,789       65,016,452       —         —         —         3,232,750  

CB-HDT Holdings, Inc.:

                 

Unsecured Debt

    4,477,360       266,434       —         —         4,743,794       —         409,917       —         —    

Preferred Stock

    15,000,000       —         —         —         15,000,000       —         —         —         —    

Common Stock

    7,447,230       —         —         (217,628     7,229,602       —         —         —         —    

First Boston Construction Holdings, LLC:

                 

Subordinated Debt

    28,800,000       800,000       —         —         29,600,000       —         2,636,000       —         —    

Limited Liability Co. Interest

    7,544,001       200,000       —         (562,072     7,181,929       —         —         —         1,027,096  

Gordon Brothers Finance Company:

                 

Unsecured Debt

    87,429,682       17,206,943       (18,001,110     —         86,635,515       —         7,540,002       —         —    

Preferred Stock

    20,497,135       —         —         —         20,497,135       —         —         —         2,098,394  

Common Stock

    10,598,300       —         —         —         10,598,300       —         —         —         —    

MBS Group Holdings Inc.:

                 

Senior Secured Loan

    40,000,000       910,000       —         (18,000,400     22,909,600       —         2,761,158       —         —    

Common Stock

    —         —         —         —               —         —         —         —    

Red Apple Stores Inc.:

                 

Senior Secured Loan

    14,291,000       —         —         1,152,500       15,443,500       —         1,737,896       —         —    

Preferred Stock

    —         —         —         —               —         —         —         —    

Common Stock

    —         486,793       —         (486,793           —         —         —         —    
 

 

 

 

Totals

  $ 309,472,929     $ 43,644,421     $ (47,850,185   $ (20,411,338   $ 284,855,827     $ 2,375,535     $ 15,915,395     $ 25,000     $ 6,358,240  
 

 

 

 

 

  * Gross additions include increases in the cost basis of investments resulting from new portfolio investments, PIK interest or dividends, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.
  ** Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category.
  Investment no longer held as of September 30, 2017.

The aggregate fair value of controlled investments at September 30, 2017 represents 49.0% of the Company’s net assets.

 

 

 

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

 


 

15


Table of Contents

BlackRock Capital Investment Corporation

Consolidated Schedules of Investments

December 31, 2016

 

Portfolio Company(t)   Industry(a)     Interest Rate   Maturity  

Principal

Amount or

Number of

Shares/Units

    Cost(b)    

Fair

Value(c)

 

Senior Secured Notes—10.7%

           

Advanced Lighting Technologies, Inc., First Lien(e)(k)

   

Capital

Equipment

 

 

  10.50%   6/1/19   $ 20,000,000     $ 18,682,622     $ 5,000,000  

AGY Holding Corp., Second Lien(g)(k)

   

Chemicals,

Plastics, &

Rubber

 

 

 

  11.00%   11/15/18     21,762,500       21,396,864       21,109,625  

Wink Holdco, Inc., Second Lien(k)

    Insurance     11.00% (L +

1000, 1.00%

Floor)

  9/30/22     37,500,000       36,837,191       37,500,000  
         

 

 

   

 

 

 

Total Senior Secured Notes

            76,916,677       63,609,625  
         

 

 

   

 

 

 

Unsecured Debt—21.3%

           

CB-HDT Holdings, Inc.(h)(k)(q)

   

Aerospace &

Defense

 

 

  12.00%
PIK
  12/15/19     4,477,360       4,477,360       4,477,360  

Gordon Brothers Finance Company(h)(r)

    Finance     12.00% (L +

1100, 1.00%

Floor)

  10/31/21     87,429,682       87,429,682       87,429,682  

SVP Worldwide Ltd.(i)(l)(q)

   

Consumer

Goods: Durable

 

 

  16.00%

(2.50% Cash /

13.50%
PIK)

  6/27/18     56,657,424       55,262,989       35,410,890  
         

 

 

   

 

 

 

Total Unsecured Debt

            147,170,031       127,317,932  
         

 

 

   

 

 

 

Subordinated Debt—4.8%

           

First Boston Construction Holdings, LLC(h)(l)(q)

    Finance     12.00%   12/31/20     28,800,000       28,800,000       28,800,000  
         

 

 

   

 

 

 

Total Subordinated Debt

            28,800,000       28,800,000  
         

 

 

   

 

 

 

Senior Secured Loans—92.0%(f)

 

         

Accriva Diagnostics, Inc., First Lien

   

Healthcare &

Pharmaceuticals

 

 

  12.25%   1/17/19     18,900,000       18,900,000       18,900,000  

AGY Holding Corp., First Lien(g)

   

Chemicals,

Plastics, &

Rubber

 

 

 

  12.00%   9/15/18     24,021,390       24,021,390       24,021,390  

Bankruptcy Management Solutions, Inc., Term Loan A, First Lien(h)

   

Services:

Business

 

 

  4.50% (L +

350, 1.00%

Floor)

  6/27/17     736,685       732,879       736,685  

Bankruptcy Management Solutions, Inc., Term Loan B, First Lien(h)

   

Services:

Business

 

 

  7.00% (L +

600,1.00%

Floor)

  6/27/18     11,271,747       10,648,390       11,271,747  

GSE Environmental, Inc., First Lien

   

Environmental

Industries

 

 

  11.00% (L +

1000, 1.00%

Floor)

  8/11/21     36,566,118       36,566,118       36,566,118  

 

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

 


 

16


Table of Contents

BlackRock Capital Investment Corporation

Consolidated Schedules of Investments—(Continued)

December 31, 2016

 

Portfolio Company(t)   Industry(a)   Interest Rate   Maturity  

Principal

Amount or

Number of

Shares/Units

    Cost(b)    

Fair

Value(c)

 

JLL Pioneer Inc., Second Lien

  Construction &

Building

  9.50% (L+

850, 1.00%

Floor)

  12/31/20   $ 20,000,000     $ 20,000,000     $ 20,000,000  

K2 Pure Solutions Nocal, L.P., First Lien

  Chemicals,

Plastics, &

Rubber

  10.00% (L+

900, 1.00%

Floor)

  2/19/21     13,000,000       12,878,533       13,000,000  

Liberty Tire Recycling Holdco, LLC, First Lien

  Environmental

Industries

  9.00% (L +

800,1.00%

Floor)

  7/7/20     19,700,000       19,144,826       19,700,000  

Loar Group Inc., Second Lien

  Aerospace &

Defense

  10.25% (L +

925,1.00%

Floor)

  7/12/22     15,000,000       14,743,818       15,000,000  

MBS Group Holdings Inc., First Lien(h)

  Services:

Business

  9.00%   6/30/20     40,000,000       40,000,000       40,000,000  

Oxford Mining Company, LLC, First Lien(q)

  Metals &

Mining

  12.45% (L+

850, 0.75%

Floor Cash /

3.00% PIK)

  12/31/18     25,946,053       25,946,053       25,686,593  

Paragon Films, Inc., Second Lien

  Containers,

Packaging, &

Glass

  11.00% (L +

1000, 1.00%

Floor)

  6/9/23     20,000,000       20,000,000       20,000,000  

Pomeroy Group LLC, Second Lien

  Services:

Business

  11.64% (L +

1000, 1.00%

Floor)

  11/30/22     27,500,000       27,056,251       27,500,000  

Pre-Paid Legal Services, Inc., Second Lien

  Services:

Consumer

  10.25% (L +

900, 1.25%

Floor)

  7/1/20     32,000,000       31,812,661       32,000,000  

Recorded Books Inc., Second Lien

  Media:

Advertising,

Printing &

Publishing

  9.50% (L +

850, 1.00%

Floor)

  7/31/22     32,500,000       32,500,000       32,500,000  

Red Apple Stores Inc., Second Lien(h)(i)(l)

  Retail   10.00%   7/24/20     23,050,000       23,050,000       14,291,000  

Shoreline Energy LLC, Second Lien(e)(q)(s)

  Energy: Oil &

Gas

  16.00% (Base +

825, 2.25%

Floor Cash /

2.00%

PIK)

  3/30/19     28,240,003       27,236,933       —    

SOURCEHOV, LLC, First Lien

  Services:

Business

  7.75% (L +

675, 1.00%

Floor)

  10/31/19     4,593,750       4,515,865       4,065,468  

SOURCEHOV, LLC, Second Lien

  Services:

Business

  11.50% (L +

1050, 1.00%

Floor)

  4/30/20     5,000,000       4,877,098       3,250,000  

 

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

 


 

17


Table of Contents

BlackRock Capital Investment Corporation

Consolidated Schedules of Investments—(Continued)

December 31, 2016

 

Portfolio Company(t)   Industry(a)     Interest Rate   Maturity  

Principal

Amount or

Number of

Shares/Units

    Cost(b)    

Fair

Value(c)

 

Sur La Table, Inc., First Lien

    Retail     12.00%   7/28/20   $ 30,000,000     $ 30,000,000     $ 30,000,000  

Tri-Anim Health Services, Inc., et al., Second Lien

   

Healthcare &

Pharmaceuticals

 

 

  10.50% (L +

950,1.00%

Floor)

  7/28/22     25,000,000       24,571,248       25,000,000  

U.S. Anesthesia Partners, Inc., Second Lien

   

Healthcare &

Pharmaceuticals

 

 

  10.25% (L +

925, 1.00%
Floor)

  9/24/20     20,000,000       19,685,726       20,000,000  

U.S. Well Services, LLC, First Lien(q)(s)

   

Energy: Oil &

Gas

 

 

  14.11% (L +

1150, 0.50%

Floor PIK)

  5/2/19     50,083,741       50,083,741       43,572,855  

Vertellus Holdings LLC, First Lien(g)

   

Chemicals,

Plastics, &

Rubber

 

 

 

  10.00% (L +

900, 1.00%

Floor)

  4/30/18     22,461,298       22,461,298       22,461,298  

Vertellus Holdings LLC, Second Lien(g)

   

Chemicals,

Plastics, &

Rubber

 

 

 

  13.00% (L +

1200, 1.00%

Floor)

  10/29/21     15,109,890       15,109,890       15,109,890  

Water Pik, Inc., Second Lien

   

Consumer

Goods: Durable

 

 

  9.75% (L +

875, 1.00%

Floor)

  1/8/21     33,882,271       33,407,686       33,882,271  
         

 

 

   

 

 

 

Total Senior Secured Loans

            589,950,404       548,515,315  
         

 

 

   

 

 

 

Preferred Stock—9.7%

           

Advantage Insurance Inc.(g)(k)

    Insurance     8.00% PIK       750,000       9,582,578       8,130,000  

CB-HDT Holdings, Inc., Series L(d)(h)

   

Aerospace &

Defense

 

 

        1,500,000       15,000,000       15,000,000  

Gordon Brothers Finance Company(h)(r)

    Finance     13.50%       20,497       20,497,135       20,497,135  

KAGY Holding Company, Inc. (AGY Holding Corp.)(g)

   

Chemicals,

Plastics, &

Rubber

 

 

 

  20.00% PIK       22,960       8,090,828       6,422,056  

Red Apple Stores Inc.(d)(h)(i)(l)

    Retail           6,806,383       —         —    

USI Senior Holdings, Inc. (United Subcontractors)(d)

   

Construction &

Building

 

 

        260,798       5,374,318       7,823,936  
         

 

 

   

 

 

 

Total Preferred Stock

            58,544,859       57,873,127  
         

 

 

   

 

 

 

Common Stock—6.3%(d)

           

Bankruptcy Management Solutions, Inc.(h)

   

Services:

Business

 

 

        370,122       16,654,505       19,586,856  

CB-HDT Holdings, Inc., Series A(h)

   

Aerospace &

Defense

 

 

        744,723       7,447,230       7,447,230  

Gordon Brothers Finance Company(h)(r)

    Finance           10,598       10,598,300       10,598,300  

 

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

 


 

18


Table of Contents

BlackRock Capital Investment Corporation

Consolidated Schedules of Investments—(Continued)

December 31, 2016

 

Portfolio Company(t)   Industry(a)   Interest Rate   Maturity  

Principal

Amount or

Number of

Shares/Units

    Cost(b)    

Fair

Value(c)

 

KAGY Holding Company, Inc. (AGY Holding Corp.)(g)

  Chemicals,

Plastics, &

Rubber

        3,131,292     $ —       $ —    

MBS Group Holdings Inc.(h)(p)

  Services:

Business

        8,500       1,000       —    

Red Apple Stores Inc.(h)(i)(j)(l)

  Retail         8,756,859       6,519,298       —    
         

 

 

   

 

 

 

Total Common Stock

            41,220,333       37,632,386  
         

 

 

   

 

 

 

Limited Partnership/Limited Liability Company Interests—11.3%

     

BCIC Senior Loan Partners, LLC(h)(k)(l)

  Finance         42,526,097       42,526,097       41,675,575  

ECI Cayman Holdings, LP(d)(i)(k)(l)

  High Tech

Industries

        3,189       2,238,811       2,842,546  

ETX Energy, LLC(d)(g)

  Energy: Oil &

Gas

        51,119       —         —    

ETX Energy Management Company, LLC(d)(g)

  Energy: Oil &

Gas

        53,815       —         —    

First Boston Construction Holdings, LLC(d)(h)(l)

  Finance         7,200,000       7,200,000       7,544,001  

Higginbotham Investment Holdings, LLC(d)

  Insurance         1,163       239,245       1,418,348  

Loar Group LLC(d)

  Aerospace &

Defense

        1,500,000       1,500,000       1,683,878  

Marsico Holdings, LLC(d)(k)

  Finance         91,445       1,848,077       5,487  

U.S. Well Services, LLC(k)(m)

  Energy: Oil &
Gas
  8.00% PIK       8,085       9,572,495       —    

V Global Holdings LLC(d)(g)(o)

  Chemicals,

Plastics, &

Rubber

        12,087,912       11,977,610       12,087,912  

Westward Dough Holdings, LLC, Class D(d)(n)

  Beverage, Food,

& Tobacco

        114,706       —         —    
         

 

 

   

 

 

 

Total Limited Partnership/Limited Liability Company Interests

 

    77,102,335       67,257,747  
         

 

 

   

 

 

 

Equity Warrants/Options—0.0%(d)

     

Bankruptcy Management Solutions, Inc., Tranche A(h)

  Services:

Business

    expire 6/27/18     28,464       375,040       117,358  

Bankruptcy Management Solutions, Inc., Tranche B(h)

  Services:

Business

    expire 6/27/19     30,654       342,295       —    

Bankruptcy Management Solutions, Inc., Tranche C(h)

  Services:

Business

    expire 6/27/20     45,981       468,803       —    

Facet Investment, Inc.

  Healthcare &

Pharmaceuticals

    expire 1/18/21     1,978       250,000       —    

 

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

 


 

19


Table of Contents

BlackRock Capital Investment Corporation

Consolidated Schedules of Investments—(Continued)

December 31, 2016

 

Portfolio Company(t)   Industry(a)     Interest Rate     Maturity    

Principal

Amount or

Number of

Shares/Units

    Cost(b)    

Fair

Value(c)

 

Marsico Parent Superholdco, LLC(k)

    Finance         expire 12/14/19       455     $ 444,450     $ —    
         

 

 

   

 

 

 

Total Equity Warrants/ Options

            1,880,588       117,358  
         

 

 

   

 

 

 

TOTAL INVESTMENTS—156.1%

 

  $ 1,021,585,227       931,123,490  
         

 

 

   

OTHER ASSETS & LIABILITIES (NET)—(56.1)%

 

      (334,803,121
           

 

 

 

NET ASSETS—100.0%

 

        $ 596,320,369  
           

 

 

 

 

(a) Unaudited.
(b) Represents amortized cost for fixed income securities and cost for preferred and common stock, limited partnership/limited liability company interests and equity warrants/options.
(c) Fair value is determined by or under the direction of the Company’s Board of Directors. See Note 2 for further details.
(d) Non-income producing equity securities at December 31, 2016.
(e) Non-accrual status at December 31, 2016 and therefore non-income producing. At December 31, 2016, the aggregate fair value and amortized cost of the Company’s debt investments on non-accrual status represents 0.7% and 5.4%, respectively.
(f) Approximately 77% of the senior secured loans in the Company’s portfolio bear interest at a floating rate that may be determined by reference to the London Interbank Offered Rate (LIBOR) or other base rate (commonly the Federal Funds Rate or the Prime Rate), at the borrower’s option. In addition, 100% of such senior secured loans have floors of 0.50% to 2.25%. The borrower under a senior secured loan generally has the option to select from interest reset periods of one, two, three or six months and may alter that selection at the end of any reset period. The stated interest rate represents the weighted average interest rate at December 31, 2016 of all contracts within the specified loan facility.
(g) Transaction and other information for “non-controlled, affiliated” investments under the Investment Company Act of 1940, whereby the Company owns 5% or more (but not more than 25%) of the portfolio company’s outstanding voting securities, is presented in a separate table in Consolidated Schedules of Investments.
(h) Transaction and other information for “controlled” investments under the Investment Company Act of 1940, whereby the Company owns more than 25% of the portfolio company’s outstanding voting securities, is presented in a separate table in Consolidated Schedules of Investments.
(i) Non-U.S. company or principal place of business outside the U.S.
(j) Original purchase denominated in Canadian dollars.
(k) Security is exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. In the aggregate, these securities represent 20.2% of the Company’s net assets at December 31, 2016.
(l) Investments that the Company has determined are not “qualifying assets” under Section 55(a) of the 1940 Act. Under the 1940 Act, we may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets. The status of these assets under the 1940 Act may be subject to change. The Company monitors the status of these assets on an ongoing basis.
(m) The Company is the sole stockholder of BKC ASW Blocker, Inc., a consolidated subsidiary, which is the beneficiary of less than 5% of the voting securities of U.S. Well Services, LLC and thus a non-controlled, non-affiliated investment.
(n) The Company is the sole stockholder of BKC ASW Blocker, Inc., a consolidated subsidiary, which is the beneficiary of less than 5% of the voting securities of Westward Dough Holdings, LLC and thus a non-controlled, non-affiliated investment.
(o) The Company is the sole stockholder of BKC ASW Blocker, Inc., a consolidated subsidiary, which is the beneficiary of 5% or more (but not more than 25%) of the voting securities of V Global Holdings LLC and thus a non-controlled, affiliated investment.
(p) The Company is the sole stockholder of BCIC-MBS, LLC, a consolidated subsidiary, which is the beneficiary of more than 25% of the voting securities of MBS Group Holdings Inc. and thus a controlled investment.

 

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

 


 

20


Table of Contents

BlackRock Capital Investment Corporation

Consolidated Schedules of Investments—(Continued)

December 31, 2016

 

(q) Interest may be paid in cash or payment-in-kind (“PIK”), or a combination thereof which is generally at the option of the borrower. PIK earned is included in the cost basis of the security. PIK represented approximately 8.6% of interest income earned for the year ended December 31, 2016. In accordance with the Company’s policy, PIK may be recorded on an effective yield basis.

 

                                  For the Year Ended December 31, 2016  
Non-controlled, Affiliated Investments  

Fair Value at

December 31,

2015

   

Gross

Additions

(Cost)*

   

Gross

Reductions

(Cost)**

   

Net

Unrealized

Appreciation
(Depreciation)

before Taxes

   

Fair Value at

December 31,

2016

   

Net

Realized

Gain (Loss)

   

Interest

Income

   

Fee

Income

   

Dividend

Income

 

Advantage Insurance Inc.

                 

Preferred Stock

  $ 8,872,757     $ 709,821     $ —       $ (1,452,578   $ 8,130,000     $ —       $ —       $ —       $ 709,821  

AGY Holding Corp.:

                 

Senior Secured Note

    21,327,250       334,527       —         (552,152     21,109,625       —         2,728,403       —         —    

Senior Secured Loan

    19,763,384       4,258,006       —         —         24,021,390       —         2,492,602       —         —    

KAGY Holding Company, Inc. (AGY Holding Corp.):

                 

Preferred Stock

    9,376,565       1,159,948       —         (4,114,457     6,422,056       —         —         —         1,159,948  

Common Stock

    —         —         —         —               —         —         —         —    

ETX Energy, LLC

                 

Limited Liability Co. Interest

    —         —         —         —         —  †      —         —         —         —    

ETX Energy Management Company, LLC

                 

Limited Liability Co. Interest

    —         —         —         —         —  †      —         —         —         —    

USI Senior Holdings, Inc.

                 

Preferred Stock

    7,823,940       —         (7,823,940     —         —  ††      —         —         —         —    

Vertellus Holdings LLC:

                 

Senior Secured Loan, First Lien

    —         22,461,298       —         —         22,461,298 †      —         386,833       —         —    

Senior Secured Loan, Second Lien

    —         15,109,890       —         —         15,109,890 †      —         338,294       —         —    
V Global Holdings LLC                  

Limited Liability Co. Interest

    —         11,977,610       —         110,302       12,087,912 †      —         —         —         —    
 

 

 

 

Totals

  $ 67,163,896     $ 56,011,100     $ (7,823,940   $ (6,008,885   $ 109,342,171     $ —       $ 5,946,132     $ —       $ 1,869,769  
 

 

 

 

 

  * Gross additions include increases in the cost basis of investments resulting from new portfolio investments, PIK interest or dividends, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.
  ** Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category.
  Investment moved into the non-controlled, affiliated category from the non-controlled, non-affiliated category.
  †† Investment moved out of the non-controlled, affiliated category into the non-controlled, non-affiliated category.

The aggregate fair value of non-controlled, affiliated investments at December 31, 2016 represents 18.3% of the Company’s net assets.

 

 

 

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

 


 

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BlackRock Capital Investment Corporation

Consolidated Schedules of Investments—(Continued)

December 31, 2016

 

  (r) This investment is deemed significant under Regulation S-X Rule 4-08(g). Gordon Brothers Finance Company commenced operations on October 31, 2014. The summarized financial information of Gordon Brothers Finance Company for the years ending December 31, 2016 and 2015 is shown below:

 

     Year ended
December 31, 2016
    Year ended
December 31, 2015
 

($ in millions)

    

Total assets

   $ 412.8     $ 270.5  

Total senior debt

   $ 248.9     $ 135.5  

Total revenue

   $ 31.4     $ 28.7  

Net change in owners’ equity resulting from operations

   $ (7.5   $ (4.8

Net change in owners’ equity resulting from operations, excluding origination costs, realized & unrealized on foreign currency, unrealized-available for sale assets & provision for loan loss

   $ (4.7   $ 0.4  

Provision for loan loss reserves

   $ 0.5     $ 0.0  

 

  Note: Balance sheet amounts are as of period end

 

  (s) All-in rate includes 2.00% default interest
  (t) Unless otherwise indicated, all investments are considered Level 3 in accordance with ASC Topic 820 (See Note 10).

 

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

 


 

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BlackRock Capital Investment Corporation

Consolidated Schedules of Investments—(Continued)

December 31, 2016

 

                                  For the Year Ended December 31, 2016  
Controlled Investments  

Fair Value at

December 31,

2015

   

Gross

Additions

(Cost)*

   

Gross

Reductions

(Cost)**

   

Net

Unrealized

Appreciation
(Depreciation)

before Taxes

   

Fair Value at

December 31,

2016

   

Net

Realized

Gain (Loss)

   

Interest

Income

   

Fee

Income

   

Dividend

Income

 

Bankruptcy Management Solutions, Inc.:

                 

Senior Secured Loan, First Lien, A

  $ 1,168,176     $ 16,028     $ (455,331   $ 7,812     $ 736,685     $ —       $ 55,254     $ 100,000     $ —    

Senior Secured Loan, First Lien, B

    10,289,082       450,000       (289,018     821,683       11,271,747       —         1,264,867       —         —    

Common Stock

    32,087,254       —         —         (12,500,398     19,586,856       —         —         —         —    

Warrants

    2,474,818       —         —         (2,357,460     117,358       —         —         —         —    

BCIC Senior Loan Partners, LLC

                 

Limited Liability Co. Interest

    —         42,526,097       —         (850,522     41,675,575       —         —         —         83,230  

CB-HDT Holdings, Inc.:

                 

Unsecured Debt

    —         4,477,360       —         —         4,477,360       —         24,885       —         —    

Preferred Stock

    —         15,000,000       —         —         15,000,000 ††      —         —         —         —    

Common Stock

    —         7,500,000       (52,770     —         7,447,230 ††      (52,770     —         —         —    

First Boston Construction Holdings, LLC:

                 

Subordinated Debt

    17,500,000       11,300,000       —         —         28,800,000       —         2,920,400       —         —    

Limited Liability Co. Interest

    4,375,000       2,825,000       —         344,001       7,544,001       —         —         —         291,667  

Gordon Brothers Finance Company:

                 

Unsecured Debt

    64,739,544       34,690,877       (12,000,739     —         87,429,682       —         9,577,284       162,372       —    

Preferred Stock

    17,460,098       3,037,037       —         —         20,497,135       —         —         —         2,569,439  

Common Stock

    10,598,300       —         —         —         10,598,300       —         —         —         —    

MBS Group Holdings Inc.:

                 

Senior Secured Loan

    40,000,000       —         —         —         40,000,000       —         3,660,000       —         —    

Common Stock

    3,933,465       —         —         (3,933,465     —         —         —         —         —    

Red Apple Stores Inc.:

                 

Senior Secured Loan

    18,440,000       —         —         (4,149,000     14,291,000       —         2,292,112       —         —    

Preferred Stock

    —         621,649       (1,479,254     857,605       —  †      (1,479,254     —         —         621,648  

Preferred Stock

    —         —         —         —         —         —         —         —         —    

Common Stock

    —         443,097       (235,122     (207,975     —         —         —         —         —    
 

 

 

 

Totals

  $ 223,065,737     $ 122,887,145     $ (14,512,234   $ (21,967,719   $ 309,472,929     $ (1,532,024   $ 19,794,802     $ 262,372     $ 3,565,984  
 

 

 

 

 

 

  * Gross additions include increases in the cost basis of investments resulting from new portfolio investments, PIK interest or dividends, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.
  ** Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category.
  Investment no longer held as of December 31, 2016.
  †† Investment moved into the controlled category from the non-controlled, non-affiliated category.

The aggregate fair value of controlled investments at December 31, 2016 represents 51.9% of the Company’s net assets.

 

 

 

 

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

 


 

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BlackRock Capital Investment Corporation

Notes to Consolidated Financial Statements (Unaudited)

1. Organization

BlackRock Capital Investment Corporation (together with its subsidiaries, the “Company”), was organized as a Delaware corporation on April 13, 2005 and was initially funded on July 25, 2005. The Company has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). In addition, for tax purposes the Company has qualified and has elected to be treated as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986 (the “Code”).

The Company’s investment objective is to generate both current income and capital appreciation through debt and equity investments. The Company invests primarily in middle-market companies in the form of senior and junior secured and unsecured debt securities and loans, each of which may include an equity component, and by making direct preferred, common and other equity investments in such companies.

2. Significant accounting policies

Unaudited Interim Consolidated Financial Statements

The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company is an investment company following the accounting and reporting guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 946, Financial Services-Investment Company (“ASC 946”).

Certain financial information that is normally included in annual financial statements, including certain financial statement footnotes, prepared in accordance with GAAP, is not required for interim reporting purposes and has been condensed or omitted herein. These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes related thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, which was filed with the Securities and Exchange Commission (“SEC”) on March 8, 2017.

The interim financial information at September 30, 2017 and for the three and nine months ended September 30, 2017 and 2016 is unaudited. However, in the opinion of management, the interim information includes all normal recurring adjustments necessary for the fair presentation of the Company’s results for the periods presented. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year.

Basis of Presentation

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

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, which were established to hold certain investments of the Company. The Company owns 100% of each subsidiary and, as such, the subsidiaries are consolidated into the Company’s consolidated financial statements. The subsidiaries hold investments which are treated as pass through entities for tax purposes. By investing through these 100% owned subsidiaries, the Company is able to benefit from corporate tax treatment for these entities and thereby create a tax structure that is more advantageous with respect to the RIC status of the Company. Transactions between the Company and subsidiaries, to the extent they occur, are eliminated in consolidation.

 

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Certain prior period information has been reclassified to conform to the current period presentation. The reclassification has no effect on the Company’s consolidated financial position or the consolidated results of operations as previously reported.

Expenses are recorded on an accrual basis.

Investments

Security transactions are accounted for on the trade date unless there are substantial conditions to the purchase. Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the amortized cost of the investment. Unrealized gains or losses primarily reflect the change in investment values, including the reversal of previously recorded unrealized gains or losses when gains or losses are realized. Realized gains or losses on the disposition of investments are calculated using the specific identification method.

Investments for which market quotations are readily available are valued at such market quotations unless they are deemed not to represent fair value. The Company obtains market quotations, when available, from an independent pricing service or one or more broker-dealers or market makers and utilizes the average of the range of bid and ask quotations. Debt and equity securities for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued at fair value as determined in good faith by or under the direction of the Company’s Board of Directors.

Because the Company expects that there will not be a readily available market for substantially all of the investments in its portfolio, the Company expects to value substantially all of its portfolio investments at fair value as determined in good faith by or under the direction of the Board of Directors using a consistently applied valuation process in accordance with a documented valuation policy that has been reviewed and approved by the Board of Directors. Due to the inherent uncertainty and subjectivity of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may differ significantly from the values that would have been used had a readily available market value existed for such investments and may differ materially from the values that the Company may ultimately realize.

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

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

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

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

(iii) The Audit Committee of the Board of Directors reviews the preliminary valuations prepared by the independent valuation firms; and

 

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(iv) The Board of Directors discusses valuations and determines the fair value of each investment in the portfolio in good faith based on the input of the Advisor, the respective independent valuation firms and the Audit Committee.

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

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

ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”), issued by the FASB, defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. See Note 10 for further details.

Cash and Cash Equivalents

Cash equivalents include short-term liquid overnight investments with original maturities of three months or less and may not be insured by the FDIC or may exceed federally insured limits.

Revenue recognition

Interest income is recorded on an accrual basis and includes amortization of discounts and accretion of premiums. Discounts and premiums to par value on securities purchased are amortized/accreted into interest income over the life of the respective security. Discounts and premiums are determined based on the cash flows expected to be received for a particular investment upon maturity.

Dividend income is recorded on the ex-dividend date and is adjusted to the extent that the Company expects to collect such amounts. For loans and securities with PIK income, which represents contractual interest or dividends accrued and added to the principal balance and generally due at maturity, such income is accrued only to the extent that the Advisor believes that the PIK income is likely to be collected. To maintain the Company’s status as a RIC, this non-cash source of income must be paid out to stockholders in the form of distributions, even though the Company has not yet collected the cash.

Fee income, such as structuring fees, origination, closing, commitment and other upfront fees are generally non-recurring and are recognized as revenue when earned. In instances where the Company does not perform significant services in connection with the related investment, fees paid to the Company may be deferred and amortized over the estimated life of the investment. Upon the prepayment of a loan or debt security, any prepayment penalties and unamortized loan origination, structuring, closing, commitment and other upfront fees are recorded as income.

 

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U.S. Federal income taxes

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

In order to qualify for favorable tax treatment as a RIC, the Company is required to distribute annually to its stockholders at least 90% of its investment company taxable income, as defined by the Code. To avoid federal excise taxes, we must distribute annually at least 98% of our ordinary income and 98.2% of net capital gains from the current year and any undistributed ordinary income and net capital gains from the preceding years. The Company, at its discretion, may carry forward taxable income in excess of calendar year distributions and pay regular federal income taxes or a 4% excise tax on this income. If the Company chooses to do so, all other things being equal, this would increase expenses and reduce the amount available to be distributed to stockholders. The Company will accrue excise tax on estimated undistributed taxable income as required.

Distributions from net investment income and distributions from net realized capital gains are determined in accordance with U.S. federal income tax regulations, which may differ from those amounts determined in accordance with GAAP. These book/tax differences are either temporary or permanent in nature. To the extent these differences are permanent, they are charged or credited to paid-in-capital or accumulated net realized gain (loss), as appropriate, in the period that the differences arise. Temporary and permanent differences are primarily attributable to differences in the tax treatment of certain loans and the tax characterization of income and non-deductible expenses. These differences are generally determined in conjunction with the preparation of the Company’s annual RIC tax return.

Book and tax basis differences relating to stockholder distributions and other permanent book and tax differences are reclassified among the Company’s capital accounts. In addition, the character of income and gains to be distributed is determined in accordance with income tax regulations that may differ from GAAP.

The final tax characterization of distributions is determined after the fiscal year and is reported on Form 1099 and in the Company’s annual report to shareholders. Distributions can be characterized as ordinary income, capital gains and/or return of capital. To the extent that distributions exceed the Company’s current and accumulated earnings and profits, the excess may be treated as a non-taxable return of capital. Distributions that exceed a Company’s taxable income but do not exceed the Company’s current and accumulated earnings and profits, may be classified as ordinary income which is taxable to shareholders.

ASC 740-10, Income Taxes (“ASC 740-10”) clarifies the accounting for income taxes by prescribing the minimum recognition threshold an uncertain tax position is required to meet before tax benefits associated with such uncertain tax position are recognized in the consolidated financial statements. Based on its analysis of its tax position, the Company has concluded that it does not have any uncertain tax positions that met the recognition or measurement criteria of ASC 740-10.

The Company files U.S. federal and various state and local tax returns. No income tax returns are currently under examination. The statute of limitations on the Company’s U.S. federal income tax returns remains open for each of the four years ended December 31, 2016. The statute of limitations on the Company’s state and local tax returns may remain open for an additional year depending upon the jurisdiction.

At December 31, 2016, the Company had a net capital loss carryforward of $123,978,507, which can be used to offset future capital gains. If not utilized against future gains, $32,937,589 of this amount is due to expire on December 31, 2018.

The Company holds certain portfolio investments through taxable subsidiaries as pass through entities. Income earned and gains realized on the investment held by the taxable subsidiary are taxable to such subsidiary. A tax provision for income, if any, is shown as income tax in the Consolidated Statements of Operations for the

 

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Company. A tax provision for realized and unrealized gains is included as a reduction of realized and/or unrealized gain (loss) in the Consolidated Statement of Operations for the Company. For the three and nine months ended September 30, 2017, unrealized gains in a consolidated taxable subsidiary resulted in a deferred tax liability of $5,257,916.

Distributions to Common Stockholders

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

The Company has adopted a dividend reinvestment plan that provides for reinvestment of distributions on behalf of stockholders, unless a stockholder elects to receive cash. As a result, if the Board of Directors authorizes, and the Company declares, a cash distribution, then stockholders who have not “opted out” of the dividend reinvestment plan will have their cash dividends automatically reinvested in additional shares of Common Stock, rather than receiving the cash distributions.

Foreign Currency

Foreign currency amounts are translated into United States dollars on the following basis:

 

  (i) market value of investment securities, other assets and liabilities—at the spot exchange rate on the last business day of the period; and

 

  (ii) purchases and sales of investment securities, income and expenses—at the rates of exchange prevailing on the respective dates of such transactions, income or expenses.

Although net assets and fair values are presented based on the applicable foreign exchange rates described above, the Company does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in fair values of investments held. Such fluctuations are included with the net realized and unrealized gain or loss from investments.

Investments denominated in foreign currencies and foreign currency transactions may involve certain considerations and risks not typically associated with those of domestic origin, including unanticipated movements in the value of the foreign currency relative to the U.S. dollar.

Debt Issuance Costs

Debt issuance costs are amortized over the term of the related debt using the straight line method, which approximates the effective interest rate method.

Equity Offering Expenses

The Company records registration expenses related to its shelf registration statement and related SEC filings as prepaid assets. These expenses are charged as a reduction of capital upon utilization, in accordance with ASC 946.

Non-Accrual Loans

Loans or debt securities are placed on non-accrual status, as a general matter, when principal or interest payments are past due 30 days or more or when there is reasonable doubt that principal or interest will be collected. Accrued interest generally is reversed when a loan or debt security is placed on non-accrual status. Interest payments received on non-accrual loans or debt securities may be recognized as income or applied to principal depending upon management’s judgment. Non-accrual loans and debt securities are restored to accrual

 

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status when past due principal and interest is paid and, in management’s judgment, are likely to remain current. The Company may make exceptions to this treatment if the loan has sufficient collateral value and is in the process of collection.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. ASU 2014-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is currently evaluating the effect on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which amends and clarifies the current guidance to reduce diversity in practice of the classification of certain cash receipts and payments in the statement of cash flows. The Company is currently evaluating the impact of adopting ASU 2016-15, which is effective for the Company on January 1, 2018 with early adoption permitted. The Company must apply the guidance retrospectively to all periods presented. The Company is currently evaluating the effect on its consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (“ASU 2017-08”). The amendments in this update require premiums on purchased callable debt securities to be amortized to the security’s earliest call date. Prior to this ASU, premiums and discounts on purchased callable debt securities were generally required to be amortized to the security’s maturity date. The amendments do not require an accounting change for securities held at a discount. The amendments are effective on January 1, 2019, with early adoption permitted. The amendments must be applied using a modified retrospective approach with a cumulative-effect adjustment through retained earnings as of the beginning of the fiscal year upon adoption. The Company is currently evaluating the effect on its consolidated financial statements, however, the Company does not expect ASU 2017-08 to have a material impact on the consolidated financial statements.

3. Agreements and related party transactions

Investment management agreement

At a Special Meeting of the Company’s Stockholders, held on February 18, 2015, the Company’s stockholders approved a new investment management agreement (“Management Agreement”) between the Company and the Advisor to permit the Advisor to serve as the Company’s investment advisor following the completion of the sale of certain assets related to managing the Company from the Company’s previous investment advisor, 52nd Street Capital Advisors LLC, formerly BlackRock Kelso Capital Advisors LLC (the “Previous Advisor,” “BKCA” or “52nd Street”), to the Advisor (the “Transaction”). The Transaction was completed on March 6, 2015 and, pursuant to the new investment management agreement, dated as of March 6, 2015, the Company’s investment activities are currently managed by the Advisor. Prior to the consummation of the Transaction, the Company had entered into an investment management agreement with the Company’s Previous Advisor, which is referred to as the “Previous Agreement”. The Company’s current Management Agreement had the same management and incentive fee terms as the Previous Agreement until March 6, 2017 and thereafter has different management and incentive fees terms.

Base Management Fee

Under the Management Agreement, the Advisor, subject to the overall supervision of the Board of Directors, manages the day-to-day operations and provides the Company with investment advisory

 

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services. For providing these services, the Advisor received, until March 6, 2017, a base management fee at an annual rate of 2.0% of total assets, including any assets acquired with the proceeds of leverage, payable quarterly in arrears. After March 6, 2017, the Advisor receives a base management fee at an annual rate of 1.75% of total assets (excluding cash), including any assets acquired with the proceeds of leverage, payable quarterly in arrears based on the asset valuation as of the end of the prior quarter, and prorated for any period of less than a quarter.

The investment management agreement became effective on March 6, 2015. Unless earlier terminated, the investment management agreement was in effect for a period of two years from the date it first became effective and will remain in effect from year-to-year thereafter if approved annually by the Board of Directors or by the affirmative vote of the holders of a majority of outstanding voting securities, including, in either case, approval by a majority of the directors who are not interested persons. The Company’s Board of Directors approved the continuation of investment management agreement in November 2016.

For the three and nine months ended September 30, 2017, the Advisor earned $3,993,673 and $12,656,877, respectively, in base management fees under the investment management agreement. For the three and nine months ended September 30, 2016, the Advisor earned $5,188,115 and $16,600,294, respectively, in base management fees under the investment management agreement.

Incentive Management Fee Until March 6, 2017

The current investment management agreement provides that the Advisor or its affiliates may be entitled to an incentive management fee (the “Incentive Fee”) as described below under certain circumstances until March 6, 2017. The Incentive Fee was calculated in the same manner as the Incentive Fee in the previous investment management agreement. The determination of the Incentive Fee, as described in more detail below, will result in the Advisor or its affiliates receiving no Incentive Fee payments if returns to stockholders do not meet an 8.0% annualized rate of return during the applicable fee measurement period, and will result in the Advisor or its affiliates receiving less than the full amount of the Incentive Fee percentage until returns to stockholders exceed an approximate 13.3% annualized rate of return during such period. Annualized rate of return in this context is computed by reference to net asset value and does not take into account changes in the market price of the common stock.

The Advisor will be entitled to receive the Incentive Fee if the performance exceeds a “hurdle rate” during different measurement periods: trailing four quarters’ periods (which apply only to the portion of the Incentive Fee based on income) and annual periods (which apply only to the portion of the Incentive Fee based on capital gains). The “trailing four quarters’ periods” for purposes of determining the income portion of the Incentive Fee payable for the three months ended September 30, 2017 and 2016 was determined by reference to the four quarter periods ended on September 30, 2017 and 2016, respectively, however, the periods utilized different incentive management fee calculations, both of which are described in more detail below. The term “annual period” means the period beginning on July 1 of each calendar year and ending on June 30 of the next calendar year.

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

Quarterly Incentive Fee Based on Income Until March 6, 2017

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

 

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It should be noted that net realized capital gains / losses during the period are calculated as the proceeds received upon disposition less the fair market value as of the beginning of the measurement period. Since this calculation is not cumulative, but rather performed on a trailing four quarters period, fluctuations in fair market values are captured in net unrealized appreciation and depreciation of prior measurement periods.

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

For the period from January 1, 2017 through March 6, 2017, the Advisor did not earn Incentive Fees based on income from the Company.

Annual Incentive Fee Based on Capital Gains Until March 6, 2017

The portion of the Incentive Fee based on capital gains is calculated and paid on an annual basis beginning on July 1 of each annual period and ending on June 30 of the next calendar year. The portion of Incentive Fee based on capital gains is calculated in the same manner as such portion of the Incentive Fee in the prior investment management agreement. For each annual period, the Company pays the Advisor an Incentive Fee on capital gains based on the amount by which (A) net realized capital gains, if any, exceeds gross unrealized capital depreciation, if any, occurring during the period in excess of (B) the amount, if any, by which the period’s hurdle rate exceeds the amount of income used in the determination of the Incentive Fee based on income for the period. The amount of the excess of (A) over (B) described in this paragraph is referred to as the excess gain amount.

It should be noted that net realized capital gains during the period are calculated as the proceeds received upon disposition in excess of the lower of each security’s amortized cost or the fair market value as of the beginning of the measurement period. Since this calculation is not cumulative, but rather performed on an annual period commencing each July 1, any unrealized depreciation on a security, if any, will be captured in the gross unrealized depreciation of a prior period.

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

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

The Company is required under GAAP to accrue a hypothetical capital gains Incentive Fee based upon net realized capital gains and unrealized capital appreciation and depreciation on investments held at the end of each period. The accrual of this hypothetical capital gains incentive fee assumes all unrealized capital appreciation and

 

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depreciation is realized in order to reflect a hypothetical capital gains Incentive Fee that would be payable at each measurement date. If such amount is positive at the end of the period, then we record a capital gains incentive fee equal to 20% of such amount, less the amount of capital gains related Incentive Fees already accrued in prior periods. If the resulting amount is negative, the accrual for GAAP in a given period may result in the reduction of an expense. There can be no assurance that such unrealized capital appreciation will be realized in the future. However, it should be noted that a fee so calculated and accrued would not be payable under the Advisers Act or the investment management agreement. Amounts actually paid will be consistent with the Advisers Act which specifically excludes consideration of unrealized capital appreciation.

The capital gains Incentive Fee due to the Advisor as calculated under the investment management agreement as described above, for the annual period ended June 30, 2017 and 2016 was zero. In accordance with GAAP, the hypothetical liquidation for the three months ended September 30, 2016, resulted in no capital gains incentive fee accrual. The total cumulative accrued balances at September 30, 2017 and 2016 were zero.

Quarterly Incentive Fee Based on Income After March 6, 2017

After March 6, 2017, the investment management agreement provides that the Advisor or its affiliates may be entitled to an incentive management fee under certain circumstances. The Incentive Fee has two parts. The first portion is based on income other than capital gains and is calculated separately for each calendar quarter and will be paid on a quarterly basis. The Company will pay the Advisor the portion of the Incentive Fee based on income for each period as follows:

 

  (i) No Incentive Fee based on income other than capital gains for any calendar quarter in which the Pre-Incentive Fee Net Investment Income does not exceed 1.75% (7.00% annualized) of net assets attributable to common stock at the beginning of such quarter.

 

  (ii) 100% of the Pre-Incentive Fee Net Investment Income in any calendar quarter with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, for such calendar quarter, that exceeds 1.75% (7.00% annualized) of net assets attributable to common stock at the beginning of such quarter but is less than 2.1875% (8.75% annualized).

 

  (iii) 20% of the Pre-Incentive Fee Net Investment Income, if any, for any calendar quarter that exceeds 2.1875% (8.75% annualized) of net assets attributable to common stock at the beginning of such quarter.

The calculations described above will be appropriately prorated for any period of less than a quarter and adjusted for the net proceeds from any common stock issuances and the cost of any common stock repurchases during such quarter.

The payment of any such Incentive Fee based on income otherwise earned by the Advisor will be deferred if, for the most recent four full calendar quarter period ending on or prior to the date such payment is to be made, the Annualized Rate of Return is less than 7.0% of net assets attributable to common stock at the beginning of such four quarter period as adjusted for the net proceeds from any common stock issuances and the cost of any common stock repurchases during such four full calendar quarter period, with any deferred Incentive Fees to be carried over for payment in subsequent quarterly calculation periods to the extent such payment can then be made in accordance with the investment management agreement.

For the three months ended September 30, 2017, the Advisor earned $1,493,619 in Incentive Fees based on income from the Company. For the period after March 6, 2017 to September 30, 2017, the Advisor earned $5,076,662 in Incentive Fees based on income from the Company.

On March 7, 2017, the Advisor, in consultation with the Company’s Board of Directors, agreed to waive incentive fees based on income after March 6, 2017 to December 31, 2018 or

 

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approximately 21 months. The start date of the fee waiver coincides with the change to the fee calculation mentioned above. The waivers for incentive fees based on income for the three months ended September 30, 2017 and the period after March 6, 2017 to September 30, 2017 are also $1,493,619 and $5,076,662, respectively, resulting in no net Incentive Fees based on income earned by the Company.

Annual Incentive Fee Based on Capital Gains After March 6, 2017

The second portion of the Incentive Fee is based on capital gains and is calculated separately for each Annual Period. The Advisor will be entitled to receive an Incentive Fee based on capital gains for each Annual Period in an amount equal to 20% of the amount by which (1) net realized capital gains occurring during the period, if any, exceeds (2) gross unrealized capital depreciation, if any, occurring during the period. In calculating the portion of the Incentive Fee based on capital gains payable for any period, investments are accounted for on a security-by-security basis. In addition, the portion of the Incentive Fee based on capital gains is determined using the “period-to-period” method pursuant to which the portion of the Incentive Fee based on capital gains for any period will be based on realized capital gains for the period reduced by realized capital losses for the period and unrealized capital depreciation for the period.

For purposes of calculating the Incentive Fee, (i) “Annual Period” means the period beginning on July 1 of each calendar year, including the calendar year prior to the year in which the investment management agreement became effective, and ending on June 30 of the next calendar year; (ii) “Annualized Rate of Return” is computed by reference to the sum of (i) the aggregate distributions to common stockholders for the period in question and (ii) the change in net assets attributable to common stock (before taking into account any Incentive Fees otherwise payable during such period); (iii) “net assets attributable to common stock” means total assets less indebtedness and preferred stock; and (iv) “Pre-Incentive Fee Net Investment Income” means net investment income (as determined in accordance with United States generally accepted accounting principles) accrued by the Company during the calendar quarter excluding any accruals for or payments in respect of the Incentive Fee.

The capital gains Incentive Fee due to the Advisor as calculated under the investment management agreement as described above, at September 30, 2017, resulted in no capital gains incentive fee accrual. The total cumulative accrued balance at September 30, 2017 was zero.

Advisor Reimbursements

The investment management agreement provides that the Company will reimburse the Advisor for costs and expenses incurred by the Advisor for administrative or operating services, office space rental, office equipment and utilities allocable to the Advisor under the investment management agreement, as well as any costs and expenses incurred by the Advisor relating to any non-investment advisory, administrative or operating services provided by the Advisor to the Company. For the three and nine months ended September 30, 2017, the Company incurred $87,504 and $262,505, respectively, for such investment advisor expenses under the Management Agreement. For the three and nine months ended September 30, 2016, the Company incurred $87,500 and $262,500, respectively, for such investment advisor expenses under the Management Agreement.

From time to time, the Advisor may pay amounts owed by the Company to third party providers of goods or services. The Company will subsequently reimburse the Advisor for such amounts paid on its behalf. Reimbursements to the Advisor for such purposes during the three and nine months ended September 30, 2017 were zero and zero, respectively. Reimbursements to the Advisor for such purposes during the three and nine months ended September 30, 2016 were zero and $5,921 respectively.

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

 

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Administration

The Company also has entered into an administration agreement with BlackRock Financial Management, Inc. (the “Administrator”) under which the Administrator provides certain administrative services to the Company. For providing these services, facilities and personnel, the Company reimburses the Administrator for the Company’s allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the administration agreement, including rent and the Company’s allocable portion of the cost of certain of the Company’s officers and their respective staffs. For the three and nine months ended September 30, 2017, the Company incurred $292,767 and $924,226, respectively, for administrative services expenses payable to the Administrator under the administration agreement. For the three and nine months ended September 30, 2016, the Company incurred $281,099 and $1,037,039, respectively, for administrative services expenses payable to the Administrator under the administration agreement.

Advisor Stock Transactions

Effective upon completion of the Transaction, BlackRock Advisors, LLC assumed the role as investment advisor to the Company. BlackRock Advisors, LLC does not own any shares of the Company at September 30, 2017 and December 31, 2016.

At September 30, 2017 and December 31, 2016, other entities affiliated with the Administrator and Advisor beneficially owned approximately 423,876 and 490,000 shares, respectively, of the Company’s common stock, representing approximately 0.6% and 0.7%, respectively, of the total shares outstanding.

4. Earnings (Loss) per share

The following information sets forth the computation of basic and diluted net increase (decrease) in net assets from operations per share (earnings (loss) per share) for the three and nine months ended September 30, 2017 and 2016.

 

     Three months
ended
September 30,
2017
    Three months
ended
September 30,
2016
    Nine months
ended
September 30,
2017
     Nine months
ended
September 30,
2016
 

Earnings (Loss) per share – basic:

         

Net increase (decrease) in net assets resulting from operations

   $ (13,751,226   $ (39,073,181   $ 17,554,432      $ (86,802,037

Weighted-average shares outstanding – basic

     73,049,648       72,554,128       72,928,772        72,786,313  

Earnings (Loss) per share – basic:

   $ (0.19   $ (0.54   $ 0.24      $ (1.19

Earnings (Loss) per share – diluted:

         

Net increase (decrease) in net assets resulting from operations, before adjustments

   $ (13,751,226   $ (39,073,181   $ 17,554,432      $ (86,802,037

Adjustments for interest on unsecured convertible senior notes

     —         —         —          —    
  

 

 

   

 

 

   

 

 

    

 

 

 

Net increase (decrease) in net assets resulting from operations, as adjusted

   $ (13,751,226   $ (39,073,181   $ 17,554,432      $ (86,802,037

Weighted-average shares outstanding – diluted(1)

     73,049,648       72,554,128       72,928,772        72,786,313  

Earnings (Loss) per share – diluted:

   $ (0.19   $ (0.54   $ 0.24      $ (1.19

 

(1) Due to a net decrease in net assets from operations for three months ended September 30, 2017 and the 2016 periods, no incremental shares were included because the effect would be antidilutive. Additionally, no incremental shares were included for nine months ended September 30, 2017, as the effect of convertible debt would be antidilutive (namely, the interest per common shares obtainable on conversion exceeds basic EPS).

 

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5. Investments

Purchases of investments, including PIK, for the three and nine months ended September 30, 2017 totaled $34,906,667 and $179,984,600, respectively. Purchases of investments, including PIK, for the three and nine months ended September 30, 2016 totaled $43,762,727 and $217,589,147, respectively. Proceeds from sales, repayments and other exits of investments for the three and nine months ended September 30, 2017 totaled $75,720,494 and $262,067,895, respectively. Proceeds from sales, repayments and other exits of investments for the three and nine months ended September 30, 2016 totaled $73,604,579 and $267,906,627, respectively.

At September 30, 2017, investments consisted of the following:

 

     Cost      Fair Value  
  

 

 

 

Senior secured notes

       $ 63,628,346      $ 61,334,994  

Unsecured debt

     149,036,628        106,417,207  

Subordinated debt

     29,600,000        29,600,000  

Senior secured loans:

     

First lien

     268,725,073        250,485,373  

Second/other priority lien

     191,384,187        184,603,250  
  

 

 

 

Total senior secured loans

     460,109,260        435,088,623  
  

 

 

 

Preferred stock

     55,250,066        59,649,805  

Common stock

     25,052,621        17,827,902  

Limited partnership/limited liability company interests

     106,302,280        123,936,218  

Equity warrants/options

     694,450        —    
  

 

 

 

Total investments

       $ 889,673,651      $ 833,854,749  
  

 

 

 

At December 31, 2016, investments consisted of the following:

 

     Cost      Fair Value  
  

 

 

 

Senior secured notes

       $ 76,916,677      $ 63,609,625  

Unsecured debt

     147,170,031        127,317,932  

Subordinated debt

     28,800,000        28,800,000  

Senior secured loans:

     

First lien

     295,899,093        289,982,154  

Second/other priority lien

     294,051,311        258,533,161  
  

 

 

 

Total senior secured loans

     589,950,404        548,515,315  
  

 

 

 

Preferred stock

     58,544,859        57,873,127  

Common stock

     41,220,333        37,632,386  

Limited partnership/limited liability company interests

     77,102,335        67,257,747  

Equity warrants/options

     1,880,588        117,358  
  

 

 

 

Total investments

       $ 1,021,585,227      $ 931,123,490  
  

 

 

 

 

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Industry Composition

The industry composition of the portfolio at fair value at September 30, 2017 and December 31, 2016 was as follows:

 

Industry    September 30, 2017     December 31, 2016  

Finance

     26.3     21.1

Chemicals, Plastics, & Rubber

     14.7       12.3  

Energy: Oil & Gas

     8.5       4.7  

Services: Business

     8.2       11.4  

Environmental Industries

     6.7       6.0  

Insurance

     5.9       5.1  

Retail

     5.4       4.8  

Aerospace & Defense

     5.3       4.7  

Healthcare & Pharmaceuticals

     4.8       6.9  

Services: Consumer

     3.8       3.4  

Metals & Mining

     3.1       2.8  

Construction & Building

     2.4       3.0  

Containers, Packaging, & Glass

     2.4       2.1  

Consumer Goods: Durable

     1.8       7.4  

High Tech Industries

     0.4       0.3  

Capital Equipment

     0.3       0.5  

Media: Advertising, Printing & Publishing

     —         3.5  
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

The geographic composition of the portfolio at fair value at September 30, 2017 was United States 95.9%, Canada 1.9%, Bermuda 1.8% and the Cayman Islands 0.4%, and at December 31, 2016 was United States 94.4%, Bermuda 3.8%, Canada 1.5% and the Cayman Islands 0.3%. The geographic composition is determined by several factors including the location of the corporate headquarters of the portfolio company.

Market and Credit Risk

In the normal course of business, the Company invests in securities and enters into transactions where risks exist due to fluctuations in the market (market risk) or failure of the issuer of a security to meet all its obligations (issuer credit risk). The value of securities held by the Company may decline in response to certain events, including those directly involving the issuers whose securities are owned by the Company; conditions affecting the general economy; overall market changes; local, regional or global political, social or economic instability; and currency and interest rate and price fluctuations. Similar to issuer credit risk, the Company may be exposed to counterparty credit risk, or the risk that an entity with which the Company has unsettled or open transactions may fail to or be unable to perform on its commitments. The Company manages counterparty risk by entering into transactions only with counterparties that they believe have the financial resources to honor their obligations and by monitoring the financial stability of those counterparties. Financial assets, which potentially expose the Company to market, issuer and counterparty credit risks, consist principally of investments in portfolio companies. The extent of the Company’s exposure to market, issuer and counterparty credit risks with respect to these financial assets is generally approximated by their value recorded in the consolidated statements of assets and liabilities. The Company is also exposed to credit risk related to maintaining all of its cash at a major financial institution.

 

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

BCIC Senior Loan Partners, LLC

On June 23, 2016, the Company and Windward Investments LLC (“Windward”) entered into an agreement to create BCIC Senior Loan Partners, LLC (“Senior Loan Partners”), a joint venture. Senior Loan Partners is structured as an unconsolidated Delaware limited liability company, and makes loans to and other investments in portfolio companies. All portfolio and other material decisions regarding Senior Loan Partners must be submitted to its board of directors, which is comprised of four members, two of whom were selected by the Company and two of whom were selected by Windward, and must be approved by at least one member appointed by the Company and one appointed by Windward. In addition, certain matters may be approved by Senior Loan Partners’ investment committee, which is comprised of one member appointed by the Company and one member appointed by Windward.

The Company does not consolidate its non-controlling interests in Senior Loan Partners because the entity is not considered a substantially wholly owned investment company subsidiary, as provided under ASC 946. Senior Loan Partners is a joint venture for which shared power exists relating to the decisions that most significantly impact the economic performance of the entity.

The Company and Windward have committed to provide an aggregate of $100.0 million of equity to Senior Loan Partners, with the Company providing $85.0 million and Windward providing $15.0 million. As of September 30, 2017, Senior Loan Partners had called and received $77.3 million of combined equity capital, of which the Company funded $65.7 million and Windward funded $11.6 million. As of September 30, 2017, Senior Loan Partners had received zero and $2.6 million of contributions in advance from the Company and Windward, respectively, which is recorded as a liability in Senior Loan Partners’ Consolidated Statements of Assets and Liabilities, as shown in the selected balance sheet information below. As a result, remaining commitments from the Company and Windward as of September 30, 2017 were $19.3 million and $0.8 million, respectively. Capital contributions have been used to make investments and to fund certain start-up expenses and ongoing administrative expenses of Senior Loan Partners.

On June 24, 2016, Senior Loan Partners as Seller and Collateral Manager, and BCIC Senior Loan Funding, LLC (“Senior Loan Funding”), a newly formed Delaware limited liability company consolidated by Senior Loan Partners, as Borrower, entered into a $200.0 million Loan and Security Agreement (the “LSA” or the “Senior Facility”) with Citibank, N.A. (“Citi”) acting as Administrative Agent and The Bank of New York Mellon Trust Company (“BoNY”) as Collateral Agent. The Senior Facility is scheduled to mature on June 24, 2021. Senior Loan Partners and Senior Loan Funding, as applicable, have made certain customary representations and warranties, and are required to comply with various covenants, including collateral maintenance, reporting requirements, usual and customary events of default and other customary requirements for similar facilities. Senior Loan Partners and Senior Loan Funding were not in default with any covenants or requirements thereunder as of September 30, 2017.

As of September 30, 2017, $122.4 million was drawn on the Senior Facility, and subject to compliance with applicable covenants and borrowing base limitations, the remaining amount available was $77.6 million. The average outstanding debt balance during the three and nine months ended September 30, 2017 was $113.2 million and $70.9 million, respectively. The maximum amount borrowed during the three and nine months ended September 30, 2017 was $122.4 million and $122.4 million, respectively. During the three and nine months ended September 30, 2017, $1.3 million and $2.8 million, respectively, of interest expense and other debt related expenses were incurred under the Senior Facility.

 

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As of September 30, 2017, Senior Loan Partners had total investments at fair value of $195.9 million, comprised of senior secured first lien loans, delayed draw term loans and revolving loans to a total of 19 borrowers. As of September 30, 2017, none of these loans were on non-accrual status. Proceeds from investment sales, prepayments or exits for the three and nine months ended September 30, 2017 were $21.0 million and $22.3 million, respectively. Additionally, Senior Loan Partners had unfunded commitments to four borrowers totaling $12.8 million. The aggregate fair value of the unfunded commitments at September 30, 2017 was $12.6 million. The weighted average yield of the portfolio at its current cost basis as of September 30, 2017 was 6.41%. Below is a summary of Senior Loan Partners’ portfolio as of September 30, 2017:

 

Portfolio Company    Industry   

Interest

Rate(1)

   Maturity   

Principal

Amount

     Cost     

Fair

Value(2)

 

Senior Secured Term & Delayed Draw Loans

           

Accruent, LLC, First Lien

   High Tech
Industries
   5.75% (L +
475,1.00%
Floor)
   7/28/23    $ 5,742,080      $ 5,713,790      $ 5,713,790  

Accruent, LLC, Delayed Draw

   High Tech
Industries
   5.75% (L +
475,1.00%
Floor)
   7/28/23      2,581,446        2,536,019        2,536,019  

Alaska Communications Systems Holdings, Inc., Term Loan A-1, First Lien

   Telecommunications    6.24% (L +
500,1.00%
Floor)
   3/13/22      3,000,000        3,000,000        2,962,500  

Alaska Communications Systems Holdings, Inc., Term Loan A-2, First Lien

   Telecommunications    8.24% (L +
700,1.00%
Floor)
   3/13/23      5,000,000        5,000,000        4,912,500  

AP Exhaust Acquisition, LLC, First Lien

   Automotive    6.31% (L +
500,1.00%
Floor)
   5/10/24      13,715,625        13,456,004        13,441,313  

AP Gaming I, LLC, First Lien

   Hotel,
Gaming, & Leisure
   6.58%

(L + 550,

1.00% Floor)

   2/15/24      9,975,000        9,951,128        9,975,000  

AP Plastics Group, LLC, Term Loan B, First Lien

   Chemicals,

Plastics, & Rubber

   7.48% (L +
625,1.00%
Floor)
   8/1/22      10,490,625        10,408,907        10,490,625  

Digital Room LLC, First Lien

   Media:

Advertising,

Printing &

Publishing

   7.24% (L +
600,1.00%
Floor)
   11/21/22      9,625,000        9,453,415        9,625,000  

Dunn Paper, Inc., First Lien

   Containers,

Packaging & Glass

   5.99%

(L + 475,

1.00% Floor)

   8/26/22      8,256,522        8,181,515        8,256,522  

ENC Holding Corporation, First Lien

   Transportation:
Cargo
   7.73%

(L + 650,

1.00% Floor)

   2/8/23      9,950,000        9,859,733        9,950,000  

Entertainment Partners, LLC, First Lien

   Media: Diversified
& Production
   6.81%

(L + 575,

1.00% Floor)

   5/8/23      11,471,250        11,471,250        11,471,250  

Give and Go Prepared Foods Corp., First Lien

   Beverage, Food &
Tobacco
   5.56% (L +
425,1.00%
Floor)
   7/29/23      12,000,000        11,970,014        11,970,014  

 

38


Table of Contents
Portfolio Company    Industry   

Interest

Rate(1)

   Maturity   

Principal

Amount

     Cost     

Fair

Value(2)

 

Golden West Packaging Group LLC, First Lien

   Containers,
Packaging & Glass
   6.49% (L +
525,1.00%
Floor)
   6/20/23    $ 9,975,000      $ 9,877,017      $ 9,877,017  

Highline Aftermarket Acquisition, LLC, First Lien

   Automotive    5.63%

(L + 425,

1.00% Floor)

   3/24/24      9,571,984        9,525,454        9,571,984  

MHE Intermediate Holdings, LLC, Delayed Draw

   Services: Business    6.33%

(L + 500,

1.00% Floor)

   3/10/24      808,231        803,682        800,148  

MHE Intermediate Holdings, LLC, First Lien

   Services: Business    6.33%

(L + 500,

1.00% Floor)

   3/10/24      10,349,169        10,251,411        10,245,677  

National Spine and Pain Centers, LLC, First Lien

   Healthcare &

Pharmaceuticals

   5.83%

(L + 450,

1.00% Floor)

   6/2/24      9,975,000        9,927,234        9,875,250  

NSM Sub Holdings Corp., Delayed Draw

   Healthcare &

Pharmaceuticals

   6.24%

(L + 500,

1.00% Floor)

   10/3/22      755,824        755,824        755,824  

NSM Sub Holdings Corp., Revolver

   Healthcare &

Pharmaceuticals

   8.25% (Base
+ 400,2.00%
Floor)
   10/3/22      195,650        195,650        195,650  

NSM Sub Holdings Corp., First Lien

   Healthcare &

Pharmaceuticals

   6.30%

(L + 500,

1.00% Floor)

   10/3/22      7,281,972        7,220,809        7,281,972  

Pasternack Enterprises, Inc., First Lien

   Wholesale    6.24%

(L + 500,

1.00% Floor)

   5/27/22      11,382,355        11,343,827        11,353,899  

Pretium Packaging, LLC, First Lien

   Containers,
Packaging & Glass
   6.93%

(L + 575,

1.00% Floor)

   11/14/22      12,437,366        12,322,777        12,312,993  

Q Holding Company, Term Loan B, First Lien

   Chemicals, Plastics,
& Rubber
   6.33%

(L + 500,

1.00% Floor)

   12/18/21      9,898,219        9,812,853        9,898,219  

Service Logic Acquisition, Inc., First Lien

   Services: Business    5.58%
(L + 425,
1.00% Floor)
   7/31/23      12,500,000        12,439,129        12,439,129  
              

 

 

    

 

 

 

Total

         $ 195,477,442      $ 195,912,295  
              

 

 

    

 

 

 

 

(1) 100% of the senior secured loans in BCIC Senior Loan Partners’ portfolio bear interest at a floating rate that may be determined by reference to the London Interbank Offered Rate (LIBOR) or other base rate (commonly the Federal Funds Rate or the Prime Rate), at the borrower’s option. In addition, 100% of such senior secured loans have floors of at least 1.00%. The borrower under a senior secured loan generally has the option to select from interest reset periods of one, two, three or six months and may alter that selection at the end of any reset period. The stated interest rate represents the weighted average interest rate at September 30, 2017 of all contracts within the specified loan facility.
(2) Represents fair value in accordance with ASC Topic 820. The determination of such fair value is not included in the Company’s Board of Directors’ valuation process described elsewhere herein.

 

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Below is certain summarized financial information for Senior Loan Partners as of September 30, 2017 and December 31, 2016, respectively, and for the three and nine months then ended:

Selected Balance Sheet Information

 

     September 30,
2017
     December 31,
2016
 

($’s in thousands)

     

Investments, at fair value (cost $195,477 and $53,099)

   $ 195,912      $ 53,162  

Cash and cash equivalents

     4,936        2,029  

Other assets

     2,585        2,408  
  

 

 

    

 

 

 

Total assets

   $ 203,433      $ 57,599  
  

 

 

    

 

 

 

Debt

     122,380        7,020  

Interest and credit facility fees payable

     309        85  

Contributions received in advance

     2,611        1,195  

Distribution payable

     1,011        —    

Other accrued expenses and payables

     279        149  
  

 

 

    

 

 

 

Total liabilities

   $ 126,590      $ 8,449  
  

 

 

    

 

 

 

Members’ equity

     76,843        49,150  
  

 

 

    

 

 

 

Total liabilities and members’ equity

   $ 203,433      $ 57,599  
  

 

 

    

 

 

 

Selected Statement of Operations Information

 

     Three months
ended
September 30,
2017
     For the Period
June 23, 2016
(Commencement

of Operation)
through
September 30,
2016
    Nine months
ended
September 30,
2017
     For the Period
June 23, 2016
(Commencement
of Operation)
through
September 30,
2016
 

($’s in thousands)

          

Interest income

   $ 3,225      $ 117     $ 6,581      $ 117  

Fee income

     25        22       450        22  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investment income

   $ 3,250      $ 139     $ 7,031      $ 139  
  

 

 

    

 

 

   

 

 

    

 

 

 

Organizational costs

     —          654       —          654  

Interest and credit facility fees

     1,285        404       2,823        404  

Other fees and expenses

     138        112       343        112  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total expenses

   $ 1,423      $ 1,170     $ 3,166      $ 1,170  
  

 

 

    

 

 

   

 

 

    

 

 

 

Net investment income (loss)

     1,827        (1,031     3,865        (1,031
  

 

 

    

 

 

   

 

 

    

 

 

 

Unrealized appreciation (depreciation)

     164        —         372        —    
  

 

 

    

 

 

   

 

 

    

 

 

 

Net increase (decrease) in members’ capital

   $ 1,991      $ (1,031   $ 4,237      $ (1,031
  

 

 

    

 

 

   

 

 

    

 

 

 

 

40


Table of Contents

For the three and nine months ended September 30, 2017, the Company’s share of investment income from Senior Loan Partners was $1.6 million and $3.2 million, respectively, which amounts are included in dividend income from controlled investments on the Company’s Consolidated Statements of Operations. As of September 30, 2017 and December 31, 2016, $0.9 million and zero, respectively, was included in interest, dividends and fees receivable on the Company’s Consolidated Statements of Assets and Liabilities.

6. Derivatives

Foreign Currency

The Company may enter into forward foreign currency contracts from time to time to facilitate settlement of purchases and sales of investments denominated in foreign currencies or to help mitigate the impact that an adverse change in foreign exchange rates would have on the value of the Company’s investments denominated in foreign currencies. A forward foreign currency contract is a commitment to purchase or sell a foreign currency at a future date (usually the security transaction settlement date) at a negotiated forward rate. These contracts are marked-to-market by recognizing the difference between the contract exchange rate and the current market rate as unrealized appreciation or depreciation. Realized gains or losses are recognized when contracts are settled. The Company’s forward foreign currency contracts generally have terms of approximately three months. The volume of open contracts at the end of each reporting period is reflective of the typical volume of transactions during each calendar quarter. Risks may arise as a result of the potential inability of the counterparties to meet the terms of their contracts. The Company attempts to limit this risk by dealing with only creditworthy counterparties. There were no open forward foreign currency contracts at September 30, 2017 and December 31, 2016.

Warrants and Options

The Company holds warrants and options in certain portfolio companies in an effort to achieve additional investment return. In purchasing warrants and options, the Company bears the risk of an unfavorable change in the value of the underlying equity interest. The aggregate fair value of warrants and options as of September 30, 2017 and December 31, 2016 represents zero and 0.02%, respectively, of the Company’s net assets.

The Company may enter into other derivative instruments and incur other exposures with other counterparties in the future. The derivative instruments held as of September 30, 2017 and December 31, 2016 reflect the volume of derivative activity throughout the periods presented.

7. Debt

In accordance with the 1940 Act, with certain limited exceptions, the Company is only allowed to borrow amounts such that its asset coverage, calculated pursuant to the 1940 Act, is at least 200% after such borrowing. As of September 30, 2017, the Company’s asset coverage was 327%.

Senior Secured Revolving Credit Facility

On February 19, 2016, the Company entered into an Amended and Restated Senior Secured Revolving Credit Facility (the “Credit Facility”) which has an initial aggregate principal amount of up to $440,000,000, a stated commitment termination date of February 19, 2020, and a stated maturity date of February 19, 2021. The interest rate applicable to Eurocurrency borrowings thereunder is generally LIBOR plus an applicable margin of either 1.75% or 2.00% based on a pricing grid using the borrowing base as a multiple of the combined debt amount. The interest rate applicable to ABR borrowings thereunder is generally the prime rate in effect plus an applicable margin of either 0.75% or 1.00% based on a pricing grid using the borrowing base as a multiple of the combined debt amount. The Credit Facility’s commitment may increase in size, under certain circumstances, up to a total of $750,000,000. From the commitment termination date to the stated maturity date, the Company is

 

41


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required to repay outstanding principal amounts under the Credit Facility on a monthly basis in an amount equal to 1/12th of the outstanding amount at the commitment termination date. On June 5, 2017, the Company entered into a Second Amendment to the Second Amended and Restated Senior Secured Revolving Credit Facility which extended the commitment termination date on the Credit Facility from February 29, 2020 to June 5, 2021 and the maturity date from February 19, 2021 to June 5, 2022, respectively.

Senior Secured Term Loan

On February 19, 2016, the Company entered into an Amended and Restated Senior Secured Term Loan Credit Agreement (the “Term Loan”) which has a principal amount of $15,000,000. The Term Loan has a stated maturity date of March 27, 2019. The interest rate applicable to borrowings thereunder is generally LIBOR plus an applicable margin of 3.25%. On June 22, 2017, the Company repaid the aggregate $15,000,000 principal amount of the Term Loan, plus accrued and unpaid interest, as well as a $192,005 make-whole premium, using proceeds from the Credit Facility.

Senior Secured Notes

On January 18, 2011, the Company closed a private placement issuance of $158,000,000 in aggregate principal amount of five-year, senior secured notes with a fixed interest rate of 6.50% and a maturity date of January 18, 2016 and $17,000,000 in aggregate principal amount of seven-year, senior secured notes with a fixed interest rate of 6.60% and a maturity date of January 18, 2018 (collectively, the “Senior Secured Notes”). The $158,000,000 five-year, senior secured notes matured on January 18, 2016 and were repaid using proceeds from the Company’s Credit Facility. On April 17, 2017, the Company redeemed the $17,000,000 aggregate principal amount of 6.60% senior secured notes due 2018, using proceeds from the Credit Facility. The notes were prepaid at 100% of the principal amount, plus accrued and unpaid interest through the prepayment date, as well as $651,472 make-whole premium.

Unsecured Convertible Senior Notes Due 2018

On February 19, 2013, the Company closed a private offering of $100,000,000 in aggregate principal amount of 5.50% unsecured convertible senior notes due 2018 (the “Convertible Notes”). The initial purchasers of the Convertible Notes fully exercised their overallotment option and purchased an additional $15,000,000 in aggregate principal amount of the Convertible Notes. The closing of the overallotment option took place on March 4, 2013. With the exercise of the overallotment option, a total of $115,000,000 in aggregate principal amount of the Convertible Notes was sold. Net proceeds to the Company from the offering, including the exercise of the overallotment option, were approximately $111,300,000. The Convertible Notes were only offered to qualified institutional buyers as defined in the Securities Act of 1933, as amended (the “Securities Act”) pursuant to Rule 144A under the Securities Act.

The Convertible Notes are unsecured and bear interest at a rate of 5.50% per year, payable semi-annually in arrears. In certain circumstances and during certain periods, the Convertible Notes are convertible into cash, shares of BlackRock Capital Investment Corporation’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election, at an initial conversion rate of 86.0585 shares of common stock per $1,000 principal amount of the Convertible Notes, which is equivalent to an initial conversion price of approximately $11.62 per share of the Company’s common stock, subject to defined anti-dilution adjustments. The Company does not have the right to redeem the Convertible Notes prior to maturity. The Convertible Notes mature on February 15, 2018, unless repurchased or converted in accordance with their terms prior to such date.

On September 27, 2017, the Company purchased $59,959,000 in aggregate principal amount of its existing $115,000,000 Convertible Notes pursuant to a cash tender offer at a purchase price equal to $1,015 per $1,000 principal amount of notes purchased, plus accrued and unpaid interest, using borrowings under the Credit Facility and cash on hand. All Convertible Notes purchased in the tender offer were retired and cancelled, and are no

 

42


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longer outstanding under the indenture. The aggregate purchase price of the Convertible Notes was $60,858,385, plus approximately $144,852 of reacquisition costs, for a total reacquisition price of $61,003,237, excluding $384,737 of interest expense. The net carrying amount of the Convertible Notes purchased in the tender offer at the time of purchase was $59,754,389, net of unamortized debt issuance costs and unamortized discount. As such, in accordance with ASC 470-50, Debt – Modifications and Extinguishments, the difference between the reacquisition price and the net carrying amount of the Convertible Notes was recorded in the accompanying Consolidated Statements of Operations as a $1,312,719 loss on extinguishment of debt.

Unsecured Convertible Senior Notes Due 2022

On June 13, 2017, the Company issued $143,750,000 in aggregate principal amount ($125,000,000 of the initial offering and $18,750,000 of the underwriters’ exercise of the overallotment option) of 5.00% Convertible Notes due 2022 (the “2022 Convertible Notes”) under an indenture, dated as of June 13, 2017. Net proceeds to the Company from the offering, including the exercise of the overallotment option, were approximately $139,800,000. The 2022 Convertible Notes will mature on June 15, 2022, unless previously converted, repurchased or redeemed in accordance with their terms. The interest rate on the notes is 5.00% per year, payable semiannually in arrears on June 15 and December 15 of each year, commencing on December 15, 2017. Holders may convert their notes at their option prior to the close of business on the business day immediately preceding December 15, 2021, in integral multiples of $1,000 principal amount, only under certain circumstances. Upon conversion of a note, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election at an initial conversion rate of 118.2173 shares of common stock per $1,000 principal amount of notes, which is equivalent to an initial conversion price of approximately $8.46 per share of the Company’s common stock. On or after December 23, 2021, the Company may redeem the 2022 Convertible Notes for cash, in whole or from time to time in part, at its option in accordance with their terms.

The 2022 Convertible Notes are accounted for in accordance with ASC 470-20, Debt – Debt with Conversion and Other Options (“ASC 470-20”). The Company has determined that the embedded conversion options in the 2022 Convertible Notes are not required to be separately accounted for as a derivative under U.S. GAAP. In accounting for the 2022 Convertible Notes, at the time of issuance the Company estimated separate debt and equity components, and an original issue discount equal to the equity component was recorded in additional paid-in-capital in the accompanying Consolidated Balance Sheet.

The Company’s outstanding debt as of September 30, 2017 and December 31, 2016 was as follows:

 

    As of  
  September 30, 2017     December 31, 2016  
  Total
Aggregate
Principal
Amount
Available(1)
    Principal
Amount
Outstanding
    Carrying Value     Total
Aggregate
Principal
Amount
Available(1)
    Principal
Amount
Outstanding
     Carrying Value  

Credit Facility

  $ 440,000,000 (2)    $ 56,000,000     $ 56,000,000     $ 440,000,000 (2)    $ 190,000,000      $ 190,000,000  

Senior Secured Notes

    —         —         —         17,000,000       17,000,000        16,973,708 (5) 

Convertible Notes

    55,041,000       55,041,000       54,901,818 (3)      115,000,000       115,000,000        113,856,080 (4) 

2022 Convertible Notes

    143,750,000       143,750,000       135,240,260 (7)      —         —          —    

Term Loan

    —         —         —         15,000,000       15,000,000        14,838,118 (6) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
  $ 638,791,000     $ 254,791,000     $ 246,142,078     $ 587,000,000     $ 337,000,000      $ 335,667,906  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(1) Subject to borrowing base and leverage restrictions.
(2) Provides for a feature that allows the Company, under certain circumstances, up to a total of $750,000,000.
(3) Represents the aggregate principal amount outstanding of the Convertible Notes less an unaccreted discount initially recorded upon issuance and unamortized debt issuance costs of $0 and $139,182, respectively, as of September 30, 2017.

 

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(4) Represents the aggregate principal amount outstanding of the Convertible Notes less an unaccreted discount initially recorded upon issuance and unamortized debt issuance costs of $277,828 and $866,092, respectively, as of December 31, 2016.
(5) Represents the aggregate principal amount outstanding of the Senior Secured Notes less unamortized debt issuance costs of $26,292 at December 31, 2016. No longer outstanding at September 30, 2017.
(6) Represents the aggregate principal amount outstanding of the Term Loan less unamortized debt issuance costs of $161,882 at December 31, 2016. No longer outstanding at September 30, 2017.
(7) Represents the aggregate principal amount outstanding of the 2022 Convertible Notes less an unaccreted discount initially recorded upon issuance and unamortized debt issuance costs of $4,110,996 and $4,398,744, respectively, as of September 30, 2017.

At September 30, 2017, the Company had $56,000,000 drawn on the Credit Facility as compared to $190,000,000 at December 31, 2016. Subject to compliance with applicable covenants and borrowing base limitations, the remaining amount available under the Credit Facility was $384,000,000 at September 30, 2017 and $250,000,000 at December 31, 2016. The Company’s average outstanding debt balance during the three and nine months ended September 30, 2017 was $275,520,929 and $311,148,465, respectively, and during the three and nine months ended September 30, 2016 was $307,205,309 and $368,721,102, respectively. The maximum amounts borrowed during the three and nine months ended September 30, 2017 were $310,630,687 and $412,247,365, respectively, and during the three and nine months ended September 30, 2016 were $362,659,979 and $452,659,979, respectively.

Amortization of $591,409 and $1,558,547 related to debt issuance costs are included in interest expense within the Consolidated Statements of Operations for the three and nine months ended September 30, 2017. Amortization of $400,747 and $1,239,907 related to debt issuance costs are included in interest expense within the consolidated statements of operations for the three and nine months ended September 30, 2016.

The weighted average annual interest cost for the three and nine months ended September 30, 2017 was 6.35% and 5.66%, respectively, exclusive of commitment fees of $398,979 and $896,042, respectively. The weighted average annual interest cost for the three and nine months ended September 30, 2016 was 4.61% and 4.35%, respectively, exclusive of commitment fees of $267,844 and $627,010, respectively. With respect to any unused portion of the commitments under the Credit Facility, the Company incurs an annual commitment fee of 0.375%.

Under the Credit Facility, the Company is required to comply with various affirmative and restrictive covenants, reporting requirements and other customary requirements for similar debt facilities, including, without limitation, covenants related to: (a) limitations on the incurrence of additional indebtedness and liens, (b) limitations on certain investments, (c) limitations on distributions and certain other restricted payments, (d) certain restrictions on subsidiaries and fundamental changes thereto, (e) maintaining a certain minimum shareholders’ equity, (f) maintaining an asset coverage ratio of not less than 2.0:1.0, (g) limitations on certain transactions with affiliates, (h) limitations on pledging certain unencumbered assets, and (i) limitations on the creation or existence of agreements that prohibit liens on certain properties of the Company and certain of its subsidiaries. These covenants are subject to important limitations and exceptions that are described in the governing documents. Further, amounts available to borrow under the Credit Facility (and the incurrence of certain other permitted debt) are also subject to compliance with a borrowing base that applies different advance rates to different types of assets in the Company’s portfolio that are pledged as collateral. The Credit Facility is secured by a lien on substantially all of the assets of the Company and its subsidiaries.

The Convertible Notes and 2022 Convertible Notes contain certain covenants, including covenants requiring the Company to reserve shares of common stock for the purpose of satisfying all obligations to issue the underlying securities upon conversion of the securities and to furnish to holders of the securities upon request, any information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.

At September 30, 2017, the Company was in compliance with all covenants required under the Credit Facility, Convertible Notes and 2022 Convertible Notes.

 

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8. Capital stock

During April 2016, the Board of Directors approved an increase to the remaining amount of shares authorized to be repurchased to a total of 2,500,000 shares, and an extension to the plan until the earlier of June 30, 2017 or such time that all of the authorized shares have been repurchased. During May 2017, the Board of Directors approved an increase to the remaining amount of shares authorized to be repurchased, effective July 1, 2017, to a total of 2,500,000 shares, and an extension to the plan until the earlier of June 30, 2018 or such time that all of the authorized shares have been repurchased. During the three and nine months ended September 30, 2016, the Company purchased a total of zero and 1,904,064 shares, respectively, of its common stock on the open market for zero and $16,093,205, respectively, including brokerage commissions. No such shares were purchased for the three and nine months ended September 30, 2017. Since inception of the repurchase plan through September 30, 2017, the Company has purchased 4,551,965 shares of its common stock on the open market for $36,302,821, including brokerage commissions. At September 30, 2017, the total number of remaining shares authorized for repurchase was 2,500,000. The Company currently holds the shares it repurchased in treasury.

9. Guarantees, commitments and contingencies

In the normal course of business, the Company may enter into guarantees on behalf of portfolio companies. Under these arrangements, the Company would be required to make payments to third parties if the portfolio companies were to default on their related payment obligations. There were no such guarantees outstanding at September 30, 2017 and December 31, 2016. In addition, from time to time, the Company may provide for a commitment to a portfolio company for investment in an existing or new security. At September 30, 2017 and December 31, 2016, the Company was obligated to existing portfolio companies for unfunded commitments of $24.7 million and $43.5 million, respectively. Of the $24.7 million and $43.5 million total unfunded commitments at September 30, 2017 and December 31, 2016, respectively, $19.3 million and $42.5 million was on our aggregate $85.0 million equity commitment to BCIC Senior Loan Partners, LLC (See Note 5). The aggregate fair value of unfunded commitments at September 30, 2017 and December 31, 2016 was $24.5 million and $42.6 million, respectively. We maintain sufficient cash on hand and available borrowings to fund such unfunded commitments should the need arise.

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

From time to time, we and the Advisor may be a party to certain legal proceedings incidental to the normal course of our business, including the enforcement of our rights under contracts with our portfolio companies. Further, third parties may try to seek to impose liability on us in connection with the activities of our portfolio companies. While we cannot predict the outcome of these legal proceedings with certainty, we do not expect that these proceedings will have a material effect on our consolidated financial statements.

10. Fair value of financial instruments

Fair Value Measurements and Disclosure

ASC 820-10 defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. ASC 820-10 defines fair value as the price that the Company would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment. ASC 820-10 emphasizes that valuation techniques maximize

 

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the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances.

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

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

Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The inputs into the determination of fair value may require significant management judgment or estimation.

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

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

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

The carrying values of the Company’s financial instruments approximate fair value. The carrying values of receivables, other assets, accounts payable and accrued expenses approximate fair value due to their short maturities. The fair value of the Company’s Credit Facility, Senior Secured Notes, Convertible Notes, 2022 Convertible Notes and Term Loan is derived by taking the average of the high and low quotes as obtained from a broker. The fair value of the Credit Facility, Senior Secured Notes, Convertible Notes, 2022 Convertible Notes and Term Loan would be classified as Level 2 with respect to the fair value hierarchy.

The carrying and fair values of the Company’s outstanding debt as of September 30, 2017 and December 31, 2016 were as follows:

 

     September 30, 2017      December 31, 2016  
     Carrying Value      Fair Value      Carrying Value      Fair Value  

Credit Facility

   $ 56,000,000      $ 52,920,000      $ 190,000,000      $ 179,550,000  

Senior Secured Notes

     —          —          16,973,708        17,752,420  

Convertible Notes

     54,901,818        55,660,215        113,856,080        118,163,837  

2022 Convertible Notes

     135,240,260        146,795,503        —          —    

Term Loan

     —          —          14,838,118        15,093,750  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 246,142,078      $ 255,375,718      $ 335,667,906      $ 330,560,007  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following tables summarize the fair values of the Company’s investments and cash and cash equivalents based on the inputs used at September 30, 2017 and December 31, 2016 in determining such fair values:

 

    

  

     Fair Value Inputs at September 30, 2017  
     Fair Value
at September 30,
2017
     Price
Quotations
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Senior secured notes

   $ 61,334,994      $ —        $           —        $ 61,334,994  

Unsecured debt

     106,417,207        —          —          106,417,207  

Subordinated debt

     29,600,000        —          —          29,600,000  

Senior secured loans

     435,088,623        —          —          435,088,623  

Preferred stock

     59,649,805        —          —          59,649,805  

Common stock

     17,827,902        —          —          17,827,902  

Limited partnership/limited liability company interests

     123,936,218        —          —          123,936,218  

Equity warrants/options

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

     833,854,749        —          —          833,854,749  

Cash and cash equivalents

     4,919,845        4,919,845        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 838,774,594      $ 4,919,845      $ —        $ 833,854,749  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

            Fair Value Inputs at December 31, 2016  
     Fair Value
at December 31,
2016
     Price
Quotations
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Senior secured notes

   $ 63,609,625      $ —        $           —        $ 63,609,625  

Unsecured debt

     127,317,932        —          —          127,317,932  

Subordinated debt

     28,800,000        —          —          28,800,000  

Senior secured loans

     548,515,315        —          —          548,515,315  

Preferred stock

     57,873,127        —          —          57,873,127  

Common stock

     37,632,386        —          —          37,632,386  

Limited partnership/limited liability company interests

     67,257,747        —          —          67,257,747  

Equity warrants/options

     117,358        —          —          117,358  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

     931,123,490        —          —          931,123,490  

Cash and cash equivalents

     10,707,834        10,707,834        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 941,831,324      $ 10,707,834      $ —        $ 931,123,490  
  

 

 

    

 

 

    

 

 

    

 

 

 

The valuation techniques used at September 30, 2017 and December 31, 2016 in determining the fair values of the Company’s investments for which significant unobservable inputs were used were the market approach, income approach or both using third party valuation firms or broker quotes for identical or similar assets. The total fair market value using the market or income approach or both using third party valuation firms was $833,854,749 and $931,123,490 as of September 30, 2017 and December 31, 2016, respectively. Any remaining balance was determined using broker quotes for identical or similar assets.

 

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The following is a reconciliation for the three months ended September 30, 2017 of investments for which Level 3 inputs were used in determining fair value:

 

    Fair Value at
June 30,
2017
    Amortization
of Premium/
Discount - Net
    Net
Realized
Gain (Loss)
    Net Change in
Unrealized
Appreciation or
Depreciation
before Taxes
    Purchases     Sales or
Repayments
    Net Transfers
in and/or
out of
Level 3
    Fair Value at
September 30,
2017
 

Senior secured notes

  $ 64,389,329     $ 78,230     $ —       $ (3,132,565   $ —       $ —       $ —       $ 61,334,994  

Unsecured debt

    120,255,833       —         —         (19,486,033     7,059,259       (1,411,852     —         106,417,207  

Subordinated debt

    29,600,000       —         —         —         —         —         —         29,600,000  

Senior secured loans

    507,560,242       675,923       —         (15,792,364     16,953,464       (74,308,642     —         435,088,623  

Preferred stock

    56,484,414       —         —         1,552,012       1,613,379       —         —         59,649,805  

Common stock

    18,462,588       —         —         (902,907     268,221       —         —         17,827,902  

Limited partnership/LLC Interest

    96,511,515       —         —         18,144,138       9,280,565       —         —         123,936,218  

Equity warrants/options

    —         —         —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

  $ 893,263,921     $ 754,153     $ —       $ (19,617,719   $ 35,174,888     $ (75,720,494   $ —       $ 833,854,749  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following is a reconciliation for the nine months ended September 30, 2017 of investments for which Level 3 inputs were used in determining fair value:

 

    Fair Value at
December 31,
2016
    Amortization
of Premium/
Discount - Net
    Net
Realized
Gain (Loss)
    Net Change in
Unrealized
Appreciation or
Depreciation
before Taxes
    Purchases     Sales or
Repayments
    Net Transfers
in and/or
out of
Level 3
    Fair Value at
September 30,
2017
 

Senior secured notes

  $ 63,609,625     $ 232,139     $ (13,682,622   $ 11,013,701     $ 5,162,151     $ (5,000,000     $ —       $ 61,334,994  

Unsecured debt

    127,317,932       —         —         (22,767,322     19,867,707       (18,001,110     —         106,417,207  

Subordinated debt

    28,800,000       —         —         —         800,000       —         —         29,600,000  

Senior secured loans

    548,515,315       1,950,536       (34,071,371     16,414,451       112,297,568       (210,017,876     —         435,088,623  

Preferred stock

    57,873,127       —         2,449,618       5,071,472       2,079,524       (7,823,936     —         59,649,805  

Common stock

    37,632,386       —         3,369,690       (3,636,771     486,792       (20,024,195     —         17,827,902  

Limited partnership/LLC Interest

    67,257,747       —         (9,638,439     27,478,525       39,777,654       (939,269     —         123,936,218  

Equity warrants/options

    117,358       —         (994,155     1,068,780       —         (191,983     —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

  $ 931,123,490     $ 2,182,675     $ (52,567,279   $ 34,642,836     $ 180,471,396     $ (261,998,369   $ —       $ 833,854,749  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following is a reconciliation for the three months ended September 30, 2016 of investments for which Level 3 inputs were used in determining fair value:

 

    Fair Value at
June 30,
2016
    Amortization
of Premium/
Discount - Net
    Net
Realized
Gain (Loss)
    Net Change in
Unrealized
Appreciation or

Depreciation
before Taxes
    Purchases     Sales or
Repayments
    Net Transfers
in and/or
out of
Level 3
    Fair Value at
September 30,
2016
 

Senior secured notes

  $ 102,362,625     $ 140,079     $ (20,845,550   $ 16,767,971     $ —       $ —       $ —       $ 98,425,125  

Unsecured debt

    116,282,488       (1     —         (1,643,037     8,316,447       —         —         122,955,897  

Subordinated debt

    26,008,119       —         (3,971,479     3,863,360       2,100,000       —         —         28,000,000  

Senior secured loans

    628,919,923       1,315,031       (7,148     (13,910,446     8,409,203       (73,333,000     —         551,393,563  

Preferred stock

    63,934,741       —         (1,479,254     (4,159,156     3,200,200       —         —         61,496,531  

Common stock

    48,865,457       —         218,809       (502,316     —         (346,362     —         48,235,588  

Limited partnership/LLC Interest

    24,558,495       —         —         (11,031,561     21,736,877       —         —         35,263,811  

Equity warrants/options

    991,412       —         (506,505     338,905       —         —         —         823,812  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

  $ 1,011,923,260     $ 1,455,109     $ (26,591,127   $ (10,276,280   $ 43,762,727     $ (73,679,362   $ —       $ 946,594,327  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following is a reconciliation for the nine months ended September 30, 2016 of investments for which Level 3 inputs were used in determining fair value:

 

    Fair Value at
December 31,
2015
    Amortization
of Premium/
Discount - Net
    Net
Realized
Gain (Loss)
    Net Change in
Unrealized
Appreciation or

Depreciation
before Taxes
    Purchases     Sales or
Repayments
    Net Transfers
in and/or
out of
Level 3
    Fair Value at
September 30,
2016
 

Senior secured notes

  $ 69,875,250     $ 528,930     $ (20,845,550   $ 13,166,495     $ 36,750,000     $ (1,050,000   $ —       $ 98,425,125  

Unsecured debt

    126,476,842       (1     —         (12,751,998     39,114,016       (29,882,962     —         122,955,897  

Subordinated debt

    42,608,119       —         (3,971,479     3,863,360       10,500,000       (25,000,000     —         28,000,000  

Senior secured loans

    756,394,823       3,515,396       (30,851,149     (44,315,380     76,301,273       (209,651,400     —         551,393,563  

Preferred stock

    43,533,360       (1     (1,238,227     (907,605     20,350,031       (241,027     —         61,496,531  

Common stock

    46,629,914       (1     (525,641     (5,443,919     7,943,097       (367,862     —         48,235,588  

Limited partnership/ LLC Interest

    28,553,438       —         (41,023     (18,980,276     27,073,827       (1,342,155     —         35,263,811  

Equity warrants/options

    2,924,818       —         (57,619     (1,589,501     —         (453,886     —         823,812  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

  $ 1,116,996,564     $ 4,044,323     $ (57,530,688   $ (66,958,824   $ 218,032,244     $ (267,989,292   $ —       $ 946,594,327  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

There were no transfers between Levels during the three and nine months ended September 30, 2017 and 2016. All realized and unrealized gains and losses are included in earnings (changes in net assets) and are reported as separate line items within the Company’s consolidated statements of operations.

Net change in unrealized appreciation (depreciation) for the nine months ended September 30, 2017 and 2016 on investments still held by the Company at the respective period ends, for which Level 3 inputs were used in determining fair value was $(18,708,385) and $(95,879,084), respectively.

The significant unobservable inputs used in the market approach of fair value measurement of the Company’s investments are the market multiples of earnings before income tax, depreciation and amortization (“EBITDA”) of the comparable guideline public companies. The independent valuation firms select a population of public companies for each investment with similar operations and attributes of the subject company. Using these guideline public companies’ data, a range of multiples of enterprise value to EBITDA is calculated. The independent valuation firms select percentages from the range of multiples for purposes of determining the subject company’s estimated enterprise value based on said multiple and generally the latest twelve months EBITDA of the subject company (or other meaningful measure). Significant increases or decreases in the multiple will result in an increase or decrease in enterprise value, resulting in an increase or decrease in the fair value estimate of the investment.

The significant unobservable input used in the income approach of fair value measurement of the Company’s investments is the discount rate or market yield used to discount the estimated future cash flows expected to be received from the underlying investment, which include both future principal and interest payments. Significant increases or decreases in the discount rate or market yield would result in a decrease or increase in the fair value measurement. Included in the consideration and selection of discount rates or market yields are the following factors: risk of default, rating of the investment and comparable company investments, and call provisions.

 

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Table of Contents

The ranges of significant unobservable inputs used in the fair value measurement of the Company’s Level 3 investments as of September 30, 2017 were as follows:

 

         Low     High     Weighted Average        

EBITDA Multiples:

        
 

Senior secured notes

     4.00x       5.00x       4.64x    
 

Unsecured debt

     6.43x       7.69x       7.06x    
 

Subordinated debt

     n/a       n/a       n/a    
 

Senior secured loans

     5.33x       6.48x       5.90x    
 

Preferred stock

     6.75x       7.50x       7.13x    
 

Common stock

     7.00x       7.50x       7.25x    
 

Limited partnerships/LLC interest

     6.57x       7.38x       6.97x    
 

Equity warrants/options

     n/a       n/a       n/a    

Market Yields:

        
 

Senior secured notes

     11.00%       12.00%       11.99%    
 

Unsecured debt

     n/a       n/a       n/a    
 

Subordinated debt

     n/a       n/a       n/a    
 

Senior secured loans

     10.48%       11.31%       11.00%    
 

Preferred stock

     n/a       n/a       n/a    
 

Common stock

     n/a       n/a       n/a    
 

Limited partnerships/LLC interest

     n/a       n/a       n/a    
 

Equity warrants/options

     n/a       n/a       n/a    

Book Value:

        
 

Senior secured notes

     n/a       n/a       n/a    
 

Unsecured debt

     1.03x       1.13x       1.08x    
 

Subordinated debt

     0.95x       1.05x       1.00x    
 

Senior secured loans

     n/a       n/a       n/a    
 

Preferred stock

     1.02x       1.15x       1.08x    
 

Common stock

     1.03x       1.13x       1.08x    
 

Limited partnerships/LLC interests

     0.95x       1.05x       1.00x    
 

Equity warrants/options

     n/a       n/a       n/a    

Net Asset Value:

        
 

Senior secured notes

     n/a       n/a       n/a    
 

Unsecured debt

     n/a       n/a       n/a    
 

Subordinated debt

     n/a       n/a       n/a    
 

Senior secured loans

     n/a       n/a       n/a    
 

Preferred stock

     n/a       n/a       n/a    
 

Common stock

     n/a       n/a       n/a    
 

Limited partnerships/LLC interests

     0.90x       1.10x       1.00x    
 

Equity warrants/options

     n/a       n/a       n/a    

 

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Table of Contents

The ranges of significant unobservable inputs used in the fair value measurement of the Company’s Level 3 investments as of December 31, 2016 were as follows:

 

          Low     High     Weighted Average        

EBITDA Multiples:

        
  

Senior secured notes

     4.00x       5.00x       4.38x    
  

Unsecured debt

     6.75x       7.75x       7.25x    
  

Subordinated debt

     n/a       n/a       n/a    
  

Senior secured loans

     6.16x       7.41x       6.82x    
  

Preferred stock

     7.00x       7.65x       7.32x    
  

Common stock

     9.17x       10.04x       9.88x    
  

Limited partnerships/LLC interests

     8.04x       8.91x       8.27x    
  

Equity warrants/options

     10.00x       11.00x       10.88x    

Market Yields:

        
  

Senior secured notes

     11.20%       11.88%       11.65%    
  

Unsecured debt

     24.25%       24.75%       24.50%    
  

Subordinated debt

     n/a       n/a       n/a    
  

Senior secured loans

     10.41%       11.24%       10.81%    
  

Preferred stock

     n/a       n/a       n/a    
  

Common stock

     n/a       n/a       n/a    
  

Limited partnerships/LLC interests

     n/a       n/a       n/a    
  

Equity warrants/options

     n/a       n/a       n/a    

Book Value:

        
  

Senior secured notes

     n/a       n/a       n/a    
  

Unsecured debt

     1.03x       1.13x       1.08x    
  

Subordinated debt

     0.95x       1.05x       1.00x    
  

Senior secured loans

     n/a       n/a       n/a    
  

Preferred stock

     1.06x       1.17x       1.12x    
  

Common stock

     1.03x       1.13x       1.08x    
  

Limited partnerships/LLC interests

     0.95x       1.05x       1.00x    
  

Equity warrants/options

     n/a       n/a       n/a    

Net Asset Value:

        
  

Senior secured notes

     n/a       n/a       n/a    
  

Unsecured debt

     n/a       n/a       n/a    
  

Subordinated debt

     n/a       n/a       n/a    
  

Senior secured loans

     n/a       n/a       n/a    
  

Preferred stock

     n/a       n/a       n/a    
  

Common stock

     n/a       n/a       n/a    
  

Limited partnerships/LLC interests

     0.90x       1.10x       1.00x    
  

Equity warrants/options

     n/a       n/a       n/a    

 

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11. Financial highlights

The following per share data and ratios have been derived from information provided in the consolidated financial statements. The following is a schedule of financial highlights for a common share outstanding during the nine months ended September 30, 2017 and 2016:

 

     Nine months
ended
September 30, 2017
    Nine months
ended
September 30, 2016
 

Per Share Data:

    

Net asset value, beginning of period

   $ 8.21     $ 10.17  
  

 

 

   

 

 

 

Net investment income

     0.56       0.51  

Net realized and unrealized gain (loss) before taxes

     (0.23     (1.71

Deferred taxes

     (0.07     —    

Realized losses on extinguishment of debt

     (0.02     —    
  

 

 

   

 

 

 

Total from investment operations

     0.24       (1.20

Distributions to stockholders from net investment income

     (0.54     (0.63

Purchases of treasury stock at prices below net asset value

     —         0.04  

Issuance of convertible notes

     0.06       —    

Issuance/reinvestment of stock at prices (below) above net asset value

     (0.01     —    
  

 

 

   

 

 

 

Net increase (decrease) in net assets

     (0.25     (1.79
  

 

 

   

 

 

 

Net asset value, end of period

   $ 7.96     $ 8.38  
  

 

 

   

 

 

 

Market price, end of period

   $ 7.50     $ 8.28  
  

 

 

   

 

 

 

Total return(1)(2)

     16.72     (5.11 )% 

Ratios / Supplemental Data:

    

Ratio of operating expenses to average net assets(3)(4)

     5.22     7.70

Ratio of interest and other debt related expenses to average net assets(3)

     3.13     2.45
  

 

 

   

 

 

 

Ratio of total expenses to average net assets(3)(5)

     8.35     10.15

Ratio of net investment income to average net assets(3)

     9.05     7.15

Net assets, end of period

   $ 581,477,987     $ 608,115,667  

Average debt outstanding

   $ 311,148,465     $ 368,721,102  

Weighted average shares outstanding

     72,928,772       72,786,313  

Average debt per share(6)

   $ 4.27     $ 5.07  

Portfolio turnover(2)

     20     21

 

 

(1) Total return is based on the change in market price per share during the respective periods. Total return calculations take into account distributions, if any, reinvested in accordance with the Company’s dividend reinvestment plan and do not reflect brokerage commissions.
(2) Not annualized.
(3) Annualized.
(4) Ratio excluding incentive fees based on income for the nine months ended September 30, 2017 and 2016 is 4.08% and 7.70%, respectively.
(5) Ratio excluding incentive fees based on income for the nine months ended September 30, 2017 and 2016 is 7.22% and 10.15%, respectively.

 

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

12. Subsequent events

On November 7, 2017, the Company’s Board of Directors declared a distribution of $0.18 per share, payable on January 2, 2018 to stockholders of record at the close of business on December 19, 2017.

On October 18, 2017, Donna Milia notified the Company that she is leaving the Company for personal reasons. Ms. Milia served as Chief Financial Officer and Treasurer for the Company. Ms. Milia agreed to remain with the Advisor through December 29, 2017 to provide transition assistance with respect to the Company. Michael Pungello was appointed by the Company’s Board of Directors as the Interim Chief Financial Officer and Interim Treasurer on October 20, 2017.

The Company has reviewed subsequent events occurring through the date that these consolidated financial statements were available to be issued, and determined that no subsequent events occurred requiring accrual or disclosure, except as disclosed above and elsewhere in these notes to consolidated financial statements.

 

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

The information contained in this section should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report.

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

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

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

 

    our future operating results;

 

    our business prospects and the prospects of our portfolio companies;

 

    the impact of investments that we expect to make;

 

    our contractual arrangements and relationships with third parties;

 

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

 

    the financial condition of and ability of our current and prospective portfolio companies to achieve their objectives;

 

    our expected financings and investments;

 

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

 

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

 

    the impact of increased competition;

 

    the ability of the Advisor to locate suitable investments for us and to monitor and administer our investments;

 

    changes in law and policy accompanying the new administration and uncertainty pending any such changes;

 

    increased geopolitical unrest, terrorist attacks or acts of war, which may adversely affect the general economy, domestic and local financial and capital markets, or the specific industries of our portfolio companies;

 

    changes and volatility in political, economic or industry conditions, the interest rate environment, foreign exchange rates or financial and capital markets;

 

    the unfavorable resolution of legal proceedings; and

 

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

 

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Overview

We were incorporated in Delaware on April 13, 2005 and commenced operations with private funding on July 25, 2005, and completed our initial public offering on July 2, 2007. Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We invest primarily in middle-market companies in the form of senior and junior secured and unsecured debt securities and loans, each of which may include an equity component, and by making direct preferred, common and other equity investments in such companies.

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

Certain items previously reported may have been reclassified to conform to the current year presentation.

Investments

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

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

Revenues

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

Expenses

Our primary operating expenses include the payment of a base management fee and, depending on our operating results, an incentive management fee, interest and credit facility fees, expenses reimbursable under the management agreement, professional fees, administration fees and the allocable portion of overhead under the administration agreement. The base management fee and incentive management fee compensate the Advisor for work in identifying, evaluating, negotiating, closing and monitoring our investments. Our management agreement with the Advisor provides that we will reimburse the Advisor for costs and expenses incurred by the Advisor for office space rental, office equipment and utilities allocable to the Advisor under the management

 

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agreement, as well as any costs and expenses incurred by the Advisor relating to any non-investment advisory, administrative or operating services provided by the Advisor to us. We bear all other costs and expenses of our operations and transactions.

Critical accounting policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ.

Management considers the significant accounting policies important to understanding the consolidated financial statements. In addition to the discussion below, our significant accounting policies are further described in the notes to the consolidated financial statements. See Note 2 to the consolidated financial statements for a description of significant accounting policies and of recently issued accounting pronouncements. Management considers Investments to be an area deemed a critical accounting policy.

Financial and operating highlights

At September 30, 2017:

Investment Portfolio: $833.9 million

Net Assets: $581.5 million

Indebtedness (borrowings under Credit Facility, Convertible Notes and

2022 Convertible Notes): $250.7 million

Net Asset Value per share: $7.96

Portfolio Activity for the Three Months Ended September 30, 2017:

Cost of investments during period, including PIK: $34.9 million

Sales, repayments and other exits during period: $75.7 million

Number of portfolio companies at end of period: 32

Operating Results for the Three Months Ended September 30, 2017:

Net investment income per share: $0.17

Distributions declared per share: $0.18

Basic earnings per share: $(0.19)

Net investment income: $12.1 million

Net realized and unrealized gain (loss) before taxes: $(19.3) million

Deferred taxes: $(5.3) million

Realized losses on extinguishment of debt: $(1.3) million

Net increase in net assets from operations: $(13.8) million

Net investment income per share, as adjusted1: $0.17

Basic earnings per share, as adjusted1: $(0.19)

Net investment income, as adjusted1: $12.1 million

Net increase in net assets from operations, as adjusted1: $(13.8) million

As Adjusted1: Amounts are adjusted to remove the incentive management fee expense based on gains, as required by GAAP, and to include only the incremental incentive management fee expense based on income. Until March 6, 2017, the incremental incentive management fee was calculated based on the current quarter’s incremental earnings, and without any reduction for incentive management fees paid during the prior calendar quarters. After March 6, 2017, incentive management fee expense based on income is calculated for each calendar quarter and may be paid on a quarterly basis if certain thresholds are met. Amounts reflect the Company’s ongoing operating results and reflect the Company’s financial performance over time.

 

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Portfolio and investment activity

We invested $34.9 million during the three months ended September 30, 2017. The new investments consisted of senior secured loans secured by first liens ($2.1 million, or 6.0%), second liens ($14.8 million, or 42.4%) and unsecured or subordinated debt securities and equity securities ($18.0 million, or 51.6%). Additionally, we received proceeds from sales/repayments and other exits of approximately $75.7 million during the three months ended September 30, 2017.

Concentration of our assets in an issuer, industry or sector may present certain risks. To the extent that we assume large positions in the securities of a small number of issuers, our net asset value may fluctuate to a greater extent than that of a diversified investment company as a result of changes in the financial condition or the market’s assessment of the issuer. At September 30, 2017, our portfolio of $833.9 million (at fair value) consisted of 32 portfolio companies and was invested 52% in senior secured loans, 24% in equity investments, 17% in unsecured or subordinated debt securities, and 7% in senior secured notes. Our average investment by portfolio company at amortized cost, excluding investments below $5.0 million, was approximately $34.1 million at September 30, 2017. Our largest investment by value was approximately $86.6 million and our five largest investments by value comprised approximately 31% of our portfolio at September 30, 2017. At December 31, 2016, our portfolio of $931.1 million (at fair value) consisted of 38 portfolio companies and was invested 59% in senior secured loans, 17% in unsecured or subordinated debt securities, 17% in equity investments and 7% in senior secured notes. Our average investment by portfolio company at amortized cost, excluding investments below $5.0 million, was approximately $31.8 million at December 31, 2016. Our largest portfolio company investment by value was approximately $87.4 million and our five largest portfolio company investments by value comprised approximately 27% of our portfolio at December 31, 2016.

In addition, we may, from time to time, invest a substantial portion of our assets in the securities of issuers in any single industry or sector of the economy or in only a few issuers. A downturn in an industry or sector in which we are concentrated could have a larger impact on us than on a company that does not concentrate in that particular industry or sector. Our Advisor monitors industry and sector uncertainties on an ongoing basis, including substantial regulatory challenges in the healthcare sector, volatility and extensive government regulation in the financial services sector, cyclical risks associated with the overall economy that may affect the consumer products sector, risks related to the costs of raw materials and energy affecting the chemicals sector, cyclicality within the energy sector as a result of fluctuations in commodity prices and demand for, and production of commodities, among various other industry and sector uncertainties due to certain exposures. At September 30, 2017, our top three industry concentrations at fair value consisted of Finance (26.3%), Chemicals, Plastics, & Rubber (14.7%) and Energy: Oil & Gas (8.5%). At December 31, 2016, our top three industry concentrations at fair value consisted of Finance (21.1%), Chemicals, Plastics, & Rubber (12.3%) and Services: Business (11.4%) (See Note 5 to the consolidated financial statements).

The weighted average yield of the debt and income producing equity securities in our portfolio at fair value was 10.8% at September 30, 2017 and 11.7% at December 31, 2016. The weighted average yields on our senior secured loans and other debt securities at fair value were 11.4% and 11.0%, respectively, at September 30, 2017, versus 11.3% and 12.4%, respectively, at December 31, 2016. The weighted average yield of the debt and income producing equity securities in our portfolio at their current cost basis was 9.9% at September 30, 2017 and 10.5% at December 31, 2016. The weighted average yields on our senior secured loans and other debt securities at their current cost basis were 10.8% and 8.9%, respectively, at September 30, 2017, versus 10.5% and 10.8%, respectively, at December 31, 2016. Yields exclude common equity investments, preferred equity investments with no stated dividend rate, short-term investments, and cash and cash equivalents.

For the three and nine months ended September 30, 2017, the total return based on net asset value was (2.1%) and 5.0%, respectively, and, the total return based on market price was 2.6% and 16.7%, respectively. For the three and nine months ended September 30, 2016, the total return based on net asset value was (5.6%) and (11.2%), respectively, and, the total return based on market price was 9.4% and (5.1%), respectively. Total

 

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returns are historical and are calculated by determining the percentage change in the net asset value or market price with all distributions reinvested, if any. Distributions are assumed to be reinvested in accordance with the Company’s dividend reinvestment plan and do not reflect brokerage commissions.

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

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

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

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

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

The Advisor monitors and, when appropriate, changes the investment ratings assigned to each investment in our portfolio. In connection with our valuation process, the Advisor and Board of Directors review these investment ratings on a quarterly basis. Our average investment rating was 1.30 at September 30, 2017 and 1.35 at December 31, 2016. The following is a distribution of the investment ratings of our portfolio companies at September 30, 2017 and December 31, 2016:

 

     September 30, 2017      December 31, 2016  

Grade 1

   $ 708,035,354      $ 696,150,783  

Grade 2

     55,748,934        133,487,483  

Grade 3

     14,492,670        88,655,801  

Grade 4

     55,572,304        5,005,487  

Not Rated

     5,487        7,823,936  
  

 

 

    

 

 

 

Total investments

   $ 833,854,749      $ 931,123,490  
  

 

 

    

 

 

 

Results of operations

Results comparisons for the three months ended September 30, 2017 and 2016.

Investment income

Investment income totaled $22,761,034 and $26,139,074, respectively, for the three months ended September 30, 2017 and 2016, of which $13,906,570 and $16,192,117 were attributable to interest and fees on

 

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senior secured loans, $4,372,913 and $7,979,526 to interest and fees earned on other debt securities, $4,463,118 and $1,961,649 to dividends from equity securities and $18,433 and $5,782 to interest earned on cash equivalents, respectively. Excluding fee income, the approximate 12% decline in investment income over the respective periods is primarily attributable to a 15% smaller average overall portfolio, at amortized cost.

For the three months ended September 30, 2017, fee income was $164,464 as compared to $524,710 for the three months ended September 30, 2016. Of the prior period total, approximately $400,000 was from capital structuring and amendment fees earned from two portfolio company investments. Interest income is comprised of approximately 7% of PIK interest for the three months ended September 30, 2017.

Expenses

Expenses for the three months ended September 30, 2017 and 2016 were $10,621,118 and $28,270,065, respectively, which consisted of $3,993,673 and $5,188,115 in base management fees, $4,808,533 and $3,831,364 in interest and credit facility fees, $323,949 and $575,000 in professional fees, $380,271 and $368,599 in investment advisor and administrative services expenses, $157,500 and $160,250 in director fees, zero and $17,500,000 in legal settlement, and $957,192 and $646,737 in other expenses, respectively. Total expenses for the three months ended September 30, 2017 also consisted of $1,493,619 of incentive fees based on income as compared to zero for the three months ended September 30, 2016. As previously disclosed, the Company’s investment advisor, in consultation with the Company’s Board of Directors has agreed to waive such incentive fees based on income through December 31, 2018 (See Note 3 to the consolidated financial statements). The decrease in the current period base management fees is primarily due to the decrease in the rate used to calculate management fees from 2.0% of total assets to 1.75% of total assets, excluding cash, after March 6, 2017 (See Note 3 to the consolidated financial statements). Interest and credit facility fees increased 26% over the respective quarters primarily due to interest expense in connection with the newly issued 2022 Convertible Notes. The decrease in professional fees during the quarter was primarily in connection with revised estimates.

Net investment income (loss)

Net investment income (loss) was $12,139,916 and $(2,130,991) for the three months ended September 30, 2017 and 2016, respectively. The increase over the comparable quarter was primarily due to a one-time legal settlement expense incurred of $17.5 million.

Net realized gain or loss

Net realized gain or loss for the three months ended September 30, 2017 was a net gain of $28,990, comprised of a change in the anticipated escrow proceeds from our previously realized equity investment in Bankruptcy Management Solutions, Inc. Net realized gain or loss for the three months ended September 30, 2016 was a loss of $26,591,127. The net loss was primarily driven by the $25,323,534 net loss realized on the restructuring of our investment in ETX Energy, LLC, et al., (formerly New Gulf Resources, LLC “New Gulf”) senior secured note, subordinated debt and warrants during the third quarter of 2016.

Net unrealized appreciation or depreciation before taxes

For the three months ended September 30, 2017 and 2016, the net change in unrealized appreciation or depreciation on investments and foreign currency translation was a increase in net unrealized depreciation of $19,349,497 and an increase of $10,351,063, respectively. The current period depreciation was primarily comprised of approximately $18.2 million of overall net decreases due to portfolio valuations during the quarter. The 2016 period depreciation was primarily comprised of approximately $33.1 million of overall net declines due to portfolio valuations during the quarter, partially offset by approximately $22.7 million of total unrealized appreciation primarily resulting from the reversal of previously recognized depreciation upon dispositions, namely a restructuring of New Gulf.

 

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Net increase or decrease in net assets resulting from operations

The net increase or decrease in net assets resulting from operations for the three months ended September 30, 2017 and 2016 was a decrease of $13,751,226 and a decrease of $39,037,181, respectively. As compared to the prior period, the increase for the three months ended September 30, 2017 is reflective of i) an overall increase in net investment income of $14.3 million period-over-period, and ii) a net realized and unrealized gain (loss) of $(19.3) million for the current period, as compared to $(36.9) million for the three months ended September 30, 2016. The impact of this was partially offset by the realized loss of $(1.3) million incurred during the current period associated with debt extinguishment (See Note 7 to the consolidated financial statements) and the deferred taxes of $(5.3) million related to unrealized gains in a consolidated taxable subsidiary (See Note 2 to the consolidated financial statements).

Results comparisons for the nine months ended September 30, 2017 and 2016.

Investment income

Investment income totaled $72,931,589 and $89,405,031, respectively, for the nine months ended September 30, 2017 and 2016, of which $44,683,063 and $59,083,476 were attributable to interest and fees on senior secured loans, $18,710,360 and $25,249,145 to interest and fees earned on other debt securities, $8,908,489 and $5,053,165 to dividends from equity securities and $39,248 and $19,244 to interest earned on cash equivalents, respectively. The 2017 total also includes a one-time insurance reimbursement related to a previously disclosed legal settlement in the amount of $590,429. Excluding fee income and the one-time insurance reimbursement, the approximate 15% decline in investment income over the respective periods is primarily attributable to a 17% smaller average overall portfolio, at amortized cost.

For the nine months ended September 30, 2017, fee income was $880,057 as compared to $5,458,426 for the nine months ended September 30, 2016. Of the prior period total, approximately $2,950,000 is from prepayment fees earned from the early repayment of two portfolio company investments. Interest income is comprised of approximately 12% of PIK interest for the nine months ended September 30, 2017.

Expenses

Expenses for the nine months ended September 30, 2017 and 2016 were $32,357,077 and $52,450,829, respectively, which consisted of $12,656,877 and $16,600,294 in base management fees, $14,056,698 and $12,641,384 in interest and credit facility fees, $1,681,342 and $1,679,000 in professional fees, $1,186,731 and $1,299,539 in investment advisor and administrative services expenses, $475,249 and $521,750 in director fees, zero and $17,500,000 in legal settlement, and $2,300,180 and $2,208,862 in other expenses, respectively. Total expenses for the nine months ended September 30, 2017 also consisted of $5,076,662 of incentive fees based on income as compared to zero for the nine months ended September 30, 2016. As previously disclosed, the Company’s investment advisor, in consultation with the Company’s Board of Directors has agreed to waive such incentive fees based on income through December 31, 2018 (See Note 3 to the consolidated financial statements). The decrease in the current period base management fees is primarily due to the decrease in the rate used to calculate management fees from 2.0% of total assets to 1.75% of total assets, excluding cash, after March 6, 2017 (See Note 3 to the consolidated financial statements). Interest and credit facility fees increased approximately 11% over the respective quarters primarily due to interest expense in connection with the newly issued 2022 Convertible Notes.

Net investment income

Net investment income was $40,574,512 and $36,954,202 for the nine months ended September 30, 2017 and 2016, respectively. The increase in net investment income over the comparable period was primarily due to a decrease of $20.1 million in expenses, net of incentive manage fee waiver, primarily attributable to i) a decrease of $3.9 million in base management fees period-over-period, and ii) a one-time legal settlement expense of approximately $17.5 million incurred in prior period. This was partially offset by a decrease of $16.5 million in investment income, primarily due to a decrease in current period interest and fees income.

 

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Net realized gain or loss

Net realized gain or loss for the nine months ended September 30, 2017 was a net loss of $51,579,074. Of this total, $57,392,431 of losses during the period were a result of restructurings or amendments of our debt investment in Advanced Lighting Technologies, Inc. (“Advanced Lighting”), and our debt and equity investments in U.S. Well Services, LLC (“USWS”), as well as the write-off of our investment in Shoreline Energy LLC (“Shoreline”). These losses were slightly offset by $5,743,830 of gains realized on the sales of our equity investment in USI Senior Holdings, Inc. and our debt and equity investments in Bankruptcy Management Solutions, Inc. Nearly the entire realized loss was reflected in unrealized depreciation in prior periods. Net realized gain or loss for the nine months ended September 30, 2016 was a loss of $57,530,688. The net loss was primarily driven by the $30,375,000 net loss realized on the restructuring of our investments in the Hunter Defense Technologies, Inc. (“Hunter”) first and second lien loans. Nearly the entire realized loss was reflected in unrealized depreciation in prior periods.

Net unrealized appreciation or depreciation before taxes

For the nine months ended September 30, 2017 and 2016, the change in net unrealized appreciation or depreciation on investments and foreign currency translation was a decrease in net unrealized depreciation of $35,129,629 and an increase in net unrealized depreciation of $66,225,551, respectively. The current period appreciation was primarily comprised of $15,588,407 of overall net decreases due to portfolio valuations during the period, offset by $50,718,036 of total unrealized appreciation primarily resulting from the reversal of previously recognized depreciation upon dispositions or restructurings, namely Advanced Lighting, USWS and Shoreline. The increase in net unrealized depreciation for the nine months ended September 30, 2016 was primarily comprised of $114,846,848 of overall net declines due to portfolio valuations during the nine month period, offset by $48,621,297 of total unrealized appreciation resulting from the reversal of previously recognized depreciation upon dispositions, namely the New Gulf and Hunter restructurings.

Net increase or decrease in net assets resulting from operations

The net increase or decrease in net assets resulting from operations for the nine months ended September 30, 2017 and 2016 was an increase of $17,554,432 and a decrease of $86,802,037, respectively. As compared to the prior period, the increase for the nine months ended September 30, 2017 is reflective of i) an overall increase in net investment income of $3.6 million period-over-period, and ii) a net realized and unrealized gain (loss) of $(16.4) million for the current period, as compared to $(123.8) million for the nine months ended September 30, 2016. The impact of this was partially offset by the realized loss of $(1.3) million incurred during the current period associated with debt extinguishment (See Note 7 to the consolidated financial statements) and the deferred taxes of $(5.3) million related to unrealized gain in a taxable subsidiary (See Note 2 to the consolidated financial statements).

Supplemental Non-GAAP information

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

Until March 6, 2017, we recorded our liability for Incentive Fees based on income as we become legally obligated to pay them, based on a hypothetical liquidation at the end of each reporting period. Our obligation to pay Incentive Fees with respect to any fiscal quarter until March 6, 2017 was based on a formula that reflects our results over a trailing four-fiscal quarter period ending with the pro-rated period until March 6, 2017. We are legally obligated to pay the amount resulting from the formula less any cash payments of Incentive Fees during the prior three quarters. The formula’s requirement to reduce the Incentive Fees by amounts paid with respect to Incentive Fees in the prior three quarters has caused our Incentive Fees expense to become generally

 

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concentrated in the fourth quarter of each year. Management believes that reflecting Incentive Fees throughout the year, as the related investment income is earned on a quarterly basis, is an effective measure of our profitability and financial performance that facilitates comparison of current results with historical results and with those of our peers. Our “as adjusted” results reflect Incentive Fees based on the formula we utilized for each trailing four-fiscal quarter period until March 6, 2017, with the formula applied to each quarter’s incremental earnings and without any reduction for Incentive Fees paid during the prior three quarters. The resulting amount represents an upper limit of each quarter’s incremental Incentive Fees that we may become legally obligated to pay at the end of the year. Prior year amounts are estimated in the same manner. These estimates represent upper limits because, in any calendar year, subsequent quarters’ investment underperformance could reduce the Incentive Fees payable with respect to prior quarters’ operating results. After March 6, 2017, Incentive Fees based on income are calculated for each calendar quarter and may be paid on a quarterly basis if certain thresholds are met. We record our liability for incentive management fees based on capital gains by performing a hypothetical liquidation at the end of each reporting period. The accrual of this hypothetical capital gains incentive management fee is required by GAAP, but it should be noted that a fee so calculated and accrued is not due and payable until the end of the measurement period, or every June 30. The incremental incentive management fees disclosed for a given period are not necessarily indicative of actual full year results. Changes in the economic environment, financial markets and other parameters used in determining such estimates could cause actual results to differ and such differences could be material. See Note 3 to the consolidated financial statements in this Quarterly Report for a more detailed description of the Company’s incentive management fee.

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

 

     Three months
ended
September 30,
2017
     Three months
ended
September 30,
2016
    Nine months
ended
September 30,
2017
     Nine months
ended
September 30,
2016
 

GAAP Basis:

          

Net Investment Income (Loss)

   $ 12,139,916      $ (2,130,991   $ 40,574,512      $ 36,954,202  

Net Investment Income (Loss) per share

     0.17        (0.03     0.56        0.51  

Addback: GAAP incentive management fee expense based on Gains

     —          —         —          —    

Addback: GAAP incentive management fee expense based on Income

     —          —         —          —    

Pre-Incentive Fee1:

          

Net Investment Income (Loss)

   $ 12,139,916      $ (2,130,991   $ 40,574,512      $ 36,954,202  

Net Investment Income (Loss) per share

     0.17        (0.03     0.56        0.51  

Less: Incremental incentive management fee expense based on Income

     —          —         —          —    

As Adjusted2:

          

Net Investment Income (Loss)

   $ 12,139,916      $ (2,130,991   $ 40,574,512      $ 36,954,202  

Net Investment Income (Loss) per share

     0.17        (0.03     0.56        0.51  

Pre-Incentive Fee1: Amounts are adjusted to remove all incentive management fees. Such fees are calculated but not necessarily due and payable at this time.

As Adjusted2: Amounts are adjusted to remove the incentive management fee expense based on gains, as required by GAAP, and to include only the incremental incentive management fee expense based on income. Until March 6, 2017, the incremental incentive management fee is calculated based on the current quarter’s incremental earnings, and without any reduction for incentive management fees paid during the prior calendar quarters. After March 6, 2017, incentive management fee expense based on income is calculated for each

 

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calendar quarter and may be paid on a quarterly basis if certain thresholds are met. Amounts reflect the Company’s ongoing operating results and reflect the Company’s financial performance over time.

Financial condition, liquidity and capital resources

During the nine months ended September 30, 2017, we generated operating cash flows primarily from investment dispositions, interest and fees received on senior secured loans and other debt securities.

Net cash provided by operating activities during the nine months ended September 30, 2017 was $121,118,521. Our primary sources of cash from operating activities during the period consisted of net proceeds from sales and repayments of $262,067,895, as well as a net increase in net assets resulting from operations of $17,554,432. Our primary uses of cash from operating activities during the period consisted of purchases of investments of $168,848,829.

Net cash used in financing activities during the nine months ended September 30, 2017 was $126,906,510. Our primary uses of cash from financing activities consisted of i) $88.1 million in net repayment under the Credit Facility, Senior Secured Notes, Term Loan and partial debt extinguishment of the Convertible Notes, net of borrowings under the Credit Facility and the issuance of the 2022 Convertible Notes, and ii) cash distributions paid of $38.8 million.

Contractual obligations

A summary of our significant contractual payment obligations for the repayment of outstanding borrowings at September 30, 2017 is as follows:

 

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

Credit Facility(1)

   $ 56.0      $ —        $ —        $ 56.0      $ —    

Convertible Notes(2)

     55.0        55.0        —          —          —    

2022 Convertible Notes

     139.6        —          —          139.6        —    

Interest and Credit Facility Fees Payable

     3.0        3.0        —          —          —    

 

(1) At September 30, 2017, $384.0 million remained unused under our Credit Facility.
(2) On September 27, 2017, we purchased $60.0 million in aggregate principal amount of its existing $115.0 million Convertible Notes pursuant to a cash tender offer. All Convertible Notes purchased in the tender offer were retired and cancelled, and are no longer outstanding under the indenture (Note 7 to the consolidated financial statements).

Off-balance sheet arrangements

In the normal course of business, the Company may enter into guarantees on behalf of portfolio companies. Under these arrangements, the Company would be required to make payments to third parties if the portfolio companies were to default on their related payment obligations. There were no such guarantees outstanding at September 30, 2017 and December 31, 2016. In addition, from time to time, the Company may provide for a commitment to a portfolio company for investment in an existing or new security. At September 30, 2017 and December 31, 2016, the Company was obligated to existing portfolio companies for unfunded commitments of $24.7 million and $43.5 million, respectively. Of the $24.7 million total unfunded commitments at September 30, 2017, $19.3 million was on our aggregate $85.0 million equity commitment to Senior Loan Partners (see Note 5 to the consolidated financial statements). We maintain sufficient cash on hand and available borrowings to fund such unfunded commitments should the need arise.

Distributions

Our quarterly distributions, if any, are determined by our Board of Directors. Distributions are declared considering our estimate of annual taxable income available for distribution to stockholders and the amount of

 

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taxable income carried over from the prior year for distribution in the current year. We cannot assure stockholders that they will receive any distributions at all or distributions at a particular level. The following table lists the quarterly distributions per share from our common stock since June 2015:

 

Distribution Amount

Per Share

Outstanding

  

Record Date

  

Payment Date

$0.21

   June 18, 2015    July 2, 2015

$0.21

   September 18, 2015    October 2, 2015

$0.21

   December 24, 2015    January 7, 2016

$0.21

   March 18, 2016    April 1, 2016

$0.21

   June 17, 2016    July 1, 2016

$0.21

   September 19, 2016    October 3, 2016

$0.21

   December 19, 2016    January 3, 2017

$0.18

   March 20, 2017    April 3, 2017

$0.18

   June 19, 2017    July 3, 2017

$0.18

   September 18, 2017    October 2, 2017

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

We have elected to be taxed as a RIC under Subchapter M of the Code. In order to maintain favorable RIC tax treatment, we must distribute annually to our stockholders at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, out of the assets legally available for distribution. Under the Regulated Investment Company Modernization Act of 2010, capital losses incurred by the Company after December 31, 2010 will not be subject to expiration. In addition, such losses must be utilized prior to the losses incurred in the years preceding enactment. 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:

 

    98% of our ordinary income for the calendar year;

 

    98.2% of our capital gains in excess of capital losses for the one-year period ending on October 31st; and

 

    any ordinary income and net capital gains for preceding years that were not distributed during such years.

We may, at our discretion, carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. If we choose to do so, all other things being equal, this would increase expenses and reduce the amounts available to be distributed to our stockholders. We will accrue excise tax on estimated taxable income as required. In addition, although we currently intend to distribute realized net capital gains (i.e., net long-term capital gains in excess of short-term capital losses), if any, at least annually, out of the assets legally available for such distributions, we may in the future decide to retain such capital gains for investment. There was no provision for federal excise taxes recorded for the years ended December 31, 2016 and 2015.

We maintain an “opt out” dividend reinvestment plan for our common stockholders. As a result, except as discussed below, if we declare a distribution, stockholders’ cash distributions will be automatically reinvested in additional shares of our common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash distributions. With respect to our distributions paid to stockholders during the nine months ended September 30, 2017 and 2016, distributions reinvested pursuant to our dividend reinvestment plan totaled $2,648,095 and $3,003,346, respectively.

Under the terms of an amendment to our dividend reinvestment plan adopted on March 4, 2009, distributions may be paid in newly issued or treasury shares of our common stock at a price equal to 95% of the

 

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market price on the payment date. This feature of the plan means that, under certain circumstances, we may issue shares of our common stock at a price below net asset value per share, which could cause our stockholders to experience dilution. We may not be able to 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. Also, we may be limited in our ability to make distributions due to the asset coverage test applicable to us as a BDC under the 1940 Act and due to provisions in our existing and future debt arrangements.

If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of favorable RIC tax treatment. In addition, in accordance with U.S. generally accepted accounting principles and tax regulations, we include in income certain amounts that we have not yet received in cash, such as payment-in-kind interest, which represents contractual interest added to the loan balance that becomes due at the end of the loan term, or the accretion of original issue or market discount. Since we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the requirement to distribute at least 90% of our investment company taxable income to obtain tax benefits as a RIC and may be subject to income or excise taxes. In order to satisfy the annual distribution requirement applicable to RICs, we may have the ability to declare a large portion of a dividend in shares of our common stock instead of in cash. As long as a sufficient portion of such dividend is paid in cash and certain requirements are met, the entire distribution would generally be treated as a dividend for U.S. federal income tax purposes.

Recent developments

On November 7, 2017, the Company’s Board of Directors declared a distribution of $0.18 per share, payable on January 2, 2018 to stockholders of record at the close of business on December 19, 2017.

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

On October 18, 2017, Donna Milia notified the Company that she is leaving the Company for personal reasons. Ms. Milia served as Chief Financial Officer and Treasurer for the Company. Ms. Milia agreed to remain with the Advisor through December 29, 2017 to provide transition assistance with respect to the Company. Michael Pungello was appointed by the Company’s Board of Directors as the Interim Chief Financial Officer and Interim Treasurer on October 20, 2017.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are subject to financial market risks, including changes in interest rates. At September 30, 2017, 74% of our debt investments bore interest based on floating rates, such as LIBOR, the Federal Funds Rate or the Prime Rate. The interest rates on such investments generally reset by reference to the current market index after one to six months. Of those floating rate debt investments, 96% contained an interest rate floor. Floating rate investments subject to a floor generally reset by reference to the current market index after one to six months only if the index exceeds the floor. Interest rate sensitivity refers to the change in our earnings that may result from changes in the level of interest rates. Since we fund a portion of our investments with borrowings, our net investment income is affected by the difference between the rate at which we invest and the rate at which we borrow. The Company’s Credit Facility bears interest at variable rates with no interest rate floors, while our Convertible Notes and 2022 Convertible Notes bear interest at fixed rates. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income.

 

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The following table shows the approximate annual impact on net investment income of base rate changes in interest rates (considering interest rate floors for variable rate instruments) to our debt portfolio and outstanding borrowings as of September 30, 2017, assuming no changes to our investment and borrowing structure:

 

     Net
Investment
Income(1)
     Net
Investment
Income
Per Share(1)
 

Basis Point Change ($’s in millions, except per share data)

     

Up 400 basis points

   $ 16.7      $ 0.23  

Up 300 basis points

   $ 12.5      $ 0.17  

Up 200 basis points

   $ 8.3      $ 0.11  

Up 100 basis points

   $ 4.2      $ 0.06  

Down 100 basis points

   $ (1.0    $ (0.01

 

(1) Excludes the impact of incentive management fees based on income

While hedging activities may help to insulate us against adverse changes in interest rates, they also may limit our ability to participate in the benefits of lower interest rates with respect to our portfolio of investments. There can be no assurance that we will be able to effectively hedge our interest rate risk. During the nine months ended September 30, 2017 and 2016, we did not engage in any interest rate hedging activity.

Item 4. Controls and Procedures

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

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

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we and the Advisor may be a party to certain legal proceedings incidental to the normal course of our business, including the enforcement of our rights under contracts with our portfolio companies. Further, third parties may try to seek to impose liability on us in connection with the activities of our portfolio companies. While we cannot predict the outcome of these legal proceedings with certainty, we do not expect that these proceedings will have a material effect on our consolidated financial statements.

Item 1A. Risk Factors

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

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

Sales of unregistered securities

None.

Issuer purchases of equity securities

The following table provides information regarding our purchases of our common stock for each month in the nine month period ended September 30, 2017:

 

Period

   Average Price Paid
per Share
     Total Number of
Shares Purchased
     Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
     Maximum Number
(or Approximate
Dollar Value) of
Shares that May Yet
Be Purchased  Under
the Plans or
Programs
 

January 2017

     —          —          —          1,958,149  

February 2017

     —          —          —          1,958,149  

March 2017

     —          —          —          1,958,149  

April 2017

     —          —          —          1,958,149  

May 2017

     —          —          —          1,958,149  

June 2017

     —          —          —          1,958,149  

July 2017

     —          —          —          2,500,000  

August 2017

     —          —          —          2,500,000  

September 2017

     —          —          —          2,500,000  
     

 

 

    

 

 

    
     —          —          —       
     

 

 

    

 

 

    

During May 2017, the Board of Directors approved an increase to the remaining amount of shares authorized to be repurchased, effective July 1, 2017, to a total of 2,500,000 shares, and an extension to the plan until the earlier of June 30, 2018 or such time that all of the authorized shares have been repurchased.

The repurchase plan does not obligate us to acquire any specific number of shares and may be discontinued at any time. We intend to fund any repurchases with available cash.

 

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Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None.

Item 6. Exhibits.

 

(a) Exhibits.

 

31.1    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32    Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

 

* Filed herewith

 

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SIGNATURES

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

 

  

BLACKROCK CAPITAL INVESTMENT

CORPORATION

Date: November 8, 2017    By:   

/s/ Michael J. Zugay

     

Michael J. Zugay

Chief Executive Officer

Date: November 8, 2017    By:   

/s/ Michael Pungello

     

Michael Pungello

Interim Chief Financial Officer and Interim Treasurer

 

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