What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-05-19 compared with 2021-05-20 · 77 added, 77 removed, 336 unchanged (31% of the section changed)

45 unchanged sentences

COVID-19 Developments

In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) a pandemic, which has resulted in uncertainty and disruption in the global economy and financial markets.

The global impact of the outbreak has been rapidly evolving, and as cases of COVID-19 have continued to be identified in additional countries, many countries have reacted by instituting quarantines and restrictions on travel, closing financial markets and/or restricting trading, and limiting operations of non-essential businesses.

Such actions are creating disruption in global supply chains, and adversely impacting many industries.

The outbreak has had and could continue to have an adverse impact on economic and market conditions and some economists, investment banks and The World Bank have indicated that current indicators point to a global recession that started in February 2020.

While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic, containment measures and the availability of effective vaccines, our compliance with these measures has impacted our day-to-day operations and could disrupt our business and operations, as well as that of our portfolio companies, for an indefinite period of time.

Depending on the duration and extent of the disruption to the operations of our portfolio companies, we expect that certain portfolio companies will experience financial distress and possibly default on their financial obligations to us and their other capital providers.

We also expect that some of our portfolio companies may significantly curtail business operations, furlough or lay off employees and terminate service providers, and defer capital expenditures if subjected to prolonged and severe financial distress, which would likely impair their business on a permanent basis.

These developments would likely result in a decrease in the value of our investment in any such portfolio company.

The COVID-19 pandemic and the related disruption and financial distress experienced by our portfolio companies may have material adverse effects on our investment income, particularly our interest income, received from our investments.

In connection with the adverse effects of the COVID-19 pandemic, we may need to restructure our investments in some of our portfolio companies, which could result in reduced interest payments, an increase in the amount of PIK interest we receive, or result in permanent impairments on our investments.

Our investment valuations are inherently less certain than they would be absent the current and potential impacts of COVID-19 and the values assigned as of this date may materially differ from the values that may ultimately be realized.

The downturn in the aviation industry from COVID-19 has resulted in Merx Aviation recording impairment losses related to aircraft leasing and impacted its financial condition.

This may result in the further unrealized depreciation in value on the Company’s investments in Merx.

Further, any additional write downs in the value of our investments may reduce our net asset value.

These events may also limit our investment origination pipeline and may increase our future funding costs.

A significant reduction in our net change in unrealized gains/losses may result due to decreases in the fair value of some of our portfolio company investments due to the immediate adverse economic effects of the COVID-19 pandemic and the continuing uncertainty surrounding its long-term impact.

We believe that the COVID-19 pandemic represents an extraordinary circumstance that could materially impact the fair value of our investments.

As a result, the fair value of our portfolio investments may be further negatively impacted after March 31, 2021 by continued duration of the adverse market, as well as circumstances and events that are not yet known.

We are also subject to financial risks, including changes in market interest rates.

As of March 31, 2021, all of our debt portfolio investments bore interest at variable rates, which generally are LIBOR-based (or based on an equivalent applicable currency rate), and many of which are subject to certain floors.

In connection with the COVID-19 pandemic, the U.S.

Federal Reserve and other central banks have reduced certain interest rates and LIBOR has decreased.

A prolonged reduction in interest rates will reduce our gross investment income and could result in a decrease in our net investment income if such decreases in LIBOR are not offset by a corresponding increase in the spread over LIBOR that we earn on any portfolio investments, a decrease in in our operating expenses, including with respect to our income incentive fee, or a decrease in the interest rate of our floating interest rate liabilities tied to LIBOR.

Quantitative and Qualitative Disclosures About Market Risk” for an analysis of the impact of hypothetical base rate changes in interest rates.

There is an ongoing global outbreak of COVID-19, which has spread to over 200 countries and territories, including every state in the United States.

The global impact of the outbreak has been rapidly evolving, and as cases of COVID-19, including new variants, have continued to be identified in additional countries, many countries have reacted, and continue to react, by instituting quarantines and restrictions on travel, closing financial markets and/or restricting trading, and limiting operations of non-essential businesses.

Such actions have created disruption in global supply chains, and adversely impacted many industries.

Supply chain disruptions could significantly impact the businesses of our portfolio companies and lead to increased costs, inventory shortages, shipping delays and an inability to meet customer demands.

The outbreak has had a continued adverse impact on economic and market conditions and has triggered a period of global economic slowdown.

Although vaccines have been widely distributed in the U.S., certain U.S.

states are planning on reopening and we believe the economy is beginning to rebound in certain respects, the uncertainty surrounding the COVID-19 pandemic, including uncertainty regarding new variants of COVID-19, the efficacy of existing vaccines against new variants and acceptance of vaccines and other factors have and may continue to contribute to significant volatility in the global markets.

COVID-19 and the current financial, economic and capital markets environment, and future developments in these and other areas present uncertainty and risk with respect to our performance, financial condition, results of operations and ability to pay distributions.

LIBOR Developments

On July 27, 2017, the Financial Conduct Authority (“FCA”) announced that it would phase out the London Interbank Offered Rate (“LIBOR”) as a benchmark by the end of 2021 and the FCA has indicated that market participants should not rely on LIBOR being available after 2021.

As an alternative to LIBOR, for example, the U.S.

Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S.

financial institutions, is considering replacing U.S.-dollar LIBOR with the Secured Overnight Financing Rate, a new index calculated by short-term repurchase agreements, backed by Treasury securities.

Abandonment of or modifications to LIBOR could have adverse impacts on newly issued financial instruments and our existing financial instruments which reference LIBOR.

Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR, or any changes announced with respect to such reforms, may result in a sudden or prolonged increase or decrease in the reported LIBOR rates and the value of LIBOR-based loans and securities, including those of other issuers we or our funds currently own or may in the future own.

It remains uncertain how such changes would be implemented and the effects such changes would have on us, issuers of instruments in which we invest and financial markets generally.

The expected discontinuation of LIBOR could have a significant impact on our business.

The dollar amount of our outstanding debt investments and borrowings that are linked to LIBOR with maturity dates after the anticipated discontinuation date of 2021 is material.

On July 27, 2017, the U.K Financial Conduct Authority (“FCA”) announced that it would phase out LIBOR as a benchmark by the end of 2021.

As of December 31, 2021, all non-U.S.

dollar LIBOR publications have been phased out.

The phase out of a majority of the U.S.

dollar publications is delayed until June 30, 2023.

The Alternative Reference Rates Committee (“ARRC”) of the Federal Reserve Bank of New York previously confirm that this constitutes a “benchmark transition event” and established “benchmark replacement dates” in ARRC standard LIBOR transition provisions that exist in many U.S.

law contracts using LIBOR.

The publication of all EUR and CHF LIBOR settings, the Spot Next/Overnight, 1 week, 2 month and 12 month JPY and GBP LIBOR settings, and the 1 week and 2 months USD LIBOR settings has ceased.

The publication of the overnight, 1 month, 3 month, 6 month, and 12 months USD LIBOR settings will cease after June 30, 2023.

The FCA plans to consult the market on creating “synthetic” 1 month, 3 month and 6 month rates for GBP and JPY LIBOR, to be published for a limited time.

The New York State legislation was signed into law to aid “tough legacy” LIBOR contracts.

Other legislative solutions are being pursued at the Federal level, in the U.K.

and in Europe.

Federal banking agencies have also issued guidance encouraging banking and global organizations to cease reference to USD LIBOR as soon as practicable and, in any event, by December 31, 2021.

Benchmarks Regulation imposed conditions under which only compliant benchmarks may be used in new contracts after 2021.

The ARRC has identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate for LIBOR.

SOFR is a measure of the cost of borrowing cash overnight, collateralized by the U.S.

Treasury securities, and is based on directly observable U.S.

Treasury-backed repurchase transactions.

However, the COVID-19 pandemic may adversely impact the timing of many firms’ transition planning, and we continue to assess the potential impact of the COVID-19 pandemic on our transition plans.

Although SOFR appears to be the preferred replacement rate for U.S.

dollar LIBOR, it is not possible at this time to predict the effect of any such changes, any establishment of alternative reference rates, whether the COVID-19 pandemic will have further effect on LIBOR transition timelines or plans, or other reforms to LIBOR that may be enacted in the United States, United Kingdom or elsewhere.

The discontinuation of LIBOR could have a significant impact on our business.

We anticipate significant operational challenges for the transition away from LIBOR, including, but not limited to, amending existing loan agreements with borrowers on investments that may have not been modified with fallback language and adding effective fallback language to new agreements in the event that LIBOR is discontinued before maturity.

Beyond these challenges, we anticipate there may be additional risks to our current processes and information systems that will need to be identified and evaluated by us.

Beyond these challenges, we anticipate there may be additional risks to our current processes and information systems that we will need to identify and evaluate.

Due to the uncertainty of the replacement for LIBOR, the potential effect of any such event on our cost of capital and net investment income cannot yet be determined.

9 unchanged sentences

We generate revenue primarily in the form of interest and dividend income from the securities we hold and capital gains, if any, on investment securities that we may acquire in portfolio companies.

Our debt investments, whether in the form of mezzanine or senior secured loans, generally have a stated term of five to ten years and bear interest at a fixed rate or a floating rate usually determined on the basis of a benchmark, such as the London Interbank Offered Rate (“LIBOR”), the Euro Interbank Offered Rate (“EURIBOR”), the federal funds rate, or the prime rate.

Our debt investments, whether in the form of mezzanine or senior secured loans, generally have a stated term of five to ten years and bear interest at a fixed rate or a floating rate usually determined on the basis of a benchmark, such as LIBOR or SOFR, the federal funds rate, or the prime rate.

Interest on debt securities is generally payable quarterly or semiannually and while U.S.

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Interest rate type, at fair value (4):

Fixed rate amount — —

Fixed rate amount $0.0 billion —

Floating rate amount $2.0 billion $1.9 billion

2 unchanged sentences

Interest rate type, at amortized cost (4):

Fixed rate amount — —

Fixed rate amount $0.0 billion —

Floating rate amount $2.0 billion $1.9 billion

9 unchanged sentences

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP.

The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, gains and losses.

114 unchanged sentences

The decrease in total investment income of $3.6 million for the year ended March 31, 2022 compared to the year ended March 31, 2021 was primarily driven by the decrease in total interest income (including PIK) of $6.3 million.

The decrease in total interest income (including PIK) was due to a decrease in the average yield for the total debt portfolio, from 9.4% for the year ended March 31, 2020 to 8.4% for the year ended March 31, 2021, and a lower income-bearing investment portfolio.

Furthermore, there was a decrease in prepayment fees and income recognized from the acceleration of discount, premium, or deferred fees on repaid investments, from $9.2 million for the year ended March 31, 2020 to $7.9 million for the year ended March 31, 2021.

The decrease in dividend income of $5.0 million was due to a decrease in dividends received from Merx Aviation Finance, LLC, which totaled $2.5 million for the year ended March 31, 2020 compared to $0.0 million for year ended March 31, 2021, and MSEA Tankers LLC, which totaled $4.7 million for the year ended March 31, 2020 compared to $1.7 million for year ended March 31, 2021.

Furthermore, there was a decrease in other income of $5.1 million primarily due to lower bridge and syndication fees.

The decrease in total interest income (including PIK) was due to a decrease in the average yield for the total debt portfolio, from 8.4% for the year ended March 31, 2021 to 8.0% for the year ended March 31, 2022.

This was partially offset by a higher income-bearing investment portfolio and an increase in prepayment fees and income recognized from the acceleration of discount, premium, or deferred fees on repaid investments, from $7.9 million for the year ended March 31, 2021 to $12.5 million for the year ended March 31, 2022.

The increase in dividend income of $0.2 million was due to a increase in dividends received from MSEA Tankers LLC, which totaled $1.7 million for the year ended March 31, 2021 compared to $2.1 million for year ended March 31, 2022.

Furthermore, there was a increase in other income of $2.6 million primarily due to higher amendment and bridge fees.

For the year ended March 31, 2022 as compared to the year ended March 31, 2021

The decrease in net expenses of $24.9 million for the year ended March 31, 2021 compared to the year ended March 31, 2020 was primarily due to the decrease in interest and other debt expenses of $17.9 million.

The decrease of interest and other debt expenses was due to the change in net leverage, from 1.71x for the year ended March 31, 2020 to 1.36x for the year ended March 31, 2021, and a decrease in the weighted average interest cost, from 4.42% for the year ended March 31, 2020 to 3.04% for the year ended March 31, 2021.

The decrease in management and performance-based incentive fees (net of amounts waived) of $5.9 million was due to a decrease in the investment portfolio and an incentive fee cap for fees paid in prior periods.

Furthermore, there was an increase of $0.5 million in other general and administrative expenses, which was primarily due to an increase in valuation fees.

The increase in net expenses of $10.5 million for the year ended March 31, 2022 compared to the year ended March 31, 2021 was primarily due to the increase in management and performance-based incentive fees (net of amounts waived) of $11.4 million an increase in performance based incentive fees.

The increase in management and performance-based incentive fees (net of amounts waived) of $11.4 million was due to an increase in performance based incentive fees.

This was partially offset by a decrease in interest and other debt expenses of $0.4 million.

The decrease of interest and other debt expenses was due to a reduction of the average debt outstanding, from $1,632 million for the year ended March 31, 2021 to $1,545 for the year ended March 31, 2022.

Furthermore, there was an decrease of $1.4 million in other general and administrative expenses, which was primarily due to an decrease in legal fees.

Net Realized Gains (Losses)

2 unchanged sentences

(in millions) Net Realized Gain (Loss)

Niacet Corporation $ 1.1

Spotted Hawk (44.4)

Glacier Oil & Gas Corp.

(f/k/a Miller Energy Resources, Inc.) (20.9)

During the year ended March 31, 2021, we recognized gross realized gains of $7.7 million and gross realized losses of $29.2 million, resulting in net realized losses of $21.5 million.

Significant realized gains (losses) for the year ended March 31, 2021 are summarized below:

(in millions) Net Realized Gain (Loss)

AMP Solar Group, Inc.

7 unchanged sentences

FiscalNote (1.4)

During the year ended March 31, 2020, we recognized gross realized gains of $18.2 million and gross realized losses of $24.5 million, resulting in net realized losses of $6.3 million.

Significant realized gains (losses) for the year ended March 31, 2020 are summarized below:

(in millions) Net Realized Gain (Loss)

Asset Repackaging Trust Six B.V.

(Israel Electric) $ 7.0

Renew Financial LLC (f/k/a Renewable Funding, LLC) 2.8

SquareTwo (CA Holdings, Collect America, Ltd.) 1.2

NFA Group 1.0

Carbonfree Chemicals SPE I LLC (f/k/a Maxus Capital Carbon SPE I LLC) (9.0)

Crowne Automotive (6.4)

Solarplicity Group Limited (f/k/a AMP Solar UK) (4.7)

Net Change in Unrealized Gains (Losses)

2 unchanged sentences

(in millions) Net Change in Unrealized Gain (Loss)

Spotted Hawk $ 39.1

Glacier Oil & Gas Corp.

(f/k/a Miller Energy Resources, Inc.) 27.6

Carbonfree Chemicals SPE I LLC (f/k/a Maxus Capital Carbon SPE I LLC) 15.8

ChyronHego Corporation 9.8

Paper Source 2.9

Sequential Brands Group, Inc.

US Legal Support 1.7

Securus Technologies Holdings, Inc.

Merx Aviation Finance, LLC (17.1)

Dynamic Product Tankers (Prime), LLC (17.0)

MSEA Tankers LLC (15.4)

Ambrosia Buyer Corp.

K&N Parent, Inc.

NFA Group (2.3)

CARE Fertility (1.5)

Golden Bear (1.4)

Niacet Corporation (1.1)

AVAD, LLC (1.1)

During the year ended March 31, 2021, we recognized gross unrealized gains of $101.8 million and gross unrealized losses of $78.4 million, including the impact of transferring unrealized to realized gains (losses), resulting in net change in unrealized gains of $23.3 million.

Additional significant changes in unrealized gains (losses) for the year ended March 31, 2021 are summarized below:

(in millions) Net Change in Unrealized Gain (Loss)

KLO Holdings, LLC $ 11.9

18 unchanged sentences

Sequential Brands Group, Inc.

During the year ended March 31, 2020, we recognized gross unrealized gains of $16.6 million and gross unrealized losses of $271.7 million, including the impact of transferring unrealized to realized gains (losses), resulting in net change in unrealized losses of $255.0 million.

Additional significant changes in unrealized gains (losses) for the year ended March 31, 2020 are summarized below:

(in millions) Net Change in Unrealized Gain (Loss)

Crowne Automotive $ 6.8

AMP Solar Group, Inc.

Sprint Industrial Holdings, LLC.

BioClinica Holding I, LP 1.1

Spotted Hawk (63.2)

Carbonfree Chemicals SPE I LLC (f/k/a Maxus Capital Carbon SPE I LLC) (32.4)

Merx Aviation Finance, LLC (25.8)

Glacier Oil & Gas Corp.

(f/k/a Miller Energy Resources, Inc.) (25.6)

Renew Financial LLC (f/k/a Renewable Funding, LLC) (15.6)

KLO Holdings, LLC (10.7)

Asset Repackaging Trust Six B.V.

(Israel Electric) (6.2)

ZPower, LLC (4.7)

Solarplicity Group Limited (f/k/a AMP Solar UK) (4.7)

Liquidity and Capital Resources

1 unchanged sentence

For liquidity and capital resources information for the year ended March 31, 2020, see the Company's Form 10-K for the fiscal year ended March 31, 2021.

We believe that our current cash and cash equivalents on hand, our short-term investments, proceeds from the sale of our 2025 Notes, our available borrowing capacity under our Senior Secured Facility and our anticipated cash flows from operations will be adequate to meet our cash needs for our daily operations for at least the next twelve months.

This "Liquidity and Capital Resources" section should be read in conjunction with "Our Response to COVID-19" above.

We believe that our current cash and cash equivalents on hand, our short-term investments, proceeds from the sale of our 2025 Notes and 2026 Notes, our available borrowing capacity under our Senior Secured Facility and our anticipated cash flows from operations will be adequate to meet our cash needs for our daily operations for at least the next twelve months.

This "Liquidity and Capital Resources" section should be read in conjunction with "COVID-19 Developments" above.

Cash Equivalents

13 unchanged sentences

2025 Notes 350.0 — 350.0 — —

2026 Notes 125.0 — — 125.0 —

Total Debt Obligations $ 1,555.5 $ — $ 350.0 $ 1,205.5 $ —

29 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis