Item 1. Financial Statements
Item 1.
Financial Statements
SOLAR CAPITAL LTD.
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(in thousands, except share amounts)
September 30,
2020
(unaudited)
December 31,
2019
Assets
Investments at fair value:
Companies less than 5% owned (cost: $869,749 and $989,564, respectively)
$
853,984
$
970,821
Companies more than 25% owned (cost: $513,098 and $513,119, respectively)
497,921
524,003
Cash
47,473
16,783
Cash equivalents (cost: $539,959 and $419,571, respectively)
539,959
419,571
Dividends receivable
6,006
10,488
Interest receivable
6,814
5,401
Receivable for investments sold
2,130
2,207
Prepaid expenses and other assets
663
615
Total assets
$
1,954,950
$
1,949,889
Liabilities
Debt ($521,000 and $593,900 face amounts, respectively, reported net of unamortized debt issuance
costs of $5,942 and $6,783, respectively. See notes 6 and 7)
$
514,058
$
587,117
Payable for investments and cash equivalents purchased
556,108
419,662
Distributions payable
17,327
17,327
Management fee payable (see note 3)
6,176
6,747
Performance-based incentive fee payable (see note 3)
4,281
Interest payable (see note 7)
6,310
3,678
Administrative services payable (see note 3)
2,018
2,757
Other liabilities and accrued expenses
1,860
2,440
Total liabilities
$
1,103,857
$
1,044,009
Commitments and contingencies (see note 10)
Net Assets
Common stock, par value $0.01 per share, 200,000,000 and 200,000,000 common shares authorized,
respectively, and 42,260,826 and 42,260,826 shares issued and outstanding, respectively
$
423
$
423
Paid-in capital in excess of par
988,792
988,792
Accumulated distributable net loss
(138,122
)
(83,335
)
Total net assets
$
851,093
$
905,880
Net Asset Value Per Share
$
20.14
$
21.44
See notes to consolidated financial statements.
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SOLAR CAPITAL LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in thousands, except share amounts)
Three months ended
Nine months ended
September 30, 2020
September 30, 2019
September 30, 2020
September 30, 2019
INVESTMENT INCOME:
Interest:
Companies less than 5% owned
$
20,922
$
27,019
$
66,329
$
82,010
Companies more than 25% owned
1,355
1,523
4,050
3,928
Dividends:
Companies less than 5% owned
14
19
37
32
Companies more than 25% owned
6,094
10,145
18,777
28,844
Other income:
Companies less than 5% owned
462
1,000
1,175
2,824
Companies more than 25% owned
4
5
12
14
Total investment income
28,851
39,711
90,380
117,652
EXPENSES:
Management fees (see note 3)
$
6,176
$
6,738
$
18,416
$
20,027
Performance-based incentive fees (see note 3)
4,606
1,480
13,830
Interest and other credit facility expenses (see note 7)
6,510
7,529
20,173
21,958
Administrative services expense (see note 3)
1,572
1,352
3,867
4,013
Other general and administrative expenses
326
1,060
2,123
2,502
Total expenses
14,584
21,285
46,059
62,330
Net investment income
$
14,267
$
18,426
$
44,321
$
55,322
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, CASH EQUIVALENTS AND DEBT:
Net realized gain (loss) on investments and cash equivalents:
Companies less than 5% owned
$
(278
)
$
(52
)
$
(25,044
)
$
179
Companies more than 25% owned
(661
)
Net realized loss on investments and cash equivalents
(278
)
(52
)
(25,044
)
(482
)
Net change in unrealized gain (loss) on investments and cash equivalents and net change in
unrealized (gain) loss on debt:
Companies less than 5% owned
2,903
(2,451
)
2,979
(4,768
)
Companies more than 25% owned
3,225
(2,206
)
(26,062
)
8,108
Debt
(1,500
)
1,000
Net change in unrealized gain (loss) on investments, cash equivalents and debt
4,628
(4,657
)
(22,083
)
3,340
Net realized and unrealized gain (loss) on investments, cash equivalents and debt
4,350
(4,709
)
(47,127
)
2,858
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
$
18,617
$
13,717
$
(2,806
)
$
58,180
EARNINGS (LOSS) PER SHARE (see note 5)
$
0.44
$
0.32
$
(0.07
)
$
1.38
See notes to consolidated financial statements.
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SOLAR CAPITAL LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (unaudited)
(in thousands, except share amounts)
Three months ended
Nine months ended
September 30, 2020
September 30, 2019
September 30, 2020
September 30, 2019
Increase in net assets resulting from operations:
Net investment income
$
14,267
$
18,426
$
44,321
$
55,322
Net realized loss
(278
)
(52
)
(25,044
)
(482
)
Net change in unrealized gain (loss)
4,628
(4,657
)
(22,083
)
3,340
Net increase (decrease) in net assets resulting from operations
18,617
13,717
(2,806
)
58,180
Distributions to stockholders:
From net investment income
(17,327
)
(17,327
)
(51,981
)
(51,981
)
Capital transactions (see note 12) :
Net increase in net assets resulting from capital transactions
Total increase (decrease) in net assets
1,290
(3,610
)
(54,787
)
6,199
Net assets at beginning of period
849,803
928,980
905,880
919,171
Net assets at end of period
$
851,093
$
925,370
$
851,093
$
925,370
Capital stock activity (see note 12) :
Net increase from capital stock activity
See notes to consolidated financial statements.
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SOLAR CAPITAL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
Nine months ended
September 30,
2020
September 30,
2019
Cash Flows from Operating Activities:
Net increase (decrease) in net assets resulting from operations
$
(2,806
)
$
58,180
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net
cash provided by (used in) operating activities:
Net realized loss on investments and cash equivalents
25,044
482
Net change in unrealized (gain) loss on investments
23,083
(3,340
)
Net change in unrealized loss on debt
(1,000
)
(Increase) decrease in operating assets:
Purchase of investments
(183,186
)
(306,026
)
Proceeds from disposition of investments
286,479
272,748
Net accretion of discount on investments
(5,628
)
(7,332
)
Capitalization of
payment-in-kind interest
(3,039
)
(967
)
Collections of
payment-in-kind interest
166
477
Receivable for investments sold
77
380
Interest receivable
(1,413
)
1,461
Dividends receivable
4,482
(1,052
)
Other receivables
95
Prepaid expenses and other assets
(48
)
56
Increase (decrease) in operating liabilities:
Payable for investments and cash equivalents purchased
136,446
(91,563
)
Management fee payable
(571
)
234
Performance-based incentive fee payable
(4,281
)
(7
)
Administrative services expense payable
(739
)
(478
)
Interest payable
2,632
1,010
Other liabilities and accrued expenses
(580
)
(670
)
Net Cash Provided by (Used in) Operating Activities
275,118
(76,312
)
Cash Flows from Financing Activities:
Cash distributions paid
(51,981
)
(51,981
)
Deferred financing costs
841
629
Proceeds from secured borrowings
31,000
791,504
Repayment of secured borrowings
(103,900
)
(701,600
)
Net Cash Provided by (Used in) Financing Activities
(124,040
)
38,552
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
151,078
(37,760
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
436,354
207,216
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
587,432
$
169,456
Supplemental disclosure of cash flow information:
Cash paid for interest
$
17,541
$
20,948
See notes to consolidated financial statements.
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Table of Contents
SOLAR CAPITAL LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited)
September 30, 2020
(in thousands, except share/unit amounts)
Description
Industry
Spread
Above
Index (7)
LIBOR
Floor
Interest
Rate (1)
Acquisition
Date
Maturity
Date
Par Amount
Cost
Fair
Value
Senior Secured Loans 87.9%
First Lien Bank Debt/Senior Secured Loans
Aegis Toxicology Sciences Corporation
Health Care Providers & Services
L+550
1.00
%
6.50
%
5/7/2018
5/9/2025
$
16,913
$
16,700
$
16,237
Alteon Health, LLC
Health Care Providers & Services
L+650
1.00
%
7.50
%
9/14/2018
9/1/2023
14,338
14,272
14,051
American Teleconferencing Services, Ltd. (PGI)
Communications Equipment
L+650
1.00
%
7.50
%
5/5/2016
6/8/2023
29,997
29,486
27,747
Atria Wealth Solutions, Inc
Diversified Financial Services
L+600
1.00
%
7.00
%
9/14/2018
11/30/2022
5,855
5,818
5,826
AviatorCap SII, LLC (2)
Aerospace & Defense
L+700
7.25
%
12/27/2018
10/30/2020
2,810
2,810
2,810
AviatorCap SII, LLC (2)
Aerospace & Defense
L+700
7.25
%
3/19/2019
1/29/2021
3,549
3,549
3,549
Enhanced Capital Group, LLC
Capital Markets
L+550
1.00
%
6.50
%
6/28/2019
6/28/2024
20,689
20,440
20,689
iCIMS, Inc.
Software
L+650
1.00
%
7.50
%
9/7/2018
9/12/2024
15,003
14,784
14,928
Kingsbridge Holdings, LLC
Multi-Sector Holdings
L+700
1.00
%
8.00
%
12/21/2018
12/21/2024
33,112
32,728
33,112
KORE Wireless Group, Inc.
Wireless Telecommunication Services
L+550
5.72
%
12/21/2018
12/21/2024
36,571
36,013
36,205
Legility, LLC
Commercial Services & Supplies
L+600
1.00
%
7.00
%
2/27/2020
12/17/2025
19,750
19,390
19,355
Logix Holding Company, LLC
Communications Equipment
L+575
1.00
%
6.75
%
9/14/2018
12/22/2024
7,046
6,999
6,905
One Touch Direct, LLC
Commercial Services & Supplies
P+100
6.50
%
4/3/2020
3/29/2021
6
6
6
Pet Holdings ULC & Pet Supermarket, Inc. (3)
Specialty Retail
L+550
1.00
%
6.50
%
9/14/2018
7/5/2022
28,820
28,669
27,955
PhyNet Dermatology LLC
Health Care Providers & Services
L+550
1.00
%
6.50
%
9/5/2018
8/16/2024
17,108
17,011
16,424
Pinnacle Treatment Centers, Inc
Health Care Providers & Services
L+625
1.00
%
7.25
%
1/22/2020
12/31/2022
12,034
11,938
12,034
PPT Management Holdings, LLC
Health Care Providers & Services
L+850
(15)
1.00
%
9.50
%
9/14/2018
12/16/2022
20,767
20,692
18,690
Sentry Data Systems, Inc
Software
L+675
1.00
%
7.75
%
9/27/2020
10/6/2025
15,765
15,450
15,450
Soleo Health Holdings, Inc
Health Care Providers & Services
L+575
1.00
%
6.75
%
3/31/2020
12/29/2021
9,929
9,929
9,929
USR Parent, Inc. (Staples)
Specialty Retail
L+884
1.00
%
9.84
%
6/3/2020
9/12/2022
4,704
4,704
4,716
Total First Lien Bank Debt/Senior Secured Loans
$
311,388
$
306,618
Second Lien Asset-Based Senior Secured Loans
Greystone Select Holdings LLC & Greystone & Co., Inc.
Thrifts & Mortgage Finance
L+800
1.00
%
9.00
%
3/29/2017
4/17/2024
19,554
$
19,440
$
19,554
Varilease Finance, Inc.
Multi-Sector Holdings
L+750
1.00
%
8.50
%
8/22/2014
11/15/2025
36,438
36,301
36,438
Total Second Lien Asset-Based Senior Secured Loans
$
55,741
$
55,992
Second Lien Bank Debt/Senior Secured Loans
Bishop Lifting Products, Inc. (5)
Trading Companies & Distributors
L+800
1.00
%
9.00
%
3/24/2014
3/27/2022
24,985
$
24,932
$
22,487
PhyMed Management LLC
Health Care Providers & Services
L+875
1.00
%
9.75
%
12/18/2015
5/18/2021
32,321
32,130
29,897
Rug Doctor LLC (2)
Diversified Consumer Services
L+975
(11)
1.50
%
11.25
%
12/23/2013
5/16/2023
10,261
10,244
10,261
Total Second Lien Bank Debt/Senior Secured Loans
$
67,306
$
62,645
First Lien Life Science Senior Secured Loans
Alimera Sciences, Inc.
Pharmaceuticals
L+765
1.78
%
9.43
%
12/31/2019
7/1/2024
$
20,074
$
20,230
$
20,174
Apollo Endosurgery, Inc.
Health Care Equipment & Supplies
L+750
1.36
%
8.86
%
3/15/2019
9/1/2023
20,492
20,746
20,594
Ardelyx, Inc. (3)
Pharmaceuticals
L+745
7.61
%
5/10/2018
11/1/2022
24,500
25,001
24,990
aTyr Pharma, Inc.
Pharmaceuticals
P+410
7.35
%
11/18/2016
11/18/2020
667
1,508
1,500
Axcella Health Inc.
Pharmaceuticals
L+850
0.20
%
8.70
%
1/9/2018
1/1/2023
26,000
26,972
26,845
Cardiva Medical, Inc.
Health Care Equipment & Supplies
L+795
1.76
%
9.71
%
9/24/2018
12/1/2023
27,667
28,455
28,497
Centrexion Therapeutics, Inc.
Pharmaceuticals
L+725
2.45
%
9.70
%
6/28/2019
1/1/2024
16,400
16,416
16,523
Cerapedics, Inc.
Health Care Equipment & Supplies
L+695
2.50
%
9.45
%
3/22/2019
3/1/2024
21,489
21,755
21,757
Delphinus Medical Technologies, Inc.
Health Care Equipment & Supplies
L+850
1.00
%
9.50
%
8/18/2017
6/1/2022
2,117
2,377
2,373
GenMark Diagnostics, Inc. (3)
Health Care Providers & Services
L+590
2.51
%
8.41
%
2/1/2019
2/1/2023
49,522
50,644
50,698
Kindred Biosciences, Inc. (16)
Pharmaceuticals
L+675
2.17
%
8.92
%
9/30/2019
9/30/2024
9,197
9,224
9,219
Neuronetics, Inc.
Health Care Equipment & Supplies
L+765
1.66
%
9.31
%
3/2/2020
2/28/2025
15,613
15,642
15,613
OmniGuide Holdings, Inc. (13)
Health Care Equipment & Supplies
L+805
1.00
%
9.05
%
7/30/2018
1/1/2021
10,500
11,319
10,763
PQ Bypass, Inc.
Health Care Equipment & Supplies
L+795
1.00
%
8.95
%
12/20/2018
12/19/2022
10,000
10,135
10,213
Rubius Therapeutics, Inc. (3)
Pharmaceuticals
L+550
5.66
%
12/21/2018
12/21/2023
40,291
40,591
40,694
scPharmaceuticals, Inc.
Pharmaceuticals
L+795
2.23
%
10.18
%
9/17/2019
9/17/2023
4,684
4,714
4,719
SI-BONE, Inc. (3)
Health Care Equipment & Supplies
L+940
0.33
%
9.73
%
5/29/2020
6/1/2025
17,843
17,831
17,799
Total First Lien Life Science Senior Secured Loans
$
323,560
$
322,971
Total Senior Secured Loans
$
757,995
$
748,226
See notes to consolidated financial statements.
7
Table of Contents
SOLAR CAPITAL LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited) (continued)
September 30, 2020
(in thousands, except share/unit amounts)
Description
Industry
Interest
Rate (1)
Acquisition
Date
Maturity
Date
Par Amount
Cost
Fair
Value
Equipment Financing - 34.9%
AmeraMex International, Inc. (10)
Commercial Services & Supplies
10.00
%
3/29/2019
3/28/2022
$
5,221
$
5,174
$
5,272
Blackhawk Mining, LLC (14)
Oil, Gas & Consumable Fuels
10.97-11.16
%
2/16/2018
3/1/2022-11/1/2022
3,972
3,826
3,872
Boart Longyear Company (10)
Metals & Mining
10.44
%
5/28/2020
7/1/2024
3,652
3,652
3,652
C&H Paving, Inc. (14)
Construction & Engineering
9.74-11.66
%
12/26/2018
1/1/2024-11/1/2024
3,620
3,662
3,544
Capital City Jet Center, Inc. (10)
Airlines
10.00
%
4/4/2018
10/4/2023
1,608
1,608
1,533
Central Freight Lines, Inc. (10)
Road & Rail
7.16
%
7/31/2017
1/14/2024
1,190
1,190
1,190
Champion Air, LLC (10)
Airlines
10.00
%
3/19/2018
1/1/2023
2,388
2,388
2,378
Easton Sales and Rentals, LLC (10)
Commercial Services & Supplies
10.00
%
9/18/2018
10/1/2021
1,431
1,426
1,347
Environmental Protection & Improvement Company, LLC (10)
Road & Rail
8.25
%
9/30/2020
10/1/2027
6,615
6,665
6,615
Equipment Operating Leases, LLC (2)(12)
Multi-Sector Holdings
7.53-8.37
%
4/27/2018
8/1/2022-4/27/2025
27,213
27,213
26,400
EquipmentShare.com, Inc. (14)
Commercial Services & Supplies
6.60
%
1/8/2020
1/8/2025
8,430
7,949
8,430
Family First Freight, LLC (10)
Road & Rail
8.00-10.33
%
7/31/2017
9/30/2021-1/1/2023
1,141
1,140
1,109
Freightsol LLC (14)
Road & Rail
12.51-12.89
%
4/9/2019
11/1/2023
1,999
2,032
1,999
Garda CL Technical Services, Inc. (14)
Commercial Services & Supplies
8.30-8.77
%
3/22/2018
6/5/2023-10/5/2023
2,125
2,125
2,121
Georgia Jet, Inc. (10)
Airlines
8.00
%
12/4/2017
12/4/2021
998
998
998
Globecomm Systems Inc. (14)
Wireless Telecommunication Services
13.18
%
5/10/2018
7/1/2021
580
580
573
GMT Corporation (14)
Machinery
12.52
%
10/23/2018
10/23/2023
5,883
5,841
5,883
Haljoe Coaches USA, LLC (14)
Road & Rail
8.03-9.69
%
7/31/2017
7/1/2022-7/1/2024
4,849
4,849
4,104
HTI Logistics Corporation (10)
Commercial Services & Supplies
9.69-9.94
%
11/15/2018
12/1/2023-9/1/2025
553
553
529
Hypro, Inc. (10)
Machinery
11.53
%
9/30/2019
10/1/2023
3,278
3,304
3,192
Interstate NDT, Inc. (14)
Road & Rail
11.32-14.44
%
6/11/2018
7/1/2023-10/25/2023
1,780
1,780
1,689
ISR Holdings, LLC (10)
Commercial Services & Supplies
9.25
%
8/27/2019
8/27/2022
3,553
3,553
3,553
JP Motorsports, Inc. (14)
Road & Rail
16.06
%
8/17/2018
1/25/2022
140
140
136
Kool Pak, LLC (14)
Road & Rail
8.58
%
2/5/2018
3/1/2024
517
517
517
Lineal Industries, Inc. (10)
Construction & Engineering
8.00
%
12/21/2018
12/21/2021
49
49
49
Loyer Capital LLC (2)(12)
Multi-Sector Holdings
8.73-11.52
%
5/16/2019
5/16/24-9/25/24
14,731
14,731
14,456
Meridian Consulting I Corp, Inc. (10)
Hotels, Restaurants & Leisure
11.00
%
7/31/2017
6/11/2026
2,960
2,933
2,553
Mountain Air Helicopters, Inc. (10)
Commercial Services & Supplies
10.00
%
7/31/2017
4/30/2022-2/28/2025
1,968
1,963
2,003
NEF Holdings, LLC (2)
Multi-Sector Holdings
8.50
%
8/14/2020
8/14/2021
850
850
850
Rane Light Metal Castings Inc. (10)
Machinery
10.00
%
6/1/2020
7/1/2024
358
358
358
Rango, Inc. (10)(14)
Commercial Services & Supplies
9.33%-9.79
%
9/24/2019
4/1/2023-11/1/2024
5,496
5,573
5,283
Rossco Crane & Rigging, Inc. (14)
Commercial Services & Supplies
11.13-11.53
%
8/25/2017
4/1/2021-9/1/2022
396
396
385
Royal Coach Lines, Inc.(14)
Road & Rail
9.56
%
11/21/2019
8/1/2025
1,242
1,242
1,109
Royal Express Inc. (14)
Road & Rail
9.53
%
1/17/2019
2/1/2024
969
983
969
Sidelines Tree Service LLC (14)
Diversified Consumer Services
10.25-10.66
%
7/31/2017
8/1/2022-10/1/2022
215
216
208
South Texas Oilfield Solutions, LLC (14)
Energy Equipment & Services
12.52-13.76
%
3/29/2018
9/1/2022-7/1/2023
2,386
2,386
2,294
Southwest Traders, Inc. (14)
Road & Rail
9.13
%
11/21/2017
11/1/2020
14
14
14
ST Coaches, LLC (14)
Road & Rail
8.21-8.58
%
7/31/2017
10/1/2022-1/25/2025
4,623
4,623
4,140
Stafford Logistics, Inc. (10)
Commercial Services & Supplies
12.63-13.12
%
9/11/2019
10/1/2024-10/1/2025
7,148
7,148
6,871
Star Coaches Inc. (14)
Road & Rail
8.42
%
3/9/2018
4/1/2025
3,314
3,314
2,842
Sturgeon Services International Inc. (10)
Energy Equipment & Services
18.07
%
7/31/2017
2/28/2022
987
987
931
Sun-Tech Leasing of Texas, L.P. (14)
Road & Rail
8.68
%
7/31/2017
7/25/2021
54
54
54
Superior Transportation, Inc. (14)
Road & Rail
9.40-12.26
%
7/31/2017
4/1/2022-8/1/2024
6,063
6,049
5,525
Tailwinds, LLC (10)
Air Freight & Logistics
9.00
%
7/26/2019
8/1/2024
1,104
1,104
1,104
The Smedley Company & Smedley Services, Inc. (10)..
Commercial Services & Supplies
10.00-15.07
%
7/31/2017
10/29/2023-2/10/2024
4,090
4,094
4,115
Thora Capital, LLC (10)
Airlines
9.00
%
7/3/2019
7/1/2025
5,759
5,759
5,737
Tornado Bus Company (14)
Road & Rail
10.79
%
7/31/2017
9/1/2021
1,199
1,199
1,160
Trinity Equipment Rentals, Inc. (14)
Commercial Services & Supplies
11.23
%
9/13/2018
10/1/2022
598
598
601
Trolleys, Inc. (14)
Road & Rail
9.98
%
7/18/2018
8/1/2022
2,032
2,032
1,952
Up Trucking Services, LLC (14)
Road & Rail
11.21-12.10
%
3/23/2018
4/1/2022-8/1/2024
1,788
1,810
1,804
Warrior Crane Services, LLC (10)
Commercial Services & Supplies
8.95
%
7/11/2019
7/11/2024-8/1/2026
3,211
3,211
3,086
Wind River Environmental, LLC (10)
Diversified Consumer Services
10.01
%
7/31/2019
8/1/2024
797
804
794
Womble Company, Inc. (14)
Energy Equipment & Services
9.11
%
12/27/2019
1/1/2025
729
729
701
Shares/
Units
NEF Holdings, LLC Equity Interests (2)(9)
Multi-Sector Holdings
7/31/2017
200
145,000
134,481
Total Equipment Financing
$
312,374
$
297,065
Preferred Equity - 0.9%
SOAGG LLC (2)(3)(4)
Aerospace & Defense
8.00
%
12/14/2010
6/30/2023
1,418
$
1,418
$
3,486
SOINT, LLC (2)(3)(4)
Aerospace & Defense
5.00
% (11)
6/8/2012
6/30/2023
52,659
5,266
4,238
Total Preferred Equity
$
6,684
$
7,724
See notes to consolidated financial statements.
8
Table of Contents
SOLAR CAPITAL LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited) (continued)
September 30, 2020
(in thousands, except share/unit amounts)
Description
Industry
Acquisition
Date
Shares/
Units
Cost
Fair
Value
Common Equity/Equity Interests/Warrants - 35.1%
aTyr Pharma, Inc. Warrants *
Pharmaceuticals
11/18/2016
6,347
$
106
$
B Riley Financial Inc. (3)(8)
Research & Consulting Services
3/16/2007
38,015
2,684
953
CardioFocus, Inc. Warrants *
Health Care Equipment & Supplies
3/31/2017
90
51
Centrexion Therapeutics, Inc. Warrants *
Pharmaceuticals
6/28/2019
289,102
136
84
Conventus Orthopaedics, Inc. Warrants *
Health Care Equipment & Supplies
6/15/2016
157,500
65
Crystal Financial LLC (2)(3)
Diversified Financial Services
12/28/2012
280,303
280,737
290,948
Delphinus Medical Technologies, Inc. Warrants *
Health Care Equipment & Supplies
8/18/2017
444,388
74
89
Essence Group Holdings Corporation (Lumeris) Warrants *
Health Care Technology
3/22/2017
208,000
63
271
PQ Bypass, Inc. Warrants *
Health Care Equipment & Supplies
12/20/2018
300,000
106
93
RD Holdco Inc. (Rug Doctor) (2)*
Diversified Consumer Services
12/23/2013
231,177
15,683
1,226
RD Holdco Inc. (Rug Doctor) Class B (2)*
Diversified Consumer Services
12/23/2013
522
5,216
5,216
RD Holdco Inc. (Rug Doctor) Warrants (2)*
Diversified Consumer Services
12/23/2013
30,370
381
Scynexis, Inc. Warrants *
Pharmaceuticals
9/30/2016
12,243
105
Senseonics Holdings, Inc. Warrants *
Health Care Equipment & Supplies
7/25/2019
526,901
117
9
Sunesis Pharmaceuticals, Inc. Warrants *
Pharmaceuticals
3/31/2016
10,400
118
Venus Concept Ltd. Warrants* (fka Restoration Robotics)
Health Care Equipment & Supplies
5/10/2018
27,352
152
1
Total Common Equity/Equity Interests/Warrants
$
305,794
$
298,890
Total Investments (6) - 158.8%
$
1,382,847
$
1,351,905
Description
Industry
Acquisition
Date
Maturity Date
Par Amount
Cash Equivalents - 63.5%
U.S. Treasury Bill
Government
9/30/2020
11/12/2020
$
540,000
$
539,959
$
539,959
Total Investments & Cash Equivalents - 222.3%
$1,922,806
$
1,891,864
Liabilities in Excess of Other Assets - (122.3%)
(1,040,771
)
Net Assets - 100.0%
$
851,093
(1)
Floating rate debt investments typically bear interest at a rate determined by reference to the London Interbank
Offered Rate (LIBOR), and which typically reset monthly, quarterly or semi-annually. For each debt investment we have provided the current rate of interest, or in the case of leases the current implied yield, in effect as of
September 30, 2020.
(2)
Denotes investments in which we are deemed to exercise a controlling influence over the management or policies
of a company, as defined in the Investment Company Act of 1940 (1940 Act), due to beneficially owning, either directly or through one or more controlled companies, more than 25% of the outstanding voting securities of the investment.
Transactions during the nine months ended September 30, 2020 in these controlled investments are as follows:
Name of Issuer
Fair Value at
December 31,
2019
Gross
Additions
Gross
Reductions
Realized
Gain
(Loss)
Change in
Unrealized
Gain
(Loss)
Interest/
Dividend
/Other
Income
Fair Value at
September 30,
2020
AviatorCap SII, LLC
$
2,896
$
$
86
$
$
$
169
$
2,810
AviatorCap SII, LLC
2,713
1,105
269
198
3,549
Crystal Financial LLC
296,000
(5,052
)
18,000
290,948
Equipment Operating Leases, LLC
29,739
2,525
(814
)
1,743
26,400
Loyer Capital LLC
14,731
(275
)
1,113
14,456
NEF Holdings, LLC (equity)
145,000
(10,519
)
250
134,481
NEF Holdings, LLC (debt)
850
10
850
RD Holdco Inc. (Rug Doctor, common equity)
7,706
(6,480
)
1,226
RD Holdco Inc. (Rug Doctor, class B)..
5,216
5,216
RD Holdco Inc. (Rug Doctor, warrants)..
Rug Doctor LLC
9,111
1,150
(4
)
829
10,261
SOAGG LLC
4,952
123
(1,343
)
86
3,486
SOINT, LLC
5,939
254
380
(1,575
)
441
4,238
$524,003
$ 3,359
$3,383
$
$(26,062)
$22,839
$497,921
See notes to consolidated financial statements.
9
Table of Contents
SOLAR CAPITAL LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited) (continued)
September 30, 2020
(in thousands)
(3)
Indicates assets that the Company believes may not represent qualifying assets under
Section 55(a) of the Investment Company Act of 1940 (1940 Act), as amended. If we fail to invest a sufficient portion of our assets in qualifying assets, we could be prevented from making
follow-on investments in existing portfolio companies or could be required to dispose of investments at inappropriate times in order to comply with the 1940 Act. As of September 30, 2020, on a fair value
basis, non-qualifying assets in the portfolio represented 23.6% of the total assets of the Company.
(4)
Solar Capital Ltd.s investments in SOAGG, LLC and SOINT, LLC include a two and one dollar investment in
common shares, respectively.
(5)
Bishop Lifting Products, Inc., SEI Holding I Corporation, Singer Equities, Inc. & Hampton Rubber Company
are co-borrowers.
(6)
Aggregate net unrealized depreciation for U.S. federal income tax purposes is $14,912; aggregate gross
unrealized appreciation and depreciation for U.S. federal tax purposes is $31,574 and $46,486, respectively, based on a tax cost of $1,366,817. Unless otherwise noted, all of the Companys investments are pledged as collateral against the
borrowings outstanding on the senior secured credit facility. The Company generally acquires its investments in private transactions exempt from registration under the Securities Act of 1933, as amended (the Securities Act). These
investments are generally subject to certain limitations on resale, and may be deemed to be restricted securities under the Securities Act. All investments are Level 3 unless otherwise indicated.
(7)
Floating rate instruments accrue interest at a predetermined spread relative to an index, typically the LIBOR
or PRIME rate. These instruments are often subject to a LIBOR or PRIME rate floor.
(8)
Denotes a Level 1 investment.
(9)
NEF Holdings, LLC is held through NEFCORP LLC, a wholly-owned consolidated taxable subsidiary and NEFPASS LLC,
a wholly-owned consolidated subsidiary.
(10)
Indicates an investment that is wholly held by Solar Capital Ltd. through NEFPASS LLC.
(11)
Interest is paid in kind (PIK).
(12)
Denotes a subsidiary of NEF Holdings, LLC.
(13)
OmniGuide Holdings, Inc., Domain Surgical, Inc. and OmniGuide, Inc. are
co-borrowers.
(14)
Indicates an investment that is held by the Company through its wholly-owned consolidated financing subsidiary
NEFPASS SPV, LLC (the NEFPASS SPV). Such investments are pledged as collateral under the NEFPASS SPV, LLC Revolving Credit Facility (see Note 7 to the consolidated financial statements) and are not generally available to creditors, if
any, of the Company.
(15)
Spread is 6.00% Cash / 2.50% PIK.
(16)
Kindred Biosciences, Inc., KindredBio Equine, Inc. and Centaur Biopharmaceutical Services, Inc. are co-borrowers.
*
Non-income producing security.
See notes to consolidated financial statements.
10
Table of Contents
SOLAR CAPITAL LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited) (continued)
September 30, 2020
(in thousands)
Industry Classification
Percentage of Total
Investments (at fair value) as
of September 30, 2020
Diversified Financial Services (includes Crystal Financial LLC)
21.9
%
Multi-Sector Holdings (includes NEF Holdings, LLC, Equipment Operating Leases, LLC and Loyer
Capital LLC)
18.2
%
Health Care Providers & Services
12.4
%
Pharmaceuticals
10.7
%
Health Care Equipment & Supplies
9.4
%
Commercial Services & Supplies
4.7
%
Road & Rail
2.7
%
Wireless Telecommunication Services
2.7
%
Communications Equipment
2.6
%
Specialty Retail
2.4
%
Software
2.2
%
Trading Companies & Distributors
1.7
%
Capital Markets
1.5
%
Thrifts & Mortgage Finance
1.5
%
Diversified Consumer Services
1.3
%
Aerospace & Defense
1.0
%
Airlines
0.8
%
Machinery
0.7
%
Energy Equipment & Services
0.3
%
Oil, Gas & Consumable Fuels
0.3
%
Metals & Mining
0.3
%
Construction & Engineering
0.3
%
Hotels, Restaurants & Leisure
0.2
%
Air Freight & Logistics
0.1
%
Research & Consulting Services
0.1
%
Health Care Technology
0.0
%
Total Investments
100.0
%
See notes to consolidated financial statements.
11
Table of Contents
SOLAR CAPITAL LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2019
(in thousands, except share/unit amounts)
Description
Industry
Spread
Above
Index (7)
LIBOR
Floor
Interest
Rate (1)
Acquisition
Date
Maturity
Date
Par Amount
Cost
Fair
Value
Senior Secured Loans 94.1%
Bank Debt/Senior Secured Loans
Aegis Toxicology Sciences Corporation
Health Care Providers & Services
L+550
1.00
%
7.40
%
5/7/2018
5/9/2025
$
17,043
$
16,800
$
16,191
Alteon Health, LLC
Health Care Providers & Services
L+650
1.00
%
8.30
%
9/14/2018
9/1/2022
15,094
15,011
15,094
Altern Marketing, LLC
Household & Personal Products
L+600
2.00
%
8.00
%
10/25/2019
10/7/2024
27,899
27,626
27,620
American Teleconferencing Services, Ltd. (PGI)
Communications Equipment
L+650
1.00
%
8.32
%
5/5/2016
6/8/2023
30,038
29,386
28,236
Atria Wealth Solutions, Inc
Diversified Financial Services
L+600
1.00
%
7.80
%
9/14/2018
11/30/2022
4,404
4,371
4,360
AviatorCap SII, LLC (2)
Aerospace & Defense
L+700
8.90
%
12/27/2018
10/30/2020
2,896
2,896
2,896
AviatorCap SII, LLC (2)
Aerospace & Defense
L+700
8.90
%
3/19/2019
1/29/2021
2,713
2,713
2,713
Bishop Lifting Products, Inc. (5)
Trading Companies & Distributors
L+800
1.00
%
9.80
%
3/24/2014
3/27/2022
24,985
24,906
24,985
Enhanced Capital Group, LLC
Capital Markets
L+550
1.00
%
7.20
%
6/28/2019
6/28/2024
20,311
20,032
20,311
Falmouth Group Holdings Corp. (AMPAC)
Chemicals
L+675
1.00
%
8.55
%
12/7/2015
12/14/2021
37,195
37,058
37,195
Greystone Select Holdings LLC & Greystone & Co., Inc.
Thrifts & Mortgage Finance
L+800
1.00
%
9.93
%
3/29/2017
4/17/2024
19,702
19,567
19,702
iCIMS, Inc.
Software
L+650
1.00
%
8.29
%
9/7/2018
9/12/2024
15,003
14,751
15,003
IHS Intermediate, Inc.**
Health Care Providers & Services
L+825
1.00
%
6/19/2015
7/20/2022
25,000
24,728
7,500
Kingsbridge Holdings, LLC
Multi-Sector Holdings
L+700
1.00
%
9.09
%
12/21/2018
12/21/2024
33,112
32,675
33,112
KORE Wireless Group, Inc.
Wireless Telecommunication Services
L+550
7.44
%
12/21/2018
12/21/2024
36,850
36,208
36,573
Logix Holding Company, LLC
Communications Equipment
L+575
1.00
%
7.55
%
9/14/2018
12/22/2024
7,103
7,048
7,103
MRI Software LLC
Software
L+575
1.00
%
7.55
%
7/23/2019
6/30/2023
31,610
31,316
31,610
On Location Events, LLC & PrimeSport Holdings Inc
Media
L+500
1.00
%
6.94
%
12/7/2017
9/29/2021
27,547
27,409
27,547
Pet Holdings ULC & Pet Supermarket, Inc. (3)
Specialty Retail
L+550
1.00
%
7.60
%
9/14/2018
7/5/2022
29,045
28,833
28,972
PhyMed Management LLC
Health Care Providers & Services
L+875
1.00
%
10.55
%
12/18/2015
5/18/2021
32,321
31,919
32,321
PhyNet Dermatology LLC
Health Care Providers & Services
L+550
1.00
%
7.29
%
9/5/2018
8/16/2024
17,239
17,125
17,239
PPT Management Holdings, LLC
Health Care Providers & Services
L+675
(15)
1.00
%
8.44
%
9/14/2018
12/16/2022
20,656
20,557
19,003
PSKW, LLC & PDR, LLC
Health Care Providers & Services
L+425
1.00
%
6.19
%
9/14/2018
11/25/2021
1,771
1,765
1,771
PSKW, LLC & PDR, LLC
Health Care Providers & Services
L+768
1.00
%
9.63
%
10/24/2017
11/25/2021
27,929
27,690
27,929
RS Energy Group U.S., Inc
Software
L+475
6.69
%
10/26/2018
10/6/2023
15,096
14,855
15,096
Rug Doctor LLC (2)
Diversified Consumer Services
L+975
1.50
%
11.54
%
12/23/2013
5/16/2023
9,111
9,089
9,111
Solara Medical Supplies, Inc
Health Care Providers & Services
L+600
1.00
%
7.94
%
5/31/2018
2/27/2024
7,507
7,385
7,507
The Octave Music Group, Inc. (fka TouchTunes)
Media
L+825
1.00
%
9.95
%
5/28/2015
5/27/2022
12,194
12,116
12,194
Varilease Finance, Inc.
Multi-Sector Holdings
L+750
1.00
%
9.59
%
8/22/2014
11/15/2025
36,438
36,286
36,438
Total Bank Debt/Senior Secured Loans
$
582,121
$
565,332
Life Science Senior Secured Loans
Alimera Sciences, Inc.
Pharmaceuticals
L+765
1.78
%
9.43
%
12/31/2019
7/1/2024
$
18,959
$
18,959
$
18,959
Apollo Endosurgery, Inc.
Health Care Equipment & Supplies
L+750
9.19
%
3/15/2019
9/1/2023
20,492
20,539
20,492
Ardelyx, Inc. (3)
Pharmaceuticals
L+745
9.14
%
5/10/2018
11/1/2022
24,500
24,741
24,745
aTyr Pharma, Inc.
Pharmaceuticals
P+410
8.85
%
11/18/2016
11/18/2020
3,667
4,302
4,327
Axcella Health Inc.
Pharmaceuticals
L+850
10.20
%
1/9/2018
1/1/2023
26,000
26,514
26,546
Cardiva Medical, Inc.
Health Care Equipment & Supplies
L+795
1.76
%
9.71
%
9/24/2018
12/1/2023
24,000
24,383
24,480
Centrexion Therapeutics, Inc.
Pharmaceuticals
L+725
2.45
%
9.70
%
6/28/2019
1/1/2024
12,615
12,533
12,504
Cerapedics, Inc.
Health Care Equipment & Supplies
L+695
2.50
%
9.45
%
3/22/2019
3/1/2024
18,803
18,893
18,897
Delphinus Medical Technologies, Inc.
Health Care Equipment & Supplies
L+850
10.19
%
8/18/2017
9/1/2021
3,810
3,919
3,906
GenMark Diagnostics, Inc. (3)
Health Care Providers & Services
L+590
2.51
%
8.41
%
2/1/2019
2/1/2023
49,522
49,823
50,017
Kindred Biosciences, Inc. (3)(16)
Pharmaceuticals
L+675
2.17
%
8.92
%
9/30/2019
9/30/2024
9,197
9,169
9,173
OmniGuide Holdings, Inc. (13)
Health Care Equipment & Supplies
L+805
9.74
%
7/30/2018
7/29/2023
10,500
10,639
10,552
PQ Bypass, Inc.
Health Care Equipment & Supplies
L+795
1.00
%
9.65
%
12/20/2018
12/19/2022
10,000
9,974
10,140
Rubius Therapeutics, Inc. (3)
Pharmaceuticals
L+550
7.19
%
12/21/2018
12/21/2023
26,861
26,974
26,995
scPharmaceuticals, Inc.
Pharmaceuticals
L+795
2.23
%
10.18
%
9/17/2019
9/17/2023
4,684
4,692
4,693
Senseonics Holdings, Inc
Health Care Equipment & Supplies
L+650
2.48
%
8.98
%
7/25/2019
7/1/2024
21,076
20,989
21,076
Total Life Science Senior Secured Loans
$
287,043
$
287,502
Total Senior Secured Loans
$
869,164
$
852,834
See notes to consolidated financial statements.
12
Table of Contents
SOLAR CAPITAL LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)
December 31, 2019
(in thousands, except share/unit amounts)
Description
Industry
Interest
Rate (1)
Acquisition
Date
Maturity
Date
Par Amount
Cost
Fair
Value
Equipment Financing 35.4%
Althoff Crane Service, Inc. (14)
Commercial Services & Supplies
10.55%
7/31/2017
6/8/2022
$
1,180
$
1,180
$
1,200
AmeraMex International, Inc. (10)
Commercial Services & Supplies
10.00%
3/29/2019
3/28/2022
6,314
6,206
6,400
Blackhawk Mining, LLC (14)
Oil, Gas & Consumable Fuels
10.99-11.17%
2/16/2018
3/1/2022-11/1/2022
4,701
4,474
4,764
C&H Paving, Inc. (14)
Construction & Engineering
9.94-11.66%
12/26/2018
1/1/2024-11/1/2024
4,136
4,187
4,158
Capital City Jet Center, Inc. (10)
Airlines
10.00%
4/4/2018
10/4/2023
1,806
1,806
1,808
Central Freight Lines, Inc. (10)
Road & Rail
7.16%
7/31/2017
1/14/2024
1,421
1,421
1,421
Champion Air, LLC (10)
Airlines
10.00%
3/19/2018
1/1/2023
2,770
2,770
2,748
Easton Sales and Rentals, LLC (10)
Commercial Services & Supplies
10.00%
9/18/2018
10/1/2021
1,882
1,866
1,845
Equipment Operating Leases, LLC (2)(12)
Multi-Sector Holdings
7.53-8.37%
4/27/2018
8/1/2022-4/27/2025
29,739
29,739
29,739
Family First Freight, LLC (10)
Road & Rail
9.43-10.10%
7/31/2017
7/1/2020-1/22/2022
557
556
554
Freightsol LLC (14)
Road & Rail
12.62-12.99%
4/9/2019
11/1/2023
2,225
2,266
2,225
Garda CL Technical Services, Inc. (14)
Commercial Services & Supplies
8.31-8.77%
3/22/2018
7/13/2023-10/5/2023
2,317
2,317
2,280
Georgia Jet, Inc. (10)
Airlines
8.00%
12/4/2017
12/4/2021
1,833
1,833
1,805
Globecomm Systems Inc. (14)
Wireless Telecommunication Services
13.18%
5/10/2018
7/1/2021
1,051
1,051
1,072
GMT Corporation (14)
Machinery
12.46%
10/23/2018
10/23/2023
6,363
6,309
6,363
Haljoe Coaches USA, LLC (14)
Road & Rail
8.15-9.90%
7/31/2017
7/1/2022-7/1/2024
5,626
5,626
5,527
Hawkeye Contracting Company, LLC (10)(11)
Oil, Gas & Consumable Fuels
10.00%
11/15/2017
11/15/2020
1,823
1,823
1,827
HTI Logistics Corporation (10)
Commercial Services & Supplies
9.69-9.80%
11/15/2018
12/1/2023-4/1/2024
289
289
286
Hypro, Inc. (10)
Machinery
11.53%
9/30/2019
10/1/2023
3,460
3,493
3,460
Interstate NDT, Inc. (14)
Road & Rail
11.32-13.94%
6/11/2018
7/1/2023-10/25/2023
2,019
2,019
2,055
ISR Holdings, LLC (10)
Commercial Services & Supplies
9.25%
8/27/2019
8/27/2022
4,781
4,781
4,781
JP Motorsports, Inc. (14)
Road & Rail
16.35%
8/17/2018
1/25/2022
192
191
194
Kool Pak, LLC (14)
Road & Rail
8.58%
2/5/2018
3/1/2024
612
612
612
Lineal Industries, Inc. (10)
Construction & Engineering
8.00%
12/21/2018
12/21/2021
76
76
76
Loyer Capital LLC (2)(12)
Multi-Sector Holdings
8.73-11.52%
5/16/2019
5/16/24-9/25/24
14,731
14,731
14,731
Meridian Consulting I Corp, Inc. (10)
Hotels, Restaurants & Leisure
10.72%
7/31/2017
12/4/2021
1,926
1,926
1,972
Mountain Air Helicopters, Inc. (10)
Commercial Services & Supplies
10.00%
7/31/2017
4/30/2022
1,509
1,509
1,528
Rango, Inc. (10)(14)
Commercial Services & Supplies
9.42%-9.92%
9/24/2019
4/1/2023-11/1/2024
6,055
6,150
6,055
Rossco Crane & Rigging, Inc. (14)
Commercial Services & Supplies
11.13-11.53%
8/25/2017
4/1/2021-9/1/2022
577
577
584
Royal Coach Lines, Inc
Road & Rail
9.56%
11/21/2019
8/1/2025
1,240
1,240
1,240
Royal Express Inc. (14)
Road & Rail
9.64%
1/17/2019
2/1/2024
1,056
1,075
1,042
Sidelines Tree Service LLC (14)
Diversified Consumer Services
10.31-10.52%
7/31/2017
8/1/2022-10/1/2022
329
329
331
South Texas Oilfield Solutions, LLC (14)
Energy Equipment & Services
12.52-13.76%
3/29/2018
9/1/2022-7/1/2023
2,753
2,753
2,754
Southern Nevada Oral & Maxillofacial Surgery, LLC (10)
Health Care Providers & Services
12.00%
7/31/2017
3/1/2024
1,273
1,273
1,286
Southwest Traders, Inc. (14)
Road & Rail
9.13%
11/21/2017
11/1/2020
70
70
69
Spartan Education, LLC (10)
Diversified Consumer Services
10.26-12.00%
3/28/2019
7/31/2020-12/27/2023
6,758
6,867
6,766
ST Coaches, LLC (14)
Road & Rail
8.21-8.59%
7/31/2017
10/1/2022-1/25/2025
4,585
4,585
4,501
Stafford Logistics, Inc. (10)
Commercial Services & Supplies
12.63-13.12%
9/11/2019
10/1/2024-10/1/2025
7,930
7,930
7,930
Star Coaches Inc. (14)
Road & Rail
8.42%
3/9/2018
4/1/2025
3,305
3,305
3,288
Sturgeon Services International Inc. (10)
Energy Equipment & Services
19.10%
7/31/2017
2/28/2022
1,271
1,271
1,249
Sun-Tech Leasing of Texas, L.P. (14)
Road & Rail
8.68-16.95%
7/31/2017
6/25/2020-7/25/2021
238
238
236
Superior Transportation, Inc. (14)
Road & Rail
9.38-12.26%
7/31/2017
4/1/2022-8/1/2024
6,492
6,471
6,471
Tailwinds, LLC (10)
Air Freight & Logistics
9.00%
7/26/2019
8/1/2024
1,153
1,153
1,153
The Smedley Company & Smedley Services, Inc. (10)..
Commercial Services & Supplies
9.92-14.75%
7/31/2017
10/29/2023-2/10/2024
5,011
5,030
5,070
Thora Capital, LLC (10)
Airlines
9.00%
7/3/2019
7/1/2025
6,209
6,209
6,209
Tornado Bus Company (14)
Road & Rail
10.78%
7/31/2017
9/1/2021
1,509
1,509
1,518
Trinity Equipment Rentals, Inc. (14)
Commercial Services & Supplies
11.24%
9/13/2018
10/1/2022
719
719
726
Trolleys, Inc. (14)
Road & Rail
9.81%
7/18/2018
8/1/2022
2,295
2,295
2,292
Up Trucking Services, LLC (14)
Road & Rail
11.21-12.10%
3/23/2018
4/1/2022-8/1/2024
2,512
2,549
2,540
Warrior Crane Services, LLC (10)
Commercial Services & Supplies
8.95%
7/11/2019
7/11/2024-8/1/2026
3,316
3,316
3,316
Wind River Environmental, LLC (10)
Diversified Consumer Services
10.00%
7/31/2019
8/1/2024
918
926
918
Womble Company, Inc. (10)
Energy Equipment & Services
9.11%
12/27/2019
1/1/2025
814
814
814
W.P.M., Inc., WPM-Southern, LLC, WPM Construction Services, Inc.(10)
Construction & Engineering
7.50%
7/31/2017
10/1/2022
1,841
1,841
1,841
Shares/
Units
NEF Holdings, LLC Equity Interests (2)(9)
Multi-Sector Holdings
7/31/2017
200
145,000
145,000
Total Equipment Financing
$
320,552
$
320,630
Preferred Equity 1.2%
SOAGG LLC (2)(3)(4)
Aerospace & Defense
8.00%
12/14/2010
6/30/2023
1,541
$
1,541
$
4,952
SOINT, LLC (2)(3)(4)
Aerospace & Defense
15.00%
6/8/2012
6/30/2023
53,932
5,393
5,939
Total Preferred Equity
$
6,934
$
10,891
See notes to consolidated financial statements.
13
Table of Contents
SOLAR CAPITAL LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)
December 31, 2019
(in thousands, except share/unit amounts)
Description
Industry
Acquisition
Date
Shares/
Units
Cost
Fair
Value
Common Equity/Equity Interests/Warrants34.3%
aTyr Pharma, Inc. Warrants *
Pharmaceuticals
11/18/2016
6,347
$
106
$
B Riley Financial Inc. (3)(8)
Research &
Consulting
Services
3/16/2007
38,015
2,684
957
CardioFocus, Inc. Warrants *
Health Care
Equipment &
Supplies
3/31/2017
440,816
51
34
Centrexion Therapeutics, Inc. Warrants *
Pharmaceuticals
6/28/2019
210,256
106
77
Conventus Orthopaedics, Inc. Warrants *
Health Care
Equipment &
Supplies
6/15/2016
157,500
65
10
Crystal Financial LLC (2)(3)
Diversified
Financial
Services
12/28/2012
280,303
280,737
296,000
Delphinus Medical Technologies, Inc. Warrants *
Health Care
Equipment &
Supplies
8/18/2017
380,904
74
50
Essence Group Holdings Corporation (Lumeris) Warrants *
Health Care
Technology
3/22/2017
208,000
63
267
PQ Bypass, Inc. Warrants *
Health Care
Equipment &
Supplies
12/20/2018
300,000
106
75
RD Holdco Inc. (Rug Doctor) (2)*
Diversified
Consumer
Services
12/23/2013
231,177
15,683
7,706
RD Holdco Inc. (Rug Doctor) Class B (2)*
Diversified
Consumer
Services
12/23/2013
522
5,216
5,216
RD Holdco Inc. (Rug Doctor) Warrants (2)*
Diversified
Consumer
Services
12/23/2013
30,370
381
Scynexis, Inc. Warrants *
Pharmaceuticals
9/30/2016
122,435
105
Senseonics Holdings, Inc. Warrants *
Health Care
Equipment &
Supplies
7/25/2019
526,901
117
70
Sunesis Pharmaceuticals, Inc. Warrants *
Pharmaceuticals
3/31/2016
104,001
118
Tetraphase Pharmaceuticals, Inc. Warrants (3)*
Pharmaceuticals
10/30/2018
14,227
269
Venus Concept Ltd. Warrants* (fka Restoration Robotics)
Health Care
Equipment &
Supplies
5/10/2018
27,352
152
7
Total Common Equity/Equity Interests/Warrants
$
306,033
$
310,469
Total Investments (6) 165.0%
$1,502,683
$1,494,824
Description
Industry
Acquisition
Date
Maturity
Date
Par Amount
Cash Equivalents 46.3%
U.S. Treasury Bill
Government
12/31/2019
1/28/2020
$
420,000
$
419,571
$
419,571
Total Investments & Cash Equivalents 211.3%
$
1,922,254
$
1,914,395
Liabilities in Excess of Other Assets (111.3%)
(1,008,515
)
Net Assets 100.0%
$
905,880
(1)
Floating rate debt investments typically bear interest at a rate determined by reference to the London
Interbank Offered Rate (LIBOR), and which typically reset monthly, quarterly or semi-annually. For each debt investment we have provided the current rate of interest, or in the case of leases the current implied yield, in effect as of
December 31, 2019.
(2)
Denotes investments in which we are deemed to exercise a controlling influence over the management or policies
of a company, as defined in the Investment Company Act of 1940 (1940 Act), due to beneficially owning, either directly or through one or more controlled companies, more than 25% of the outstanding voting securities of the investment.
Transactions during the year ended December 31, 2019 in these controlled investments are as follows:
Name of Issuer
Fair Value at
December 31,
2018
Gross
Additions
Gross
Reductions
Realized
Gain
(Loss)
Change in
Unrealized
Gain
(Loss)
Interest/
Dividend
/Other
Income
Fair Value at
December 31,
2019
Ark Real Estate Partners LP
$
39
$
$
$
(526
)
$
487
$
$
Ark Real Estate Partners II LP
1
(135
)
11
AviatorCap SII, LLC
2,975
79
274
2,896
AviatorCap SII, LLC
2,975
262
208
2,713
Crystal Financial LLC
293,000
3,000
30,000
296,000
Equipment Operating Leases, LLC
32,882
3,143
2,550
29,739
Loyer Capital LLC
21,634
6,903
1,085
14,731
NEF Holdings, LLC
145,000
3,300
145,000
RD Holdco Inc. (Rug Doctor, common equity)...
7,732
(26
)
7,706
RD Holdco Inc. (Rug Doctor, class B)..
5,216
5,216
RD Holdco Inc. (Rug Doctor, warrants)..
Rug Doctor LLC
9,111
(39
)
1,182
9,111
SOAGG LLC
9,113
951
(3,210
)
5,256
4,952
SOINT, LLC
2,144
2,188
148
SOINT, LLC (preferred equity)
6,414
444
(31
)
826
5,939
$511,483
$26,753
$13,970
$ (661)
$ 192
$44,829
$524,003
See notes to consolidated financial statements.
14
Table of Contents
SOLAR CAPITAL LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)
December 31, 2019
(in thousands)
(3)
Indicates assets that the Company believes may not represent qualifying assets under
Section 55(a) of the Investment Company Act of 1940 (1940 Act), as amended. If we fail to invest a sufficient portion of our assets in qualifying assets, we could be prevented from making
follow-on investments in existing portfolio companies or could be required to dispose of investments at inappropriate times in order to comply with the 1940 Act. As of December 31, 2019, on a fair value
basis, non-qualifying assets in the portfolio represented 22.9% of the total assets of the Company.
(4)
Solar Capital Ltd.s investments in SOAGG, LLC and SOINT, LLC include a two and one dollar investment in
common shares, respectively.
(5)
Bishop Lifting Products, Inc., SEI Holding I Corporation, Singer Equities, Inc. & Hampton Rubber Company
are co-borrowers.
(6)
Aggregate net unrealized appreciation for U.S. federal income tax purposes is $8,172; aggregate gross
unrealized appreciation and depreciation for U.S. federal tax purposes is $45,038 and $36,866, respectively, based on a tax cost of $1,486,652. Unless otherwise noted, all of the Companys investments are pledged as collateral against the
borrowings outstanding on the senior secured credit facility. The Company generally acquires its investments in private transactions exempt from registration under the Securities Act of 1933, as amended (the Securities Act). These
investments are generally subject to certain limitations on resale, and may be deemed to be restricted securities under the Securities Act. All investments are Level 3 unless otherwise indicated.
(7)
Floating rate instruments accrue interest at a predetermined spread relative to an index, typically the LIBOR
or PRIME rate. These instruments are often subject to a LIBOR or PRIME rate floor.
(8)
Denotes a Level 1 investment.
(9)
NEF Holdings, LLC is held through NEFCORP LLC, a wholly-owned consolidated taxable subsidiary and NEFPASS LLC,
a wholly-owned consolidated subsidiary.
(10)
Indicates an investment that is wholly held by Solar Capital Ltd. through NEFPASS LLC.
(11)
Hawkeye Contracting Company, LLC, Eagle Creek Mining, LLC & Falcon Ridge Leasing, LLC are co-borrowers.
(12)
Denotes a subsidiary of NEF Holdings, LLC.
(13)
OmniGuide Holdings, Inc., Domain Surgical, Inc. and OmniGuide, Inc. are
co-borrowers.
(14)
Indicates an investment that is held by the Company through its wholly-owned consolidated financing subsidiary
NEFPASS SPV, LLC (the NEFPASS SPV). Such investments are pledged as collateral under the NEFPASS SPV, LLC Revolving Credit Facility (see Note 7 to the consolidated financial statements) and are not generally available to creditors, if
any, of the Company.
(15)
Spread is 6.00% Cash / 0.75% PIK.
(16)
Kindred Biosciences, Inc., KindredBio Equine, Inc. and Centaur Biopharmaceutical Services, Inc. are co-borrowers.
*
Non-income producing security.
**
Investment is on non-accrual status.
See notes to consolidated financial statements.
15
Table of Contents
SOLAR CAPITAL LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)
December 31, 2019
(in thousands)
Industry Classification
Percentage of Total
Investments (at fair value) as
of December 31, 2019
Diversified Financial Services (includes Crystal Financial LLC)
20.1
%
Multi-Sector Holdings (includes NEF Holdings, LLC, Equipment Operating Leases, LLC and Loyer
Capital LLC)
17.3
%
Health Care Providers & Services
13.1
%
Pharmaceuticals
8.6
%
Health Care Equipment & Supplies
7.3
%
Software
4.1
%
Commercial Services & Supplies
2.8
%
Media
2.7
%
Wireless Telecommunication Services
2.5
%
Chemicals
2.5
%
Road & Rail
2.4
%
Communications Equipment
2.4
%
Diversified Consumer Services
2.0
%
Specialty Retail
1.9
%
Household & Personal Products
1.9
%
Trading Companies & Distributors
1.7
%
Capital Markets
1.4
%
Thrifts & Mortgage Finance
1.3
%
Aerospace & Defense
1.1
%
Airlines
0.8
%
Machinery
0.7
%
Oil, Gas & Consumable Fuels
0.4
%
Construction & Engineering
0.4
%
Energy Equipment & Services
0.3
%
Hotels, Restaurants & Leisure
0.1
%
Air Freight & Logistics
0.1
%
Research & Consulting Services
0.1
%
Health Care Technology
0.0
%
Total Investments
100.0
%
See notes to consolidated financial statements.
16
Table of Contents
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2020
(in thousands, except share amounts)
Note 1. Organization
Solar Capital LLC, a Maryland limited liability company, was formed in February 2007 and commenced operations on March 13, 2007 with
initial capital of $1,200,000 of which 47.04% was funded by affiliated parties.
Immediately prior to our initial public offering, through
a series of transactions, Solar Capital Ltd. merged with Solar Capital LLC, leaving Solar Capital Ltd. as the surviving entity (the Merger). Solar Capital Ltd. issued an aggregate of approximately 26.65 million shares of common
stock and $125,000 in senior unsecured notes to the existing Solar Capital LLC unit holders in connection with the Merger. Solar Capital Ltd. had no assets or operations prior to completion of the Merger and as a result, the historical books and
records of Solar Capital LLC have become the books and records of the surviving entity. The number of shares used to calculate weighted average shares for use in computations on a per share basis have been decreased retroactively by a factor of
approximately 0.4022 for all periods prior to February 9, 2010. This factor represents the effective impact of the reduction in shares resulting from the Merger.
Solar Capital Ltd. (Solar Capital, the Company, we, us or our), a Maryland
corporation formed in November 2007, is a closed-end, externally managed, non-diversified management investment company that has elected to be regulated as a business
development company (BDC) under the Investment Company Act of 1940, as amended (the 1940 Act). Furthermore, as the Company is an investment company, it continues to apply the guidance in FASB Accounting Standards Codification
(ASC) Topic 946. In addition, for U.S. federal income tax purposes, the Company has elected to be treated, and intend to qualify annually, as a regulated investment company (RIC) under Subchapter M of the Internal Revenue
Code of 1986, as amended (the Code).
On February 9, 2010, Solar Capital priced its initial public offering, selling
5.68 million shares of common stock, including the underwriters over-allotment, at a price of $18.50 per share. Concurrent with this offering, the Companys senior management purchased an additional 600,000 shares through a private
placement, also at $18.50 per share.
The Companys investment objective is to maximize both current income and capital appreciation
through debt and equity investments. The Company directly and indirectly invests primarily in leveraged middle market companies in the form of senior secured loans, stretch-senior loans, financing leases and to a lesser extent, unsecured loans and
equity securities. From time to time, we may also invest in public companies that are thinly traded.
Note 2. Significant Accounting Policies
The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally
accepted accounting principles (GAAP), and include the accounts of the Company and certain wholly-owned subsidiaries. The consolidated financial statements reflect all adjustments and reclassifications which, in the opinion of
management, are necessary for the fair presentation of the results of the operations and financial condition for the periods presented. All significant intercompany balances and transactions have been eliminated. Certain prior period amounts may
have been reclassified to conform to the current period presentation.
Interim consolidated financial statements are prepared in
accordance with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Regulation S-X, as appropriate. Accordingly, they
may not include all of the information and notes required by GAAP for annual consolidated financial statements. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses during the reported periods. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to
differ materially. The current periods results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending on December 31, 2020.
In the opinion of management, all adjustments, which are of a normal recurring nature, considered necessary for the fair presentation of
financial statements, have been included.
17
Table of Contents
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)
September 30, 2020
(in thousands, except share amounts)
The significant accounting policies consistently followed by the Company are:
(a)
Investment transactions are accounted for on the trade date;
(b)
Under procedures established by our board of directors (the Board), we value investments, including
certain senior secured debt, subordinated debt and other debt securities with maturities greater than 60 days, for which market quotations are readily available, at such market quotations (unless they are deemed not to represent fair value). We
attempt to obtain market quotations from at least two brokers or dealers (if available, otherwise from a principal market maker or a primary market dealer or other independent pricing service). We utilize
mid-market pricing as a practical expedient for fair value unless a different point within the range is more representative. If and when market quotations are deemed not to represent fair value, we may utilize
independent third-party valuation firms to assist us in determining the fair value of material assets. Accordingly, such investments go through our multi-step valuation process as described below. In each such case, independent valuation firms
consider observable market inputs together with significant unobservable inputs in arriving at their valuation recommendations. Debt investments with maturities of 60 days or less shall each be valued at cost plus accreted discount, or minus
amortized premium, which is expected to approximate fair value, unless such valuation, in the judgment of Solar Capital Partners, LLC (the Investment Adviser), does not represent fair value, in which case such investments shall be valued
at fair value as determined in good faith by or under the direction of our Board. Investments that are not publicly traded or whose market quotations are not readily available are valued at fair value as determined in good faith by or under the
direction of our Board. Such determination of fair values involves subjective judgments and estimates.
With respect to
investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, our Board has approved a multi-step valuation process each quarter, as described below:
(1)
our quarterly valuation process begins with each portfolio company or investment being initially valued by the
investment professionals of the Investment Adviser responsible for the portfolio investment;
(2)
preliminary valuation conclusions are then documented and discussed with senior management of the Investment
Adviser;
(3)
independent valuation firms engaged by our Board conduct independent appraisals and review the Investment
Advisers preliminary valuations and make their own independent assessment for all material assets;
(4)
the audit committee of the Board reviews the preliminary valuation of the Investment Adviser and that of the
independent valuation firm and responds to the valuation recommendation of the independent valuation firm, if any, to reflect any comments; and
(5)
the Board discusses valuations and determines the fair value of each investment in our portfolio in good faith
based on the input of the Investment Adviser, the respective independent valuation firm, if any, and the audit committee.
Investments in all asset classes are valued utilizing a market approach, an income approach, or both approaches, as appropriate. However, in
accordance with ASC 820-10, certain investments that qualify as investment companies in accordance with ASC 946, may be valued using net asset value as a practical expedient for fair value. 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 approaches 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 we may take into account
in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection
provisions, the nature and realizable value of any collateral, the portfolio companys ability to make payments, 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, our principal market (as the reporting entity) and enterprise values, among other factors. When available, broker quotations and/or quotations provided by pricing services are considered as an
input in the valuation process. For the nine months ended September 30, 2020, there has been no change to the Companys valuation approaches or techniques and the nature of the related inputs considered in the valuation process.
18
Table of Contents
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)
September 30, 2020
(in thousands, except share amounts)
ASC Topic 820 classifies the inputs used to measure these fair values into the following
hierarchy:
Level 1 : Quoted prices in active markets for identical assets or liabilities, accessible by the
Company at the measurement date.
Level 2 : Quoted prices for similar assets or liabilities in active markets, or
quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.
Level 3 : Unobservable inputs for the asset or liability.
In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the
lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each investment. The
exercise of judgment is based in part on our knowledge of the asset class and our prior experience.
(c)
Gains or losses on investments are calculated by using the specific identification method.
(d)
The Company records dividend income and interest, adjusted for amortization of premium and accretion of
discount, on an accrual basis. Loan origination fees, original issue discount, and market discounts are capitalized and we amortize such amounts into income using the effective interest method. Upon the prepayment of a loan, any unamortized loan
origination fees are recorded as interest income. We record call premiums received on loans repaid as interest income when we receive such amounts. Capital structuring fees, amendment fees, consent fees, and any other
non-recurring fee income as well as management fee and other fee income for services rendered, if any, are recorded as other income when earned.
(e)
The Company intends to comply with the applicable provisions of the Code pertaining to regulated investment
companies to make distributions of taxable income sufficient to relieve it of substantially all U.S. federal income taxes. The Company, at its discretion, may carry forward taxable income in excess of calendar year distributions and pay a 4% excise
tax on this income. The Company will accrue excise tax on such estimated excess taxable income as appropriate.
(f)
Book and tax basis differences relating to stockholder distributions and other permanent book and tax
differences are typically reclassified among the Companys capital accounts annually. In addition, the character of income and gains to be distributed is determined in accordance with income tax regulations that may differ from GAAP.
(g)
Distributions to common stockholders are recorded as of the record date. The amount to be paid out as a
distribution is determined by the Board. Net realized capital gains, if any, are generally distributed or deemed distributed at least annually.
(h)
In accordance with Regulation S-X and ASC Topic
810 Consolidation , the Company consolidates its interest in controlled investment company subsidiaries, financing subsidiaries and certain wholly-owned holding companies that serve to facilitate investment in portfolio companies. In
addition, the Company may also consolidate any controlled operating companies substantially all of whose business consists of providing services to the Company.
(i)
The accounting records of the Company are maintained in U.S. dollars. Any assets and liabilities denominated in
foreign currencies are translated into U.S. dollars based on the rate of exchange of such currencies against U.S. dollars on the date of valuation. The Company will 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 market prices of securities held. Such fluctuations would be included with the net unrealized gain or loss from investments. The Companys investments in
foreign securities, if any, may involve certain risks, including without limitation: foreign exchange restrictions, expropriation, taxation or other political, social or economic risks, all of which could affect the market and/or credit risk of the
investment. In addition, changes in the relationship of foreign currencies to the U.S. dollar can significantly affect the value of these investments in terms of U.S. dollars and therefore the earnings of the Company.
(j)
The Company has made elections to apply the fair value option of accounting to the unsecured senior notes due
2022 (the 2022 Unsecured Notes) (see notes 6 and 7), in accordance with ASC 825-10.
(k)
In accordance with ASC 835-30, the Company reports origination and
other expenses related to certain debt issuances as a direct deduction from the carrying amount of the debt liability. Applicable expenses are deferred and amortized using either the effective interest method or the straight-line method over the
stated life. The straight-line method may be used on revolving facilities and/or when it approximates the effective yield method.
19
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SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)
September 30, 2020
(in thousands, except share amounts)
(l)
The Company may enter into forward exchange contracts in order to hedge against foreign currency risk. 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.
(m)
The Company records expenses related to shelf registration statements and applicable equity offering costs as
prepaid assets. These expenses are typically charged as a reduction of capital upon utilization or expensed, in accordance with ASC 946-20-25.
(n)
Investments that are expected to pay regularly scheduled interest in cash are generally placed on non-accrual status when principal or interest cash payments are past due 30 days or more (90 days or more for equipment financing) and/or when it is no longer probable that principal or interest cash payments will
be collected. Such non-accrual investments are restored to accrual status if past due principal and interest are paid in cash, and in managements judgment, are likely to continue timely payment of their
remaining principal and interest obligations. Cash interest payments received on such investments may be recognized as income or applied to principal depending on managements judgment.
(o)
The Company defines cash equivalents as securities that are readily convertible into known amounts of cash and
so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Generally, only securities with a maturity of three months or less would qualify, with limited exceptions. The Company believes
that certain U.S. Treasury bills, repurchase agreements and other high-quality, short-term debt securities would qualify as cash equivalents.
Recent Accounting Pronouncements
In August
2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in ASU 2018-13 modify and eliminate certain disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. ASU 2018-13 is effective for all entities for
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company has adopted ASU 2018-13 and determined that the adoption has not
had a material impact on its consolidated financial statements and disclosures.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). The amendments in ASU 2020-04 provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and
other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently
evaluating the impact of adopting ASU 2020-04 on its consolidated financial statements and disclosures.
20
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SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)
September 30, 2020
(in thousands, except share amounts)
Note 3. Agreements
Solar Capital
has an Advisory Agreement with the Investment Adviser, under which the Investment Adviser will manage the day-to-day operations of, and provide investment advisory
services to, Solar Capital. For providing these services, the Investment Adviser receives a fee from Solar Capital, consisting of two componentsa base management fee and a performance-based incentive fee. The base management fee is determined
by taking the average value of Solar Capitals gross assets at the end of the two most recently completed calendar quarters calculated at an annual rate of 1.75% on gross assets up to 200% of the Companys total net assets as of the
immediately preceding quarter end and 1.00% on gross assets that exceed 200% of the Companys total net assets as of the immediately preceding quarter end. For purposes of computing the base management fee, gross assets exclude temporary assets
acquired at the end of each fiscal quarter for purposes of preserving investment flexibility in the next fiscal quarter. Temporary assets include, but are not limited to, U.S. treasury bills, other short-term U.S. government or government agency
securities, repurchase agreements or cash borrowings.
The performance-based incentive fee has two parts, as follows: one part is
calculated and payable quarterly in arrears based on Solar Capitals pre-incentive fee net investment income for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination,
structuring, diligence and consulting fees or other fees that we receive from portfolio companies) accrued during the calendar quarter, minus Solar Capitals operating expenses for the quarter (including the base management fee, any expenses
payable under the Administration Agreement, and any interest expense and distributions paid on any issued and outstanding preferred stock, but excluding the performance-based incentive fee). Pre-incentive fee
net investment income does not include any realized capital gains or losses, or unrealized capital appreciation or depreciation. Pre-incentive fee net investment income, expressed as a rate of return on the
value of Solar Capitals net assets at the end of the immediately preceding calendar quarter, is compared to the hurdle rate of 1.75% per quarter (7% annualized). Solar Capital pays the Investment Adviser a performance-based incentive fee
with respect to Solar Capitals pre-incentive fee net investment income in each calendar quarter as follows: (1) no performance-based incentive fee in any calendar quarter in which Solar
Capitals pre-incentive fee net investment income does not exceed the hurdle rate; (2) 100% of Solar Capitals pre-incentive fee net investment income
with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875% in any calendar quarter; and (3) 20% of the amount of Solar
Capitals pre-incentive fee net investment income, if any, that exceeds 2.1875% in any calendar quarter. These calculations are appropriately pro-rated for any
period of less than three months.
The second part of the performance-based incentive fee is determined and payable in arrears as of the
end of each calendar year (or upon termination of the Advisory Agreement, as of the termination date), and will equal 20% of Solar Capitals cumulative realized capital gains less cumulative realized capital losses, unrealized capital
depreciation (unrealized depreciation on a gross investment-by-investment basis at the end of each calendar year) and all net capital gains upon which prior
performance-based capital gains incentive fee payments were previously made to the Investment Adviser. For financial statement purposes, the second part of the performance-based incentive fee is accrued based upon 20% of cumulative net realized
gains and net unrealized capital appreciation. No accrual was required for the three and nine months ended September 30, 2020 and 2019.
For the three and nine months ended September 30, 2020, the Company recognized $6,176 and $18,416, respectively, in base management fees
and $0 and $1,480, respectively, in performance-based incentive fees. For the three and nine months ended September 30, 2019, the Company recognized $6,738 and $20,027, respectively, in base management fees and $4,606 and $13,830, respectively,
in performance-based incentive fees.
Solar Capital has also entered into an Administration Agreement with Solar Capital Management, LLC
(the Administrator) under which the Administrator provides administrative services to Solar Capital. For providing these services, facilities and personnel, Solar Capital reimburses the Administrator for Solar Capitals allocable
portion of overhead and other expenses incurred by the Administrator in performing its obligations under the Administration Agreement, including rent. The Administrator will also provide, on Solar Capitals behalf, managerial assistance to
those portfolio companies to which Solar Capital is required to provide such assistance. The Company typically reimburses the Administrator on a quarterly basis.
For the three and nine months ended September 30, 2020, the Company recognized expenses under the Administration Agreement of $1,572 and
$3,867, respectively. For the three and nine months ended September 30, 2019, the Company recognized expenses under the Administration Agreement of $1,352 and $4,013, respectively. No managerial assistance fees were accrued or collected for the
three and nine months ended September 30, 2020 and 2019.
21
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SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)
September 30, 2020
(in thousands, except share amounts)
Note 4. Net Asset Value Per Share
At September 30, 2020, the Companys total net assets and net asset value per share were $851,093 and $20.14, respectively. This
compares to total net assets and net asset value per share at December 31, 2019 of $905,880 and $21.44, respectively.
Note 5. Earnings
(Loss) Per Share
The following table sets forth the computation of basic and diluted net increase (decrease) in net assets per share
resulting from operations, pursuant to ASC 260-10, for the three and nine months ended September 30, 2020 and 2019:
Three months ended
September 30,
Nine months ended
September 30,
2020
2019
2020
2019
Earnings (loss) per share (basic & diluted)
Numerator - net increase (decrease) in net assets resulting from operations:
$
18,617
$
13,717
$
(2,806
)
$
58,180
Denominator - weighted average shares:
42,260,826
42,260,826
42,260,826
42,260,826
Earnings (loss) per share:
$
0.44
$
0.32
($
0.07
)
$
1.38
Note 6. Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. GAAP establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs to valuations used to measure
fair value into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy
are as follows:
Level 1. Financial assets and liabilities whose values are based on unadjusted quoted
prices for identical assets or liabilities in an active market that the Company has the ability to access.
Level 2. Financial assets and liabilities whose values are based on quoted prices in markets that are not
active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:
a)
Quoted prices for similar assets or liabilities in active markets;
b)
Quoted prices for identical or similar assets or liabilities in
non-active markets;
c)
Pricing models whose inputs are observable for substantially the full term of the asset or liability; and
d)
Pricing models whose inputs are derived principally from or corroborated by observable market data through
correlation or other means for substantially the full term of the asset or liability.
Level 3.
Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect managements and, if
applicable, an independent third-party valuation firms own assumptions about the assumptions a market participant would use in pricing the asset or liability.
When the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is
categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable
(Level 3).
Gains and losses for assets and liabilities categorized within the Level 3 table below may include changes in fair
value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3).
A review of fair
value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. Such reclassifications involving Level 3 assets
and liabilities are reported as transfers in/out of Level 3 as of the end of the quarter in which the reclassifications occur. Within the fair value hierarchy tables below, cash and cash equivalents are excluded but could be classified as
Level 1.
22
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SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)
September 30, 2020
(in thousands, except share amounts)
The following tables present the balances of assets and liabilities measured at fair value on
a recurring basis, as of September 30, 2020 and December 31, 2019:
Fair Value Measurements
As of September 30, 2020
Level 1
Level 2
Level 3
Total
Assets:
Senior Secured Loans
$
$
$
748,226
$
748,226
Equipment Financing
297,065
297,065
Preferred Equity
7,724
7,724
Common Equity/Equity Interests/Warrants
953
297,937
298,890
Total Investments$
$
953
$
$
1,350,952
$
1,351,905
Liabilities:
2022 Unsecured Notes
$
$
$
149,000
$
149,000
Fair Value Measurements
As of December 31, 2019
Level 1
Level 2
Level 3
Total
Assets:
Senior Secured Loans
$
$
$
852,834
$
852,834
Equipment Financing
320,630
320,630
Preferred Equity
10,891
10,891
Common Equity/Equity Interests/Warrants
957
309,512
310,469
Total Investments$
$
957
$
$
1,493,867
$
1,494,824
Liabilities:
2022 Unsecured Notes
$
$
$
150,000
$
150,000
23
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SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)
September 30, 2020
(in thousands, except share amounts)
The following tables provide a summary of the changes in fair value of Level 3 assets
and liabilities for the three and nine months ended September 30, 2020, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets and liabilities still held at
September 30, 2020:
Fair Value Measurements Using Level 3 Inputs
Senior Secured
Loans
Equipment
Financing
Preferred Equity
Common Equity/
Equity
Interests/
Warrants
Total
Fair value, June 30, 2020
$
752,474
$
302,000
$
8,103
$
296,603
$
1,359,180
Total gains or losses included in earnings:
Net realized gain (loss)
158
(133
)
(269
)
(244
)
Net change in unrealized gain (loss)
1,646
3,416
(633
)
1,573
6,002
Purchase of investment securities
37,464
8,398
254
30
46,146
Proceeds from dispositions of investment securities.
(43,516
)
(16,616
)
(60,132
)
Transfers in/out of Level 3
Fair value, September 30, 2020
$
748,226
$
297,065
$
7,724
$
297,937
$
1,350,952
Unrealized gains (losses) for the period relating to those Level 3 assets that were still
held by the Company at the end of the period:
Net change in unrealized gain (loss)
$
1,966
$
3,416
$
(633
)
$
1,573
$
6,322
Senior Secured
Loans
Equipment
Financing
Preferred Equity
Common Equity/
Equity
Interests/
Warrants
Total
Fair value, December 31, 2019
$
852,834
$
320,630
$ 10,891
$
309,512
$
1,493,867
Total gains or losses included in earnings:
Net realized loss
(24,570
)
(150
)
(269
)
(24,989
)
Net change in unrealized gain (loss)
6,562
(15,387
)
(2,917)
(11,336
)
(23,078
)
Purchase of investment securities
158,607
32,962
254
30
191,853
Proceeds from dispositions of investment securities.
(245,207
)
(40,990
)
(504)
(286,701
)
Transfers in/out of Level 3
Fair value, September 30, 2020
$
748,226
$
297,065
$ 7,724
$
297,937
$
1,350,952
Unrealized gains (losses) for the period relating to those Level 3 assets that were still
held by the Company at the end of the period:
Net change in unrealized loss
$
(9,331
)
$
(15,387
)
$ (2,917)
$
(11,605
)
$
(39,240
)
The following table shows a reconciliation of the beginning and ending balances for fair valued liabilities
measured using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2020:
2022 Unsecured Notes
For the three months ended
September 30, 2020
Beginning fair value
$
147,500
Net realized (gain) loss
Net change in unrealized (gain) loss
1,500
Borrowings
Repayments
Transfers in/out of Level 3
Ending fair value
$
149,000
24
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SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)
September 30, 2020
(in thousands, except share amounts)
2022 Unsecured Notes
For the nine months ended
September 30, 2020
Beginning fair value
$
150,000
Net realized (gain) loss
Net change in unrealized (gain) loss
(1,000
)
Borrowings
Repayments
Transfers in/out of Level 3
Ending fair value
$
149,000
The Company made an election to apply the fair value option of accounting to the 2022 Unsecured Notes, in
accordance with ASC 825-10. On September 30, 2020, there were borrowings of $150,000 on the 2022 Unsecured Notes.
The following table provides a summary of the changes in fair value of Level 3 assets and liabilities for the year ended December 31, 2019, as well
as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets and liabilities still held at December 31, 2019:
Fair Value Measurements Using Level 3 Inputs
Senior Secured
Loans
Equipment
Financing
Preferred Equity
Common Equity/
Equity
Interests/
Warrants
Total
Fair value, December 31, 2018
$
818,861
$
314,226
$
15,527
$
306,926
$
1,455,540
Total gains or losses included in earnings:
Net realized gain (loss)
391
162
(108
)
445
Net change in unrealized gain (loss)
(14,296
)
(576
)
(3,242
)
3,028
(15,086
)
Purchase of investment securities
322,882
90,330
426
413,638
Proceeds from dispositions of investment securities.
(275,004
)
(83,512
)
(1,394
)
(760
)
(360,670
)
Transfers in/out of Level 3
Fair value, December 31, 2019
$
852,834
$
320,630
$
10,891
$
309,512
$
1,493,867
Unrealized gains (losses) for the period relating to those Level 3 assets that were still
held by the Company at the end of the period:
Net change in unrealized gain (loss)
$
(14,064
)
$
(576
)
$
(3,242
)
$
2,519
$
(15,363
)
The following table shows a reconciliation of the beginning and ending balances for fair valued liabilities
measured using significant unobservable inputs (Level 3) for the year ended December 31, 2019:
Credit Facility, 2022 Unsecured Notes and SSLP Facility
For the year ended
December 31, 2019
Beginning fair value
$
350,185
Net realized (gain) loss
Net change in unrealized (gain) loss
Borrowings
529,600
Repayments
(626,600
)
Transfers into Level 3
Transfers out of Level 3
(103,185
)
Ending fair value
$
150,000
The Company made elections to apply the fair value option of accounting to the 2022 Unsecured Notes, in
accordance with ASC 825-10. On December 31, 2019, there were borrowings of $150,000 on the 2022 Unsecured Notes.
25
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SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)
September 30, 2020
(in thousands, except share amounts)
The Company did not elect to apply the fair value option of accounting to the SSLP Facility,
which was refinanced by way of amendment on May 31, 2019. As this refinancing was deemed to be a significant modification of debt, per ASC 825-10-25, a new election
was triggered. As such the SSLP Facility is shown as a transfer out of Level 3.
Quantitative Information about Level 3
Fair Value Measurements
The Company typically determines the fair value of its performing debt investments utilizing a yield
analysis. In a yield analysis, a price is ascribed for each investment based upon an assessment of current and expected market yields for similar investments and risk profiles. Additional consideration is given to current contractual interest rates,
relative maturities and other key terms and risks associated with an investment. Among other factors, a significant determinant of risk is the amount of leverage used by the portfolio company relative to the total enterprise value of the company,
and the rights and remedies of our investment within each portfolio company.
Significant unobservable quantitative inputs typically used
in the fair value measurement of the Companys Level 3 assets and liabilities primarily reflect current market yields, including indices, and readily available quotes from brokers, dealers, and pricing services as indicated by comparable
assets and liabilities, as well as enterprise values, returns on equity and earnings before income taxes, depreciation and amortization (EBITDA) multiples of similar companies, and comparable market transactions for equity securities.
Quantitative information about the Companys Level 3 asset and liability fair value measurements as of September 30, 2020
is summarized in the table below:
Asset or
Liability
Fair Value at
September 30,
2020
Principal Valuation
Technique/
Methodology
Unobservable Input
Range (Weighted
Average)
Senior Secured Loans
Asset
$
748,226
Income
Approach
Market Yield
5.9% 12.1% (9.0%)
Equipment Financing
Asset
$
$
162,584
134,481
Income
Approach Market
Approach
Market Yield
Return on
Equity
6.6% 19.9% (10.5%)
8.9%-8.9% (8.9%)
Preferred Equity
Asset
$
7,724
Income
Approach
Market Yield
8.0% 14.0% (11.3%)
Common Equity/Equity Interests/Warrants
Asset
$
$
6,989
290,948
Market
Approach Market
Approach
EBITDA
Multiple Return on
Equity
5.8x 6.3x (6.3x)
(4.1%) 15.0% (1.7%)
2022 Unsecured Notes
Liability
$
149,000
Income
Approach
Market Yield
1.5% 5.0% (5.0%)
Quantitative information about the Companys Level 3 asset and liability fair value measurements as
of December 31, 2019 is summarized in the table below:
Asset or
Liability
Fair Value at
December 31,
2019
Principal Valuation
Technique/
Methodology
Unobservable Input
Range (Weighted
Average)
Senior Secured Loans
Asset
$
$
845,334
7,500
Income
Approach Market
Approach
Market Yield
EBITDA
Multiple
6.2% 11.9% (9.3%)
7.8x-8.0x (7.9x)
Equipment Financing
Asset
$
$
175,630
145,000
Income
Approach Market
Approach
Market Yield
Return on
Equity
7.2% 19.7% (10.0%)
7.8%-7.8% (7.8%)
Preferred Equity
Asset
$
10,891
Income
Approach
Market Yield
8.0% 12.9% (10.7%)
Common Equity/Equity Interests/Warrants
Asset
$
$
13,512
296,000
Market
Approach Market
Approach
EBITDA
Multiple Return on
Equity
5.8x 6.3x (6.0x)
3.9% 17.0% (17.0%)
2022 Unsecured Notes
Liability
$
150,000
Income
Approach
Market Yield
3.8% 6.0% (4.5%)
Significant increases or decreases in any of the above unobservable inputs in isolation, including
unobservable inputs used in deriving bid-ask spreads, if applicable, could result in significantly lower or higher fair value measurements for such assets and liabilities. Generally, an increase in market
yields or decrease in EBITDA multiples may result in a decrease in the fair value of certain of the Companys investments.
26
Table of Contents
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)
September 30, 2020
(in thousands, except share amounts)
Note 7. Debt
Our debt obligations consisted of the following as of September 30, 2020 and December 31, 2019:
September 30, 2020
December 31, 2019
Facility
Face Amount
Carrying Value
Face Amount
Carrying Value
Credit Facility
$
75,000
$
72,612
(1)
$
117,900
$
115,217
(1)
NEFPASS Facility
(680
) (2)
30,000
29,149
(2)
2022 Unsecured Notes
150,000
149,000
150,000
150,000
2022 Tranche C Notes
21,000
20,928
(3)
21,000
20,905
(3)
2023 Unsecured Notes
75,000
74,137
(4)
75,000
73,876
(4)
2024 Unsecured Notes
125,000
123,812
(5)
125,000
123,732
(5)
2026 Unsecured Notes
75,000
74,249
(6)
75,000
74,238
(6)
$521,000
$514,058
$593,900
$587,117
(1)
Carrying Value equals the Face Amount net of unamortized debt issuance costs of $2,388 and $2,683,
respectively, as of September 30, 2020 and December 31, 2019.
(2)
Carrying Value equals the Face Amount net of unamortized debt issuance costs of $680 and $851, respectively, as
of September 30, 2020 and December 31, 2019.
(3)
Carrying Value equals the Face Amount net of unamortized debt issuance costs of $72 and $95, respectively, as
of September 30, 2020 and December 31, 2019.
(4)
Carrying Value equals the Face Amount net of unamortized debt issuance costs of $863 and $1,124, respectively,
as of September 30, 2020 and December 31, 2019.
(5)
Carrying Value equals the Face Amount net of unamortized debt issuance costs of $1,188 and $1,268,
respectively, as of September 30, 2020 and December 31, 2019.
(6)
Carrying Value equals the Face Amount net of unamortized debt issuance costs of $751 and $762, respectively as
of September 30, 2020 and December 31, 2019.
Unsecured Notes
On December 18, 2019, the Company closed a private offering of $125,000 of the 2024 Unsecured Notes with a fixed interest rate of 4.20%
and a maturity date of December 15, 2024. Interest on the 2024 Unsecured Notes is due semi-annually on June 15 and December 15. The 2024 Unsecured Notes were issued in a private placement only to qualified institutional buyers.
On December 18, 2019, the Company closed a private offering of $75,000 of the 2026 Unsecured Notes with a fixed interest rate of 4.375%
and a maturity date of December 15, 2026. Interest on the 2026 Unsecured Notes is due semi-annually on June 15 and December 15. The 2026 Unsecured Notes were issued in a private placement only to qualified institutional buyers.
On December 28, 2017, the Company closed a private offering of $21,000 of the 2022 Tranche C Notes with a fixed interest rate of 4.50%
and a maturity date of December 28, 2022. Interest on the 2022 Tranche C Notes is due semi-annually on June 28 and December 28. The 2022 Tranche C Notes were issued in a private placement only to qualified institutional buyers.
On November 22, 2017, we issued $75,000 in aggregate principal amount of publicly registered 2023 Unsecured Notes for net proceeds of
$73,846. Interest on the 2023 Unsecured Notes is paid semi-annually on January 20 and July 20, at a fixed rate of 4.50% per year, commencing on January 20, 2018. The 2023 Unsecured Notes mature on January 20, 2023.
On February 15, 2017, the Company closed a private offering of $100,000 of the 2022 Unsecured Notes with a fixed interest rate of 4.60%
and a maturity date of May 8, 2022. Interest on the 2022 Unsecured Notes is due semi-annually on May 8 and November 8. The 2022 Unsecured Notes were issued in a private placement only to qualified institutional buyers.
On November 8, 2016, the Company closed a private offering of $50,000 of the 2022 Unsecured Notes with a fixed interest rate of 4.40% and
a maturity date of May 8, 2022. Interest on the 2022 Unsecured Notes is due semi-annually on May 8 and November 8. The 2022 Unsecured Notes were issued in a private placement only to qualified institutional buyers.
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SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)
September 30, 2020
(in thousands, except share amounts)
Revolving and Term Loan Facilities
On August 28, 2019, the Company repaid its existing senior secured credit agreement due September 2021 and entered into the new senior
secured credit agreement (the Credit Facility). The Credit Facility was originally composed of $470,000 of revolving credit and $75,000 of term loans. On February 12, 2020, a new lender to the Company executed a commitment increase
to our Credit Facility providing for an additional $75,000 of revolving credit, bringing our Credit Facilitys total revolving credit capacity to $545,000. Borrowings generally bear interest at a rate per annum equal to the base rate plus a
range of 2.00-2.25% or the alternate base rate plus 1.00%-1.25%. The Credit Facility has no LIBOR floor requirement. The Credit Facility matures in August 2024 and
includes ratable amortization in the final year. The Credit Facility may be increased up to $800,000 with additional new lenders or an increase in commitments from current lenders. The Credit Facility contains certain customary affirmative and
negative covenants and events of default. In addition, the Credit Facility contains certain financial covenants that among other things, requires the Company to maintain a minimum shareholders equity and a minimum asset coverage ratio. At
September 30, 2020, outstanding USD equivalent borrowings under the Credit Facility totaled $75,000, composed of $0 of revolving credit and $75,000 of term loans.
On September 26, 2018, NEFPASS SPV LLC, a newly formed wholly-owned subsidiary of NEFPASS LLC, as borrower entered into a $50,000 senior
secured revolving credit facility (the NEFPASS Facility) with Keybank acting as administrative agent. The Company acts as servicer under the NEFPASS Facility. The NEFPASS Facility is scheduled to mature on September 26, 2023. The
NEFPASS Facility generally bears interest at a rate of LIBOR plus 2.15%. NEFPASS and NEFPASS SPV LLC, as applicable, have made certain customary representations and warranties, and are required to comply with various covenants, including leverage
restrictions, reporting requirements and other customary requirements for similar credit facilities. The NEFPASS Facility also includes usual and customary events of default for credit facilities of this nature. There were no borrowings outstanding
as of September 30, 2020.
Certain covenants on our issued debt may restrict our business activities, including limitations that
could hinder our ability to finance additional loans and investments or to make the distributions required to maintain our status as a RIC under Subchapter M of the Code.
The Company has made an election to apply the fair value option of accounting to the 2022 Unsecured Notes, in accordance with ASC 825-10. We believe accounting for this facility at fair value better aligns the measurement methodologies of assets and liabilities, which may mitigate certain earnings volatility. ASC
825-10 requires entities to display the fair value of the selected assets and liabilities on the face of the Consolidated Statement of Assets and Liabilities and changes in fair value of the above facility are
reported in the Consolidated Statement of Operations.
The average annualized interest cost for all borrowings for the nine months ended
September 30, 2020 and the year ended December 31, 2019 was 4.23% and 4.52%, respectively. These costs are exclusive of other credit facility expenses such as unused fees, agency fees and other prepaid expenses related to establishing
and/or amending the Credit Facility, the 2022 Unsecured Notes, the 2022 Tranche C Notes, the NEFPASS Facility, the 2023 Unsecured Notes, the 2024 Unsecured Notes, and the 2026 Unsecured Notes (collectively the Credit Facilities), if any.
The maximum amounts borrowed on the Credit Facilities during the nine months ended September 30, 2020 and the year ended December 31, 2019 were $601,000 and $616,186, respectively.
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SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)
September 30, 2020
(in thousands, except share amounts)
Note 8. Financial Highlights
The following is a schedule of financial highlights for the nine months ended September 30, 2020 and 2019:
Nine months ended
September 30, 2020
Nine months ended
September 30, 2019
Per Share Data: (a)
Net asset value, beginning of year
$
21.44
$
21.75
Net investment income
1.05
1.31
Net realized and unrealized gain (loss)
(1.12
)
0.07
Net increase (decrease) in net assets resulting from operations
(0.07
)
1.38
Distributions to stockholders:
From net investment income
(1.23
)
(1.23
)
Net asset value, end of period
$
20.14
$
21.90
Per share market value, end of period
$
15.85
$
20.65
Total Return (b)
(16.53
%)
14.06
%
Net assets, end of period
$
851,093
$
925,370
Shares outstanding, end of period
42,260,826
42,260,826
Ratios to average net assets (c):
Net investment income
5.18
%
5.98
%
Operating expenses
3.02
%
4.37
%
Interest and other credit facility expenses
2.36
%
2.37
%
Total expenses
5.38
%
6.74
%
Average debt outstanding
$
533,773
$
556,651
Portfolio turnover ratio
13.4
%
18.3
%
(a)
Calculated using the average shares outstanding method.
(b)
Total return is based on the change in market price per share during the period and takes into account
distributions, if any, reinvested in accordance with the dividend reinvestment plan. The market price per share as of December 31, 2019 and December 31, 2018 was $20.62 and $19.19, respectively. Total return does not include a sales load.
(c)
Not annualized for periods less than one year.
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SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)
September 30, 2020
(in thousands, except share amounts)
Note 9. Crystal Financial LLC
On December 28, 2012, we completed the acquisition of Crystal Capital Financial Holdings LLC (Crystal Financial), a commercial
finance company focused on providing asset-based and other secured financing solutions (the Crystal Acquisition). We invested $275,000 in cash to effect the Crystal Acquisition. Crystal Financial owned approximately 98% of the
outstanding ownership interest in Crystal Financial LLC. The remaining financial interest was held by various employees of Crystal Financial LLC, through their investment in Crystal Management LP. Crystal Financial LLC had a diversified portfolio of
23 loans having a total par value of approximately $400,000 at November 30, 2012 and a $275,000 committed revolving credit facility. On July 28, 2016, the Company purchased Crystal Management LPs approximately 2% equity interest in
Crystal Financial LLC for approximately $5,737. Upon the closing of this transaction, the Company holds 100% of the equity interest in Crystal Financial LLC. On September 30, 2016, Crystal Capital Financial Holdings LLC was dissolved. On
December 20, 2018, the revolving credit facility was expanded to $330,000.
As of September 30, 2020 Crystal Financial LLC had
28 funded commitments to 23 different issuers with a total par value of approximately $380,874 on total assets of $417,726. As of December 31, 2019 Crystal Financial LLC had 35 funded commitments to 28 different issuers with total funded loans
of approximately $496,833 on total assets of $518,024. As of September 30, 2020 and December 31, 2019, the largest loan outstanding totaled $45,000 and $45,000, respectively. For the same periods, the average exposure per issuer was
$16,560 and $17,744, respectively. Crystal Financial LLCs credit facility, which is non-recourse to Solar Capital, had approximately $167,422 and $275,954 of borrowings outstanding at
September 30, 2020 and December 31, 2019, respectively. For the three months ended September 30, 2020 and 2019, Crystal Financial LLC had net income of $6,041 and $4,518, respectively, on gross income of $9,301 and $13,346,
respectively. For the nine months ended September 30, 2020 and 2019, Crystal Financial LLC had net income of $16,291 and $20,163, respectively, on gross income of $32,944 and $48,336, respectively. Due to timing and non-cash items, there may be material differences between GAAP net income and cash available for distributions.
Note
10. Commitments and Contingencies
The Company had unfunded debt and equity commitments to various revolving and delayed draw loans as
well as to Crystal Financial LLC. The total amount of these unfunded commitments as of September 30, 2020 and December 31, 2019 is $109,559 and $124,529, respectively, comprised of the following:
September 30, 2020
December 31, 2019
Crystal Financial LLC*
$
44,263
$
44,263
Kindred Biosciences, Inc
13,795
13,795
One Touch Direct, LLC
7,494
Cardiva Medical, Inc
7,333
11,000
Neuronetics, Inc
6,691
Soleo Health Holdings, Inc.
5,071
PQ Bypass, Inc
5,000
5,000
NEF Holdings, Inc.
4,150
Centrexion Therapeutics, Inc
3,785
7,569
Atria Wealth Solutions, Inc
3,529
387
Cerapedics, Inc
2,686
5,372
Sentry Data Systems, Inc
1,577
Pinnacle Treatment Centers, Inc.
1,386
Delphinus Medical Technologies, Inc.
1,250
iCIMS, Inc
792
792
Enhanced Capital Group, LLC
757
2,523
Rubius Therapeutics, Inc
13,430
Phynet Dermatology LLC
4,668
Altern Marketing, LLC
4,227
Varilease Finance, Inc
3,438
MRI Software LLC
3,331
Solara Medical Supplies, Inc
1,934
RS Energy Group U.S., Inc
1,685
Alimera Sciences, Inc
1,115
Total Commitments
$
109,559
$
124,529
* The Company controls the funding of the Crystal Financial LLC commitment and may cancel it
at its discretion.
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SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)
September 30, 2020
(in thousands, except share amounts)
The credit agreements of the above loan commitments contain customary lending provisions
and/or are subject to the portfolio companys achievement of certain milestones that allow relief to the Company from funding obligations for previously made commitments in instances where the underlying company experiences materially adverse
events that affect the financial condition or business outlook for the company. Since these commitments may expire without being drawn upon, unfunded commitments do not necessarily represent future cash requirements or future earning assets for the
Company. As of September 30, 2020 and December 31, 2019, the Company had sufficient cash available and/or liquid securities available to fund its commitments.
Note 11. NEF Holdings, LLC
On
July 31, 2017, we completed the acquisition of NEF Holdings, LLC (NEF), which conducts its business through its wholly-owned subsidiary Nations Equipment Finance, LLC. NEF is an independent equipment finance company that provides
senior secured loans and leases primarily to U.S. based companies. We invested $209,866 in cash to effect the transaction, of which $145,000 was invested in the equity of NEF through our wholly-owned consolidated taxable subsidiary NEFCORP LLC and
our wholly-owned consolidated subsidiary NEFPASS LLC and $64,866 was used to purchase certain leases and loans held by NEF through NEFPASS LLC. Concurrent with the transaction, NEF refinanced its existing senior secured credit facility into a
$150,000 non-recourse facility with an accordion feature to expand up to $250,000. In September 2019, NEF amended the facility, increasing commitments to $213,957 with an accordion feature to expand up to
$313,957 and extended the maturity date of the facility to July 31, 2023. At July 31, 2017, NEF also had two securitizations outstanding, with an issued note balance of $94,587, which were later redeemed in 2018.
As of September 30, 2020, NEF had 141 funded equipment-backed leases and loans to 62 different customers with a total net investment in
leases and loans of approximately $192,316 on total assets of $279,063. As of December 31, 2019, NEF had 168 funded equipment-backed leases and loans to 78 different customers with a total net investment in leases and loans of approximately
$244,996 on total assets of $304,203. As of September 30, 2020 and December 31, 2019, the largest position outstanding totaled $25,600 and $26,948, respectively. For the same periods, the average exposure per customer was $3,102 and
$3,141, respectively. NEFs credit facility, which is non-recourse to Solar Capital, had approximately $106,927 and $128,150 of borrowings outstanding at September 30, 2020 and December 31,
2019, respectively. For the three months ended September 30, 2020 and September 30, 2019, NEF had net income (loss) of $1,532 and ($707), respectively, on gross income of $6,462 and $8,728, respectively. For the nine months ended
September 30, 2020 and September 30, 2019, NEF had net loss of $395 and $206, respectively, on gross income of $17,795 and $24,284, respectively. Due to timing and non-cash items, there may be
material differences between GAAP net income and cash available for distributions.
Note 12. Capital Share Transactions
As of September 30, 2020 and September 30, 2019, 200,000,000 shares of $0.01 par value capital stock were authorized.
There were no transactions in capital stock during the three and nine months ended September 30, 2020 and September 30, 2019.
Note 13. Subsequent Events
The Company
has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date the consolidated financial statements were issued.
On November 3, 2020, the Company completed the acquisition of Kingsbridge Holdings, LLC (Kingsbridge). Kingsbridge is an
independent equipment finance company that provides senior secured financings to U.S. based companies.
On November 5, 2020, our
Board declared a quarterly distribution of $0.41 per share payable on January 5, 2021 to holders of record as of December 17, 2020.
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SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)
September 30, 2020
(in thousands, except share amounts)
The global outbreak of the COVID-19 pandemic, and the
related effect on the U.S. and global economies, has continued to have adverse consequences for the business operations of some of the Companys portfolio companies and, as a result, has had adverse effects on the Companys operations. The
ultimate economic fallout from the pandemic, and the long-term impact on economies, markets, industries and individual issuers, remain uncertain. The operational and financial performance of the issuers of securities in which the Company invests
depends on future developments, including the duration and spread of the outbreak, and such uncertainty may in turn adversely affect the value and liquidity of the Companys investments and negatively impact the Companys performance.
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Solar Capital Ltd.:
Results of Review of Interim Financial Information
We have reviewed the consolidated statement of assets and liabilities of Solar Capital Ltd. (and subsidiaries) (the Company), including the consolidated
schedule of investments, as of September 30, 2020, the related consolidated statements of operations and changes in net assets, for the three-month and nine-month periods ended September 30, 2020 and 2019, the related consolidated
statements of cash flows for the nine-month periods ended September 30, 2020 and 2019, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications
that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.
We
have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statement of assets and liabilities, including the consolidated schedule of investments, of the
Company as of December 31, 2019, and the related consolidated statements of operations, changes in net assets, and cash flows for the year then ended (not presented herein); and in our report dated February 20, 2020, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated statement of assets and liabilities, including the consolidated schedule of investments, as of
December 31, 2019, is fairly stated, in all material respects, in relation to the consolidated statement of assets and liabilities, including the consolidated schedule of investments, from which it has been derived.
Basis for Review Results
This consolidated interim
financial information is the responsibility of the Companys management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with the
standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ KPMG LLP
New York, New York
November 5, 2020
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Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
The information contained in this section should be read in conjunction with our consolidated financial
statements and notes thereto appearing elsewhere in this report.
Some of the statements in this report constitute forward-looking
statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained herein involve risks and uncertainties, including statements as to:
our future operating results, including our ability to achieve objectives as a result of the current COVID-19 pandemic;
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
and the impact of the COVID-19 pandemic thereon;
the impact of any protracted decline in the liquidity of credit markets on our business and the impact of the COVID-19 pandemic thereon;
the ability of our portfolio companies to achieve their objectives, including as a result of the current COVID-19 pandemic;
the valuation of our investments in portfolio companies, particularly those having no liquid trading market, and
the impact of the COVID-19 pandemic thereon;
market conditions and our ability to access alternative debt markets and additional debt and equity capital, and
the impact of the COVID-19 pandemic thereon;
our expected financings and investments;
the adequacy of our cash resources and working capital;
the timing of cash flows, if any, from the operations of our portfolio companies and the impact of the COVID-19 pandemic thereon; and
the ability of our investment adviser to locate suitable investments for us and to monitor and administer our
investments and the impacts of the COVID-19 pandemic thereon.
These statements
are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted
in the forward-looking statements, including without limitation:
an economic downturn, including as a result of the current COVID-19
pandemic, could impair our portfolio companies ability to continue to operate, which could lead to the loss of some or all of our investments in such portfolio companies;
a contraction of available credit and/or an inability to access the equity markets, including as a result of the
current COVID-19 pandemic, could impair our lending and investment activities;
interest rate volatility could adversely affect our results, particularly because we use leverage as part of our
investment strategy;
currency fluctuations could adversely affect the results of our investments in foreign companies, particularly to
the extent that we receive payments denominated in foreign currency rather than U.S. dollars; and
the risks, uncertainties and other factors we identify in Item 1A. Risk Factors contained in our Annual
Report on Form 10-K for the year ended December 31, 2019, elsewhere in this Quarterly Report on Form 10-Q and in our other filings with the SEC.
We generally use words such as anticipates, believes, expects, intends
and similar expressions to identify forward-looking statements. Our actual results could differ materially from those projected in the forward-looking statements for any reason, including any factors set forth in Risk Factors and
elsewhere in this report.
We have based the forward-looking statements included in this report on information available to us on the date
of this report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise,
you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including any annual reports on Form 10-K, quarterly
reports on Form 10-Q and current reports on Form 8-K.
Overview
Solar Capital LLC, a Maryland limited liability company, was formed in February 2007 and commenced operations on March 13, 2007
with initial capital of $1.2 billion of which 47.04% was funded by affiliated parties.
Solar Capital Ltd. (Solar
Capital, the Company, we or our), a Maryland corporation formed in November 2007, is a closed-end, externally managed,
non-diversified management investment company that has elected to be regulated as a business
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development company (BDC) under the Investment Company Act of 1940, as amended (the 1940 Act). Furthermore, as the Company is an investment company, it continues to apply
the guidance in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 946. In addition, for U.S federal income tax purposes, the Company has elected to be treated as a regulated
investment company (RIC) under Subchapter M of the Internal Revenue Code of 1986, as amended (the Code).
On
February 9, 2010, we priced our initial public offering, selling 5.68 million shares of our common stock. Concurrent with our initial public offering, Michael S. Gross, our Chairman, Co-Chief
Executive Officer and President, and Bruce Spohler, our Co-Chief Executive Officer and Chief Operating Officer, collectively purchased an additional 0.6 million shares of our common stock through a
private placement transaction exempt from registration under the Securities Act.
We invest primarily in privately held U.S. middle-market
companies, where we believe the supply of primary capital is limited and the investment opportunities are most attractive. Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We
invest primarily in leveraged middle-market companies in the form of senior secured loans, stretch-senior loans, financing leases and to a lesser extent, unsecured loans and equity securities. From time to time, we may also invest in public
companies that are thinly traded. Our business is focused primarily on the direct origination of investments through portfolio companies or their financial sponsors. Our investments generally range between $5 million and $100 million each,
although we expect that this investment size will vary proportionately with the size of our capital base and/or with strategic initiatives. Our investment activities are managed by Solar Capital Partners, LLC (the Investment Adviser) and
supervised by our board of directors, a majority of whom are non-interested, as such term is defined in the 1940 Act. Solar Capital Management, LLC (the Administrator) provides the administrative
services necessary for us to operate.
In addition, we may invest a portion of our portfolio in other types of investments, which we refer
to as opportunistic investments, which are not our primary focus but are intended to enhance our overall returns. These investments may include, but are not limited to, direct investments in public companies that are not thinly traded and securities
of leveraged companies located in select countries outside of the United States.
As of September 30, 2020, the Investment Adviser
has directly invested approximately $9.5 billion in more than 400 different portfolio companies since 2006. Over the same period, the Investment Adviser completed transactions with approximately 200 different financial sponsors.
Recent Developments
On November 3,
2020, the Company completed the acquisition of Kingsbridge Holdings, LLC (Kingsbridge). Kingsbridge is an independent equipment finance company that provides senior secured financings to U.S. based companies.
On November 5, 2020, our Board declared a quarterly distribution of $0.41 per share payable on January 5, 2021 to holders of record
as of December 17, 2020.
The global outbreak of the COVID-19 pandemic, and the related effect
on the U.S. and global economies, has continued to have adverse consequences for the business operations of some of the Companys portfolio companies and, as a result, has had adverse effects on the Companys operations. The ultimate
economic fallout from the pandemic, and the long-term impact on economies, markets, industries and individual issuers, remain uncertain. The operational and financial performance of the issuers of securities in which the Company invests depends on
future developments, including the duration and spread of the outbreak, and such uncertainty may in turn adversely affect the value and liquidity of the Companys investments and negatively impact the Companys performance.
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 for such companies, the
general economic environment and the competitive environment for the types of investments we make. As a BDC, we must not acquire any assets other than qualifying assets 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. The definition of eligible portfolio company includes
certain public companies that do not have any securities listed on a national securities exchange and companies whose securities are listed on a national securities exchange but whose market capitalization is less than $250 million.
Revenue
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 sell. Our debt investments generally have a stated term of three to seven years and typically bear interest at a
floating rate usually determined on the basis of a benchmark London interbank offered rate (LIBOR), commercial paper rate, or the prime rate. Interest on our debt investments is generally payable monthly or quarterly but may be bi-monthly or semi-annually. In addition, our investments may provide payment-in-kind (PIK) interest. Such amounts of
accrued PIK interest are added to the cost of the investment on the respective capitalization dates and generally become due at maturity of the investment or upon the investment being called by the issuer. We may also generate revenue in the form of
commitment, origination, structuring fees, fees for providing managerial assistance and, if applicable, consulting fees, etc.
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Expenses
All investment professionals of the investment adviser and their respective staffs, when and to the extent engaged in providing investment
advisory and management services, and the compensation and routine overhead expenses of such personnel allocable to such services, are provided and paid for by Solar Capital Partners. We bear all other costs and expenses of our operations and
transactions, including (without limitation):
the cost of our organization and public offerings;
the cost of calculating our net asset value, including the cost of any third-party valuation services;
the cost of effecting sales and repurchases of our shares and other securities;
interest payable on debt, if any, to finance our investments;
fees payable to third parties relating to, or associated with, making investments, including fees and expenses
associated with performing due diligence reviews of prospective investments and advisory fees;
transfer agent and custodial fees;
fees and expenses associated with marketing efforts;
federal and state registration fees, any stock exchange listing fees;
federal, state and local taxes;
independent directors fees and expenses;
brokerage commissions;
fidelity bond, directors and officers errors and omissions liability insurance and other insurance premiums;
direct costs and expenses of administration, including printing, mailing, long distance telephone and staff;
fees and expenses associated with independent audits and outside legal costs;
costs associated with our reporting and compliance obligations under the 1940 Act and applicable federal and
state securities laws; and
all other expenses incurred by either Solar Capital Management or us in connection with administering our
business, including payments under the Administration Agreement that will be based upon our allocable portion of overhead and other expenses incurred by Solar Capital Management in performing its obligations under the Administration Agreement,
including rent, the fees and expenses associated with performing compliance functions, and our allocable portion of the costs of compensation and related expenses of our chief compliance officer and our chief financial officer and their respective
staffs.
We expect our general and administrative operating expenses related to our ongoing operations to increase
moderately in dollar terms. During periods of asset growth, we generally expect our general and administrative operating expenses to decline as a percentage of our total assets and increase during periods of asset declines. Incentive fees, interest
expense and costs relating to future offerings of securities, among others, may also increase or reduce overall operating expenses based on portfolio performance, interest rate benchmarks, and offerings of our securities relative to comparative
periods, among other factors.
Portfolio and Investment Activity
During the three months ended September 30, 2020, we invested approximately $42.4 million across 12 portfolio companies. This
compares to investing approximately $116.2 million in 24 portfolio companies for the three months ended September 30, 2019. Investments sold, prepaid or repaid during the three months ended September 30, 2020 totaled approximately
$60.3 million versus approximately $111.4 million for the three months ended September 30, 2019.
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At September 30, 2020, our portfolio consisted of 105 portfolio companies and was
invested 22.3% in cash flow senior secured loans, 31.8% in asset-based senior secured loans / Crystal, 22.0% in equipment senior secured financings / NEF, and 23.9% in life science senior secured loans, in each case, measured at fair value, versus
110 portfolio companies invested 29.2% in cash flow senior secured loans, 29.7% in asset-based senior secured loans / Crystal, 21.8% in equipment senior secure financings / NEF, and 19.3% in life science senior secured loans, in each case, measured
at fair value, at September 30, 2019.
At September 30, 2020, 77.3% or $1.04 billion of our income producing investment
portfolio * is floating rate and 22.7% or $305.1 million is fixed rate, measured at fair value. At September 30, 2019, 76.8% or $1.13 billion of our income producing investment
portfolio * is floating rate and 23.2% or $340.4 million is fixed rate, measured at fair value. As of September 30, 2020 and 2019, we had zero issuers and one issuer on non-accrual status, respectively.
Since inception through September 30, 2020, Solar Capital and
its predecessor companies have invested approximately $6.5 billion in more than 290 portfolio companies. Over the same period, Solar Capital has completed transactions with more than 150 different financial sponsors.
* We have included Crystal Financial LLC and NEF Holdings LLC within our income producing
investment portfolio.
Crystal Financial LLC
On December 28, 2012, we completed the acquisition of Crystal Capital Financial Holdings LLC (Crystal Financial), a commercial
finance company focused on providing asset-based and other secured financing solutions (the Crystal Acquisition). We invested $275 million in cash to effect the Crystal Acquisition. Crystal Financial owned approximately 98% of the
outstanding ownership interest in Crystal Financial LLC. The remaining financial interest was held by various employees of Crystal Financial LLC, through their investment in Crystal Management LP. Crystal Financial LLC had a diversified portfolio of
23 loans having a total par value of approximately $400 million at November 30, 2012 and a $275 million committed revolving credit facility. On July 28, 2016, the Company purchased Crystal Management LPs approximately 2%
equity interest in Crystal Financial LLC for approximately $5.7 million. Upon the closing of this transaction, the Company holds 100% of the equity interest in Crystal Financial LLC. On September 30, 2016, Crystal Capital Financial
Holdings LLC was dissolved. On December 20, 2018, the revolving credit facility was expanded to $330 million.
As of
September 30, 2020, Crystal Financial LLC had 28 funded commitments to 23 different issuers with a total par value of approximately $380.9 million on total assets of $417.7 million. As of December 31, 2019, Crystal Financial LLC
had 35 funded commitments to 28 different issuers with total funded loans of approximately $496.8 million on total assets of $518.0 million. As of September 30, 2020 and December 31, 2019, the largest loan outstanding totaled
$45.0 million and $45.0 million, respectively. For the same periods, the average exposure per issuer was $16.6 million and $17.7 million, respectively. Crystal Financial LLCs credit facility, which is non-recourse to Solar Capital, had approximately $167.4 million and $276.0 million of borrowings outstanding at September 30, 2020 and December 31, 2019, respectively. For the three months ended
September 30, 2020 and September 30, 2019, Crystal Financial LLC had net income of $6.0 million and $4.5 million, respectively, on gross income of $9.3 million and $13.3 million, respectively. For the nine months
ended September 30, 2020 and September 30, 2019, Crystal Financial LLC had net income of $16.3 million and $20.2 million, respectively, on gross income of $32.9 million and $48.3 million, respectively. Due to
timing and non-cash items, there may be material differences between GAAP net income and cash available for distributions. As such, and subject to fluctuations in Crystal Financial LLCs funded
commitments, the timing of originations, and the repayments of financings, the Company cannot guarantee that Crystal Financial LLC will be able to maintain consistent dividend payments to us.
NEF Holdings, LLC
On July 31, 2017,
we completed the acquisition of NEF Holdings, LLC (NEF), which conducts its business through its wholly-owned subsidiary Nations Equipment Finance, LLC. NEF is an independent equipment finance company that provides senior secured loans
and leases primarily to U.S. based companies. We invested $209.9 million in cash to effect the transaction, of which $145.0 million was invested in the equity of NEF through our wholly-owned consolidated taxable subsidiary NEFCORP LLC and
our wholly-owned consolidated subsidiary NEFPASS LLC and $64.9 million was used to purchase certain leases and loans held by NEF through NEFPASS LLC. Concurrent with the transaction, NEF refinanced its existing senior secured credit facility
into a $150.0 million non-recourse facility with an accordion feature to expand up to $250.0 million. In September 2019, NEF amended the facility, increasing commitments to $214.0 million with
an accordion feature to expand up to $314.0 million and extended the maturity date of the facility to July 31, 2023. At July 31, 2017, NEF also had two securitizations outstanding, with an issued note balance of $94.6 million,
which were later redeemed in 2018.
As of September 30, 2020, NEF had 141 funded equipment-backed leases and loans to 62 different
customers with a total net investment in leases and loans of approximately $192.3 million on total assets of $279.1 million. As of December 31, 2019, NEF had 168 funded equipment-backed leases and loans to 78 different customers with
a total net investment in leases and loans of approximately $245.0 million on total assets of $304.2 million. As of September 30, 2020 and December 31, 2019, the largest position
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outstanding totaled $25.6 million and $26.9 million, respectively. For the same periods, the average exposure per customer was $3.1 million and $3.1 million,
respectively. NEFs credit facility, which is non-recourse to Solar Capital, had approximately $106.9 million and $128.2 million of borrowings outstanding at September 30, 2020 and
December 31, 2019, respectively. For the three months ended September 30, 2020 and September 30, 2019, NEF had net income (loss) of $1.5 million and ($0.7) million, respectively, on gross income of $6.5 million and
$8.7 million, respectively. For the nine months ended September 30, 2020 and September 30, 2019, NEF had net loss of $0.4 million and $0.2 million, respectively, on gross income of $17.8 million and
$24.3 million, respectively. Due to timing and non-cash items, there may be material differences between GAAP net income and cash available for distributions. As such, and subject to fluctuations in
NEFs funded commitments, the timing of originations, and the repayments of financings, the Company cannot guarantee that NEF will be able to maintain consistent dividend payments to us.
Critical Accounting Policies
The
preparation of consolidated financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the consolidated financial statements, and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following items as critical accounting
policies. Within the context of these critical accounting policies and disclosed subsequent events herein, we are not currently aware of any other reasonably likely events or circumstances that would result in materially different amounts being
reported.
Valuation of Portfolio Investments
We conduct the valuation of our assets, pursuant to which our net asset value is determined, at all times consistent with GAAP, and the 1940
Act. Our valuation procedures are set forth in more detail below:
Under procedures established by our board of directors (the
Board), we value investments, including certain senior secured debt, subordinated debt and other debt securities with maturities greater than 60 days, for which market quotations are readily available, at such market quotations (unless
they are deemed not to represent fair value). We attempt to obtain market quotations from at least two brokers or dealers (if available, otherwise from a principal market maker or a primary market dealer or other independent pricing service). We
utilize mid-market pricing as a practical expedient for fair value unless a different point within the range is more representative. If and when market quotations are deemed not to represent fair value, we may
utilize independent third-party valuation firms to assist us in determining the fair value of material assets. Accordingly, such investments go through our multi-step valuation process as described below. In each case, independent valuation firms
consider observable market inputs together with significant unobservable inputs in arriving at their valuation recommendations. Debt investments with maturities of 60 days or less shall each be valued at cost plus accreted discount, or minus
amortized premium, which is expected to approximate fair value, unless such valuation, in the judgment of the Investment Adviser, does not represent fair value, in which case such investments shall be valued at fair value as determined in good faith
by or under the direction of our Board. Investments that are not publicly traded or whose market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of our Board. Such determination of
fair values involves subjective judgments and estimates.
With respect to investments for which market quotations are not readily
available or when such market quotations are deemed not to represent fair value, our Board has approved a multi-step valuation process each quarter, as described below:
(1)
our quarterly valuation process begins with each portfolio company or investment being initially valued by the
investment professionals of the Investment Adviser responsible for the portfolio investment;
(2)
preliminary valuation conclusions are then documented and discussed with senior management of the Investment
Adviser;
(3)
independent valuation firms engaged by our Board conduct independent appraisals and review the Investment
Advisers preliminary valuations and make their own independent assessment for all material assets;
(4)
the audit committee of the Board reviews the preliminary valuation of the Investment Adviser and that of the
independent valuation firm, if any, and responds to the valuation recommendation of the independent valuation firm to reflect any comments; and
(5)
the Board discusses valuations and determines the fair value of each investment in our portfolio in good faith
based on the input of the Investment Adviser, the respective independent valuation firm, if any, and the audit committee.
Investments in all asset classes are valued utilizing a market approach, an income approach, or both approaches, as appropriate. However, in
accordance with ASC 820-10, certain investments that qualify as investment companies in accordance with ASC 946, may be valued using net asset value as a practical expedient for fair value. 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 approaches 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 we may take into account
in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection
provisions, the nature and realizable value of any collateral, the
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portfolio companys ability to make payments, 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, our principal market (as the reporting entity) and enterprise values, among other factors. When available, broker quotations and/or quotations provided by pricing services are considered as an input in
the valuation process. For the nine months ended September 30, 2020, there has been no change to the Companys valuation approaches or techniques and the nature of the related inputs considered in the valuation process.
Accounting Standards Codification (ASC) Topic 820 classifies the inputs used to measure these fair values into the following
hierarchy:
Level 1: Quoted prices in active markets for identical assets or liabilities, accessible by the
Company at the measurement date.
Level 2: Quoted prices for similar assets or liabilities in active markets, or
quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.
Level 3: Unobservable inputs for the asset or liability.
In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the
lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each investment. The
exercise of judgment is based in part on our knowledge of the asset class and our prior experience.
Determination of fair value involves
subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements express the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our consolidated financial
statements.
Valuation of 2022 Unsecured Notes
The Company has made an election to apply the fair value option of accounting to the 2022 Unsecured Notes, in accordance with ASC 825-10. We believe accounting for the 2022 Unsecured Notes at fair value better aligns the measurement methodologies of assets and liabilities, which may mitigate certain earnings volatility.
Revenue Recognition
The Company
records dividend income and interest, adjusted for amortization of premium and accretion of discount, on an accrual basis. Investments that are expected to pay regularly scheduled interest and/or dividends in cash are generally placed on non-accrual status when principal or interest/dividend cash payments are past due 30 days or more (90 days or more for equipment financing) and/or when it is no longer probable that principal or interest/dividend
cash payments will be collected. Such non-accrual investments are restored to accrual status if past due principal and interest or dividends are paid in cash, and in managements judgment, are likely to
continue timely payment of their remaining interest or dividend obligations. Interest or dividend cash payments received on investments may be recognized as income or applied to principal depending upon managements judgment. Some of our
investments may have contractual PIK interest or dividends. PIK interest and dividends computed at the contractual rate are accrued into income and reflected as receivable up to the capitalization date. PIK investments offer issuers the option at
each payment date of making payments in cash or in additional securities. When additional securities are received, they typically have the same terms, including maturity dates and interest rates as the original securities issued. On these payment
dates, the Company capitalizes the accrued interest or dividends receivable (reflecting such amounts as the basis in the additional securities received). PIK generally becomes due at the maturity of the investment or upon the investment being called
by the issuer. At the point the Company believes PIK is not expected to be realized, the PIK investment will be placed on non-accrual status. When a PIK investment is placed on
non-accrual status, the accrued, uncapitalized interest or dividends is reversed from the related receivable through interest or dividend income, respectively. The Company does not reverse previously
capitalized PIK interest or dividends. Upon capitalization, PIK is subject to the fair value estimates associated with their related investments. PIK investments on non-accrual status are restored to accrual
status if the Company again believes that PIK is expected to be realized. Loan origination fees, original issue discount, and market discounts are capitalized and amortized into income using the effective interest method. Upon the prepayment of a
loan, any unamortized loan origination fees are recorded as interest income. We record prepayment premiums on loans and other investments as interest income when we receive such amounts. Capital structuring fees are recorded as other income when
earned.
The typically higher yields and interest rates on PIK securities, to the extent we invested, reflects the payment deferral and
increased credit risk associated with such instruments and that such investments may represent a significantly higher credit risk than coupon loans. PIK securities may have unreliable valuations because their continuing accruals require continuing
judgments about the collectability of the deferred payments and the value of any associated collateral. PIK interest has the effect of generating investment income and increasing the incentive fees payable at a compounding rate. In addition, the
deferral of PIK interest also increases the loan-to-value ratio at a compounding rate. PIK securities create the risk that incentive fees will be paid to the Investment
Adviser based on non-cash accruals that ultimately may not be realized, but the Investment Adviser will be under no obligation to reimburse the Company for these fees. For the three and nine months ended
September 30, 2020, capitalized PIK income totaled $1.6 million and $3.0 million, respectively. For the three and nine months ended September 30, 2019, capitalized PIK income totaled $0.3 million and $1.0 million,
respectively.
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Net Realized Gain or Loss and Net Change in Unrealized Gain or Loss
We generally measure realized gain or loss by the difference between the net proceeds from the repayment or sale and the amortized cost basis
of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized origination or commitment fees and prepayment penalties. The net change in unrealized gain or loss reflects the change in
portfolio investment values during the reporting period, including the reversal of previously recorded unrealized gain or loss, when gains or losses are realized. Gains or losses on investments are calculated by using the specific identification
method.
Income Taxes
Solar
Capital, a U.S. corporation, has elected to be treated, and intends to qualify annually, as a RIC under Subchapter M of the Code. In order to qualify for U.S. federal income taxation as a RIC, the Company is required, among other things, to timely
distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code, for each year. Depending on the level of taxable income earned in a given tax year, we may choose to carry forward taxable income in excess of
current year distributions into the next tax year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year
distributions, the Company accrues an estimated excise tax, if any, on estimated excess taxable income.
Recent Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework
Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in ASU 2018-13 modify and eliminate certain disclosure requirements on fair value measurements in Topic 820, Fair Value
Measurement. ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company has
adopted ASU 2018-13 and determined that the adoption has not had a material impact on its consolidated financial statements and disclosures.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). The amendments in ASU 2020-04 provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of adopting ASU 2020-04 on its
consolidated financial statements and disclosures.
RESULTS OF OPERATIONS
Results comparisons are for the three and nine months ended September 30, 2020 and 2019:
Investment Income
For the three and nine
months ended September 30, 2020, gross investment income totaled $28.9 million and $90.4 million, respectively. For the three and nine months ended September 30, 2019, gross investment income totaled $39.7 million and
$117.7 million, respectively. The decrease in gross investment income for the year over year three and nine month periods was primarily due to a reduction in portfolio yield, mainly as a result of the approximately 175 basis point decrease in
average LIBOR year over year, on a smaller income producing investment portfolio on average.
Expenses
Expenses totaled $14.6 million and $46.1 million, respectively, for the three and nine months ended September 30, 2020, of which
$6.2 million and $19.9 million, respectively, were base management fees and performance-based incentive fees and $6.5 million and $20.2 million, respectively, were interest and other credit facility expenses. Administrative
services and other general and administrative expenses totaled $1.9 million and $6.0 million, respectively, for the three and nine months ended September 30, 2020. Expenses totaled $21.3 million and $62.3 million,
respectively, for the three and nine months ended September 30, 2019, of which $11.3 million and $33.9 million, respectively, were base management fees and performance-based incentive fees and $7.5 million and $22.0 million,
respectively, were interest and other credit facility expenses. Administrative services and other general and administrative expenses totaled $2.4 million and $6.5 million, respectively, for the three and nine months ended
September 30, 2019. Expenses generally consist of management and performance-based incentive fees, interest and other credit facility expenses, administrative services fees, insurance expenses, legal fees, directors fees, transfer
agency fees, printing and proxy expenses, audit and tax services expenses, and other general and administrative expenses. Interest and other credit facility expenses generally consist of interest, unused fees, agency fees and loan origination fees,
if any, among others. The decrease in expenses for the three and nine months ended September 30, 2020 versus the three and nine months ended September 30, 2019 was primarily due to lower management and incentive fees resulting from a
reduction in portfolio yield on a smaller income producing investment portfolio on average as well as lower interest expense due to reductions in LIBOR.
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Net Investment Income
The Companys net investment income totaled $14.3 million and $44.3 million, or $0.34 and $1.05, per average share,
respectively, for the three and nine months ended September 30, 2020. The Companys net investment income totaled $18.4 million and $55.3 million, or $0.44 and $1.31, per average share, respectively, for the three and nine months
ended September 30, 2019.
Net Realized Gain (Loss)
The Company had investment sales and prepayments totaling approximately $60 million and $289 million, respectively, for the three and
nine months ended September 30, 2020. Net realized losses over the same periods were $0.3 million and $25.0 million, respectively. The Company had investment sales and prepayments totaling approximately $111 million and
$276 million, respectively, for the three and nine months ended September 30, 2019. Net realized losses over the same periods were ($0.1) million and ($0.5) million, respectively. Net realized losses for the three month period ended
September 30, 2020 was primarily related to the termination of warrants. Net realized losses for the nine month period ended September 30, 2020 were primarily related to the exit of our investment in IHS Intermediate, Inc. Net realized
losses for the three months ended September 30, 2019 were primarily related to the termination of warrants. Net realized losses for the nine months ended September 30, 2019 were primarily related to the exit of our investments in ARK Real
Estate Partners.
Net Change in Unrealized Gain (Loss)
For the three and nine months ended September 30, 2020, net change in unrealized gain (loss) on the Companys assets and liabilities
totaled $4.6 million and ($22.1) million, respectively. For the three and nine months ended September 30, 2019, net change in unrealized gain (loss) on the Companys assets and liabilities totaled ($4.7) million and $3.3 million,
respectively. Net unrealized gain for the three months ended September 30, 2020 is primarily due to appreciation in the value of our investments in NEF Holdings LLC, Crystal Financial LLC and PhyMed Management LLC, among others, partially
offset by appreciation on our 2022 Unsecured Notes. Net unrealized loss for the nine months ended September 30, 2020 is primarily due to depreciation in the value of our investments in NEF Holdings LLC, Rug Doctor, Crystal Financial LLC, PhyMed
Management LLC and Bishop Lifting Products, Inc., among others, partially offset by the reversal of previously recognized unrealized depreciation in the value of our investment in IHS Intermediate, Inc. as well as depreciation on our 2022 Unsecured
Notes. Net unrealized loss for the three months ended September 30, 2019 is primarily due to depreciation in the value of our investments in IHS Intermediate, Inc., SOAGG LLC and NEF Holdings LLC, among others, partially offset by appreciation
on our investments in PPT Management Holdings, LLC and iCIMS, Inc., among others. Net unrealized gain for the nine months ended September 30, 2019 is primarily due to appreciation in the value of our investments in Crystal Financial LLC, Rug
Doctor and PPT Management Holdings, LLC, among others, partially offset by depreciation on our investments in IHS Intermediate, Inc., American Teleconferencing Services, Ltd. and Aegis Toxicology Sciences Corporation, among others. The year over
year net change in unrealized loss for the nine month period ended September 30, 2020 is impacted by uncertainty due to the COVID-19 pandemic and its effect on market yields and fundamental portfolio
company performance.
Net Increase (Decrease) in Net Assets From Operations
For the three and nine months ended September 30, 2020, the Company had a net increase (decrease) in net assets resulting from operations
of $18.6 million and ($2.8) million, respectively. For the same periods, earnings (loss) per average share were $0.44 and ($0.07), respectively. For the three and nine months ended September 30, 2019, the Company had a net increase in net
assets resulting from operations of $13.7 million and $58.2 million, respectively. For the same periods, earnings per average share were $0.32 and $1.38, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The
Companys liquidity and capital resources are generated and generally available through its Credit Facility, the 2022 Unsecured Notes, the 2022 Tranche C Notes, the NEFPASS Facility, the 2023 Unsecured Notes, the 2024 Unsecured Notes and the
2026 Unsecured Notes (collectively the Credit Facilities), through cash flows from operations, investment sales, prepayments of senior and subordinated loans, income earned on investments and cash equivalents, and periodic follow-on equity and/or debt offerings. As of September 30, 2020, we had a total of $595.0 million of unused borrowing capacity under the Credit Facilities, subject to borrowing base limits.
We may from time to time issue equity and/or debt securities in either public or private offerings. The issuance of such securities will
depend on future market conditions, funding needs and other factors and there can be no assurance that any such issuance will occur or be successful. The primary uses of existing funds and any funds raised in the future is expected to be for
investments in portfolio companies, repayment of indebtedness, cash distributions to our stockholders, or for other general corporate purposes.
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On February 12, 2020, a new lender to the Company executed a commitment increase to our
Credit Facility providing for an additional $75.0 million of revolving credit, bringing our Credit Facilitys total revolving credit capacity to $545.0 million.
On December 18, 2019, the Company closed a private offering of $125 million of the 2024 Unsecured Notes with a fixed interest rate
of 4.20% and a maturity date of December 15, 2024. Interest on the 2024 Unsecured Notes is due semi-annually on June 15 and December 15. The 2024 Unsecured Notes were issued in a private placement only to qualified institutional buyers.
On December 18, 2019, the Company closed a private offering of $75 million of the 2026 Unsecured Notes with a fixed interest
rate of 4.375% and a maturity date of December 15, 2026. Interest on the 2026 Unsecured Notes is due semi-annually on June 15 and December 15. The 2026 Unsecured Notes were issued in a private placement only to qualified institutional
buyers.
On August 28, 2019, the Company repaid its existing senior secured credit agreement due September 2021 and entered into the
new senior secured credit agreement (the Credit Facility). The Credit Facility was originally composed of $470 million of revolving credit and $75 million of term loans, but was expanded to $545 million of revolving credit
and $75 million of term loans in February 2020. Borrowings generally bear interest at a rate per annum equal to the base rate plus a range of 2.00-2.25% or the alternate base rate plus 1.00%-1.25%. The Credit Facility has no LIBOR floor requirement. The Credit Facility matures in August 2024 and includes ratable amortization in the final year.
On December 28, 2017, the Company closed a private offering of $21 million of the 2022 Tranche C Notes with a fixed interest rate of
4.50% and a maturity date of December 28, 2022. Interest on the 2022 Tranche C Notes is due semi-annually on June 28 and December 28. The 2022 Tranche C Notes were issued in a private placement only to qualified institutional buyers.
On November 22, 2017, we issued $75 million in aggregate principal amount of publicly registered 2023 Unsecured Notes for net
proceeds of $73.8 million. Interest on the 2023 Unsecured Notes is paid semi-annually on January 20 and July 20, at a fixed rate of 4.50% per year, commencing on January 20, 2018. The 2023 Unsecured Notes mature on
January 20, 2023.
On February 15, 2017, the Company closed a private offering of $100 million of the 2022 Unsecured Notes
with a fixed interest rate of 4.60% and a maturity date of May 8, 2022. Interest on the 2022 Unsecured Notes is due semi-annually on May 8 and November 8. The 2022 Unsecured Notes were issued in a private placement only to qualified
institutional buyers.
On November 8, 2016, the Company closed a private offering of $50 million of the 2022 Unsecured Notes
with a fixed interest rate of 4.40% and a maturity date of May 8, 2022. Interest on the 2022 Unsecured Notes is due semi-annually on May 8 and November 8. The 2022 Unsecured Notes were issued in a private placement only to qualified
institutional buyers.
On January 11, 2013, the Company closed its most recent follow-on
public equity offering of 6.3 million shares of common stock raising approximately $146.9 million in net proceeds. The primary uses of the funds raised were for investments in portfolio companies, reductions in revolving debt outstanding
and for other general corporate purposes.
Cash Equivalents
We deem certain U.S. Treasury bills, repurchase agreements and other high-quality, short-term debt securities as cash equivalents. The Company
makes purchases that are consistent with its purpose of making investments in securities described in paragraphs 1 through 3 of Section 55(a) of the 1940 Act. From time to time, including at or near the end of each fiscal quarter, we consider
using various temporary investment strategies for our business. One strategy includes taking proactive steps by utilizing cash equivalents as temporary assets with the objective of enhancing our investment flexibility pursuant to Section 55 of
the 1940 Act. More specifically, from time-to-time we may purchase U.S. Treasury bills or other high-quality, short-term debt securities at or near the end of the
quarter and typically close out the position on a net cash basis subsequent to quarter end. We may also utilize repurchase agreements or other balance sheet transactions, including drawing down on our credit facilities, as deemed appropriate. The
amount of these transactions or such drawn cash for this purpose is excluded from total assets for purposes of computing the asset base upon which the management fee is determined. We held approximately $540 million in cash equivalents as of
September 30, 2020.
Debt
Unsecured Notes
On
December 18, 2019, the Company closed a private offering of $125 million of the 2024 Unsecured Notes with a fixed interest rate of 4.20% and a maturity date of December 15, 2024. Interest on the 2024 Unsecured Notes is due
semi-annually on June 15 and December 15. The 2024 Unsecured Notes were issued in a private placement only to qualified institutional buyers.
On December 18, 2019, the Company closed a private offering of $75 million of the 2026 Unsecured Notes with a fixed interest rate of
4.375% and a maturity date of December 15, 2026. Interest on the 2026 Unsecured Notes is due semi-annually on June 15 and December 15. The 2026 Unsecured Notes were issued in a private placement only to qualified institutional buyers.
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On December 28, 2017, the Company closed a private offering of $21 million of the
2022 Tranche C Notes with a fixed interest rate of 4.50% and a maturity date of December 28, 2022. Interest on the 2022 Tranche C Notes is due semi-annually on June 28 and December 28. The 2022 Tranche C Notes were issued in a private
placement only to qualified institutional buyers.
On November 22, 2017, we issued $75 million in aggregate principal amount of
publicly registered 2023 Unsecured Notes for net proceeds of $73.8 million. Interest on the 2023 Unsecured Notes is paid semi-annually on January 20 and July 20, at a fixed rate of 4.50% per year, commencing on January 20, 2018.
The 2023 Unsecured Notes mature on January 20, 2023.
On February 15, 2017, the Company closed a private offering of
$100 million of the 2022 Unsecured Notes with a fixed interest rate of 4.60% and a maturity date of May 8, 2022. Interest on the 2022 Unsecured Notes is due semi-annually on May 8 and November 8. The 2022 Unsecured Notes were
issued in a private placement only to qualified institutional buyers.
On November 8, 2016, the Company closed a private offering of
$50 million of the 2022 Unsecured Notes with a fixed interest rate of 4.40% and a maturity date of May 8, 2022. Interest on the 2022 Unsecured Notes is due semi-annually on May 8 and November 8. The 2022 Unsecured Notes were
issued in a private placement only to qualified institutional buyers.
Revolving & Term Loan Facilities
On August 28, 2019, the Company repaid its existing senior secured credit agreement due September 2021 and entered into the new Credit
Facility. The Credit Facility was originally composed of $470 million of revolving credit and $75 million of term loans. On February 12, 2020, a new lender to the Company executed a commitment increase to our Credit Facility providing
for an additional $75.0 million of revolving credit, bringing our Credit Facilitys total revolving credit capacity to $545.0 million. Borrowings generally bear interest at a rate per annum equal to the base rate plus a range of 2.00-2.25% or the alternate base rate plus 1.00%-1.25%. The Credit Facility has no LIBOR floor requirement. The Credit Facility matures in August 2024 and includes ratable
amortization in the final year. The Credit Facility may be increased up to $800 million with additional new lenders or an increase in commitments from current lenders. The Credit Facility contains certain customary affirmative and negative
covenants and events of default. In addition, the Credit Facility contains certain financial covenants that among other things, requires the Company to maintain a minimum shareholders equity and a minimum asset coverage ratio. At
September 30, 2020, outstanding USD equivalent borrowings under the Credit Facility totaled $75.0 million, composed of $0 of revolving credit and $75.0 million of term loans.
On September 26, 2018, NEFPASS SPV LLC, a newly formed wholly-owned subsidiary of NEFPASS LLC, as borrower entered into the NEFPASS
Facility with Keybank acting as administrative agent. The Company acts as servicer under the NEFPASS Facility. The NEFPASS Facility is scheduled to mature on September 26, 2023. The NEFPASS Facility generally bears interest at a rate of LIBOR
plus 2.15%. NEFPASS and NEFPASS SPV LLC, as applicable, have made certain customary representations and warranties, and are required to comply with various covenants, including leverage restrictions, reporting requirements and other customary
requirements for similar credit facilities. The NEFPASS Facility also includes usual and customary events of default for credit facilities of this nature. There were no borrowings outstanding as of September 30, 2020.
Certain covenants on our issued debt may restrict our business activities, including limitations that could hinder our ability to finance
additional loans and investments or to make the distributions required to maintain our status as a RIC under Subchapter M of the Code. At September 30, 2020, the Company was in compliance with all financial and operational covenants required by
our Credit Facilities.
Contractual Obligations
A summary of our significant contractual payment obligations is as follows as of September 30, 2020:
Payments Due by Period (in millions)
Total
Less than
1 Year
1-3 Years
3-5 Years
More Than
5 Years
Revolving credit facilities(1)
$
$
$
$
$
Unsecured senior notes
446.0
246.0
125.0
75.0
Term Loans
75.0
75.0
(1)
As of September 30, 2020, we had a total of $595.0 million of unused borrowing capacity under our
revolving credit facilities, subject to borrowing base limits.
Under the provisions of the 1940 Act, we are permitted,
as a BDC, to issue senior securities in amounts such that our asset coverage ratio, as defined in the 1940 Act, equals at least 150% of gross assets less all liabilities and indebtedness not represented by senior securities, after each issuance of
senior securities. If the value of our assets declines, we may be unable to satisfy the asset coverage test. If that happens, we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of
our indebtedness at a time when such sales may be disadvantageous. Also, any amounts that we use to service our indebtedness would not be available for distributions to our common stockholders. Furthermore, as a result of issuing senior securities,
we would also be exposed to typical risks associated with leverage, including an increased risk of loss.
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Senior Securities
Information about our senior securities is shown in the following table (in thousands) as of the quarter ended September 30, 2020 and each
year ended December 31 for the past ten years, unless otherwise noted. The indicates information which the SEC expressly does not require to be disclosed for certain types of senior securities.
Class and Year
Total Amount
Outstanding(1)
Asset
Coverage
Per Unit(2)
Involuntary
Liquidating
Preference
Per Unit(3)
Average
Market Value
Per Unit(4)
Revolving Credit Facility
Fiscal 2020 (through September 30, 2020)
$
$
N/A
Fiscal 2019
42,900
182
N/A
Fiscal 2018
96,400
593
N/A
Fiscal 2017
245,600
1,225
N/A
Fiscal 2016
115,200
990
N/A
Fiscal 2015
207,900
1,459
N/A
Fiscal 2014
N/A
Fiscal 2013
N/A
Fiscal 2012
264,452
1,510
N/A
Fiscal 2011
201,355
3,757
N/A
Fiscal 2010
400,000
2,668
N/A
2022 Unsecured Notes
Fiscal 2020 (through September 30, 2020)
150,000
759
N/A
Fiscal 2019
150,000
638
N/A
Fiscal 2018
150,000
923
N/A
Fiscal 2017
150,000
748
N/A
Fiscal 2016
50,000
430
N/A
2022 Tranche C Notes
Fiscal 2020 (through September 30, 2020)
21,000
106
N/A
Fiscal 2019
21,000
89
N/A
Fiscal 2018
21,000
129
N/A
Fiscal 2017
21,000
105
N/A
2023 Unsecured Notes
Fiscal 2020 (through September 30, 2020)
75,000
379
N/A
Fiscal 2019
75,000
319
N/A
Fiscal 2018
75,000
461
N/A
Fiscal 2017
75,000
374
N/A
2024 Unsecured Notes
Fiscal 2020 (through September 30, 2020)
125,000
632
N/A
Fiscal 2019
125,000
531
N/A
2026 Unsecured Notes
Fiscal 2020 (through September 30, 2020)
75,000
379
N/A
Fiscal 2019
75,000
319
N/A
2042 Unsecured Notes
Fiscal 2017
N/A
Fiscal 2016
100,000
859
$
1,002
Fiscal 2015
100,000
702
982
Fiscal 2014
100,000
2,294
943
Fiscal 2013
100,000
2,411
934
Fiscal 2012
100,000
571
923
Senior Secured Notes
Fiscal 2017
N/A
Fiscal 2016
75,000
645
N/A
Fiscal 2015
75,000
527
N/A
Fiscal 2014
75,000
1,721
N/A
Fiscal 2013
75,000
1,808
N/A
Fiscal 2012
75,000
428
N/A
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Term Loans
Fiscal 2020 (through September 30, 2020)
75,000
379
N/A
Fiscal 2019
75,000
319
N/A
Fiscal 2018
50,000
308
N/A
Fiscal 2017
50,000
250
N/A
Fiscal 2016
50,000
430
N/A
Fiscal 2015
50,000
351
N/A
Fiscal 2014
50,000
1,147
N/A
Fiscal 2013
50,000
1,206
N/A
Fiscal 2012
50,000
285
N/A
Fiscal 2011
35,000
653
N/A
Fiscal 2010
35,000
233
N/A
NEFPASS Facility
Fiscal 2020 (through September 30, 2020)
N/A
Fiscal 2019
30,000
128
N/A
Fiscal 2018
30,000
185
N/A
SSLP Facility
Fiscal 2019
N/A
Fiscal 2018
53,785
331
N/A
Total Senior Securities
Fiscal 2020 (through September 30, 2020)
$
521,000
$
2,634
N/A
Fiscal 2019
593,900
2,525
N/A
Fiscal 2018
476,185
2,930
N/A
Fiscal 2017
541,600
2,702
N/A
Fiscal 2016
390,200
3,354
N/A
Fiscal 2015
432,900
3,039
N/A
Fiscal 2014
225,000
5,162
N/A
Fiscal 2013
225,000
5,425
N/A
Fiscal 2012
489,452
2,794
N/A
Fiscal 2011
236,355
4,410
N/A
Fiscal 2010
435,000
2,901
N/A
(1)
Total amount of each class of senior securities outstanding (in thousands) at the end of the period presented.
(2)
The asset coverage ratio for a class of senior securities representing indebtedness is calculated as our
consolidated total assets, less all liabilities and indebtedness not represented by senior securities, divided by all senior securities representing indebtedness. This asset coverage ratio is multiplied by one thousand to determine the Asset
Coverage Per Unit. In order to determine the specific Asset Coverage Per Unit for each class of debt, the total Asset Coverage Per Unit is allocated based on the amount outstanding in each class of debt at the end of the period. As of
September 30, 2020, asset coverage was 263.4%.
(3)
The amount to which such class of senior security would be entitled upon the involuntary liquidation of the
issuer in preference to any security junior to it.
(4)
Not applicable except for the 2042 Unsecured Notes which were publicly traded. The Average Market Value Per
Unit is calculated by taking the daily average closing price during the period and dividing it by twenty-five dollars per share and multiplying the result by one thousand to determine a unit price per thousand consistent with Asset Coverage Per
Unit. The average market value for the fiscal 2016, 2015, 2014, 2013 and 2012 periods was $100,175, $98,196, $94,301, $93,392, and $92,302, respectively.
We have also entered into two contracts under which we have future commitments: the Advisory Agreement, pursuant to which Solar Capital
Partners, LLC has agreed to serve as our investment adviser, and the Administration Agreement, pursuant to which the Administrator has agreed to furnish us with the facilities and administrative services necessary to conduct our day-to-day operations and provide on our behalf managerial assistance to those portfolio companies to which we are required to provide such assistance. Payments under the
Advisory Agreement are equal to (1) a percentage of the value of our average gross assets and (2) a two-part incentive fee. Payments under the Administration Agreement are equal to an amount based
upon our allocable portion of the Administrators overhead in performing its obligations under the Administration Agreement, including rent, technology systems, insurance and our allocable portion of the costs of our chief financial
officer and chief compliance officer and their respective staffs. Either party may terminate each of the Advisory Agreement and administration agreement without penalty upon 60 days written notice to the other. See note 3 to our
Consolidated Financial Statements.
On July 31, 2017, the Company, NEFPASS LLC and NEFCORP LLC entered into a servicing agreement.
NEFCORP LLC was engaged to provide NEFPASS LLC with administrative services related to the loans and capital leases held by NEFPASS LLC. NEFPASS LLC may terminate this agreement upon 30 days written notice to NEFCORP LLC.
Off-Balance Sheet Arrangements
From time-to-time and in the normal course of business, the
Company may make unfunded capital commitments to current or prospective portfolio companies. Typically, the Company may agree to provide delayed-draw term loans or, to a lesser extent, revolving loan or equity commitments. These unfunded capital
commitments always take into account the Companys liquidity and cash available for investment, portfolio and issuer diversification, and other considerations. Accordingly, the Company had the following unfunded capital commitments at
September 30, 2020 and December 31, 2019, respectively:
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September 30,
2020
December 31,
2019
(in millions)
Crystal Financial LLC*
$
44.3
$
44.3
Kindred Biosciences, Inc
13.8
13.8
One Touch Direct, LLC
7.5
Cardiva Medical, Inc
7.3
11.0
Neuronetics, Inc
6.7
Soleo Health Holdings, Inc
5.1
PQ Bypass, Inc
5.0
5.0
NEF Holdings, Inc
4.1
Centrexion Therapeutics, Inc
3.8
7.6
Atria Wealth Solutions, Inc
3.5
0.4
Cerapedics, Inc
2.7
5.4
Sentry Data Systems, Inc
1.6
Pinnacle Treatment Centers, Inc
1.4
Delphinus Medical Technologies, Inc
1.2
iCIMS, Inc
0.8
0.8
Enhanced Capital Group, LLC
0.8
2.5
Rubius Therapeutics, Inc
13.4
Phynet Dermatology LLC
4.7
Altern Marketing, LLC
4.2
Varilease Finance, Inc
3.4
MRI Software LLC
3.3
Solara Medical Supplies, Inc
1.9
RS Energy Group U.S., Inc
1.7
Alimera Sciences, Inc
1.1
Total Commitments
$
109.6
$
124.5
* The Company controls the funding of the Crystal Financial LLC commitment and may cancel it
at its discretion.
The credit agreements of the above loan commitments contain customary lending provisions and/or are subject to the
portfolio companys achievement of certain milestones that allow relief to the Company from funding obligations for previously made commitments in instances where the underlying company experiences materially adverse events that affect the
financial condition or business outlook for the company. Since these commitments may expire without being drawn upon, unfunded commitments do not necessarily represent future cash requirements or future earning assets for the Company. As of
September 30, 2020 and December 31, 2019, the Company had sufficient cash available and/or liquid securities available to fund its commitments.
In the normal course of its business, we invest or trade in various financial instruments and may enter into various investment activities
with off-balance sheet risk, which may include forward foreign currency contracts. Generally, these financial instruments represent future commitments to purchase or sell other financial instruments at
specific terms at future dates. These financial instruments contain varying degrees of off-balance sheet risk whereby changes in the market value or our satisfaction of the obligations may exceed the amount
recognized in our Consolidated Statements of Assets and Liabilities.
Distributions
The following table reflects the cash distributions per share on our common stock for the two most recent fiscal years and the current fiscal
year to date:
Date Declared
Record Date
Payment Date
Amount
Fiscal 2020
November 5, 2020
December 17, 2020
January 5, 2021
$
0.41
August 4, 2020
September 17, 2020
October 2, 2020
0.41
May 7, 2020
June 18, 2020
July 2, 2020
0.41
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February 20, 2020
March 19, 2020
April 3, 2020
0.41
Total 2020
$
1.64
Fiscal 2019
November 4, 2019
December 19, 2019
January 3, 2020
$
0.41
August 5, 2019
September 19, 2019
October 2, 2019
0.41
May 6, 2019
June 20, 2019
July 2, 2019
0.41
February 21, 2019
March 21, 2019
April 3, 2019
0.41
Total 2019
$
1.64
Fiscal 2018
November 5, 2018
December 20, 2018
January 4, 2019
$
0.41
August 2, 2018
September 20, 2018
October 2, 2018
0.41
May 7, 2018
June 21, 2018
July 3, 2018
0.41
February 22, 2018
March 22, 2018
April 3, 2018
0.41
Total 2018
$
1.64
Tax characteristics of all distributions will be reported to stockholders on Form 1099 after the end of the
calendar year. Future quarterly distributions, if any, will be determined by our Board. We expect that our distributions to stockholders will generally be from accumulated net investment income, from net realized capital gains or non-taxable return of capital, if any, as applicable.
We have elected to be taxed as a RIC under
Subchapter M of the Code. To maintain our RIC tax treatment, we must distribute 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. 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.
We maintain an opt
out dividend reinvestment plan for our common stockholders. As a result, if we declare a distribution, then 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.
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. In addition, due to the asset coverage test applicable to us as a business development company, we may
in the future be limited in our ability to make distributions. Also, our revolving credit facility may limit our ability to declare distributions if we default under certain provisions. If we do not distribute a certain percentage of our income
annually, we will suffer adverse tax consequences, including possible loss of the tax benefits available to us as a regulated investment company. In addition, in accordance with GAAP and tax regulations, we include in income certain amounts that we
have not yet received in cash, such as contractual 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 accrual 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 regulated investment company.
With respect to the distributions to
stockholders, income from origination, structuring, closing and certain other upfront fees associated with investments in portfolio companies are treated as taxable income and accordingly, distributed to stockholders.
Related Parties
We have entered into a
number of business relationships with affiliated or related parties, including the following:
We have entered into the Advisory Agreement with Solar Capital Partners. Mr. Gross, our Chairman, Co-Chief Executive Officer and President and Mr. Spohler, our Co-Chief Executive Officer, Chief Operating Officer and board member, are managing members and senior
investment professionals of, and have financial and controlling interests in, the Investment Adviser. In addition, Mr. Peteka, our Chief Financial Officer, Treasurer and Secretary serves as the Chief Financial Officer for Solar Capital
Partners.
The Administrator provides us with the office facilities and administrative services necessary to conduct day-to-day operations pursuant to our Administration Agreement. We reimburse the Administrator for the allocable portion of overhead and other expenses incurred by it in
performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions, and the compensation of our chief compliance officer, our chief financial officer and their
respective staffs.
We have entered into a license agreement with the Investment Adviser, pursuant to which the Investment Adviser
has granted us a non-exclusive, royalty-free license to use the name Solar Capital.
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The Investment Adviser may also manage other funds in the future that may have investment
mandates that are similar, in whole and in part, with ours. For example, the Investment Adviser presently serves as investment adviser to Solar Senior Capital Ltd., a publicly traded BDC, which focuses on investing in senior secured loans, including
first lien and second lien debt instruments, as well as SCP Private Credit Income BDC LLC, an unlisted BDC that focuses on investing primarily in senior secured loans, including non-traditional asset-based
loans and first lien loans. In addition, Michael S. Gross, our Chairman, Co-Chief Executive Officer and President, Bruce Spohler, our Co-Chief Executive Officer and
Chief Operating Officer, and Richard L. Peteka, our Chief Financial Officer, serve in similar capacities for Solar Senior Capital Ltd. and SCP Private Credit Income BDC LLC. The Investment Adviser and certain investment advisory affiliates may
determine that an investment is appropriate for us and for one or more of those other funds. In such event, depending on the availability of such investment and other appropriate factors, the Investment Adviser or its affiliates may determine that
we should invest side-by-side with one or more other funds. Any such investments will be made only to the extent permitted by applicable law and interpretive positions
of the SEC and its staff, and consistent with the Investment Advisers allocation procedures. On June 13, 2017, the Adviser received an exemptive order that permits the Company to participate in
negotiated co-investment transactions with certain affiliates, in a manner consistent with the Companys investment objective, positions, policies, strategies and restrictions as well as
regulatory requirements and other pertinent factors, and pursuant to various conditions (the Order). If the Company is unable to rely on the Order for a particular opportunity, such opportunity will be allocated first to the entity whose
investment strategy is the most consistent with the opportunity being allocated, and second, if the terms of the opportunity are consistent with more than one entitys investment strategy, on an alternating basis. Although the Advisers
investment professionals will endeavor to allocate investment opportunities in a fair and equitable manner, the Company and its stockholders could be adversely affected to the extent investment opportunities are allocated among us and other
investment vehicles managed or sponsored by, or affiliated with, our executive officers, directors and members of the Adviser.
Related
party transactions may occur among Solar Capital Ltd., Crystal Financial LLC, Equipment Operating Leases LLC, Loyer Capital LLC and NEF Holdings LLC. These transactions may occur in the normal course of business. No administrative fees are paid to
Solar Capital Partners by Crystal Financial LLC, Equipment Operating Leases LLC, Loyer Capital LLC or NEF Holdings LLC.
In addition, we
have adopted a formal code of ethics that governs the conduct of our officers and directors. Our officers and directors also remain subject to the duties imposed by both the 1940 Act and the Maryland General Corporation Law.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.