Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarter Ended September 30, 2020    

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 814-00754

 

 

SOLAR CAPITAL LTD.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   26-1381340
(State of Incorporation)  

(I.R.S. Employer

Identification No.)

500 Park Avenue

New York, N.Y.

  10022
(Address of principal executive offices)   (Zip Code)

(212) 993-1670

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

  

Trading Symbol(s)

  

Name of Each Exchange on Which Registered

Common Stock, par value $0.01 per share    SLRC    The NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☐    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller Reporting company  
Emerging growth company       

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

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

The number of shares of the registrant’s Common Stock, $.01 par value, outstanding as of October 30, 2020 was 42,260,826.

 

 

 


Table of Contents

SOLAR CAPITAL LTD.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2020

TABLE OF CONTENTS

 

     PAGE  

PART I. FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements

  
 

Consolidated Statements of Assets and Liabilities as of September  30, 2020 (unaudited) and December 31, 2019

     3  
    Consolidated Statements of Operations for the three and nine months ended September 30, 2020 (unaudited) and
the three and nine months ended September 30, 2019 (unaudited)
   4  
    Consolidated Statements of Changes in Net Assets for the three and nine months ended September 30, 2020
(unaudited) and the three and nine months ended September 30, 2019 (unaudited)
   5  
    Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 (unaudited) and the nine
months ended September 30, 2019 (unaudited)
   6  
    Consolidated Schedule of Investments as of September 30, 2020 (unaudited)    7  
    Consolidated Schedule of Investments as of December 31, 2019    12  
    Notes to Consolidated Financial Statements (unaudited)    17  
    Report of Independent Registered Public Accounting Firm    33  

Item 2.

 

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

     34  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     48  

Item 4.

 

Controls and Procedures

     49  

PART II. OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     49  

Item 1A.

 

Risk Factors

     49  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     54  

Item 3.

 

Defaults Upon Senior Securities

     54  

Item 4.

 

Mine Safety Disclosures

     54  

Item 5.

 

Other Information

     54  

Item 6.

 

Exhibits

     54  
    Signatures    55  


Table of Contents

PART I. FINANCIAL INFORMATION

In this Quarterly Report, “Solar Capital”, “Company”, “Fund”, “we”, “us”, and “our” refer to Solar Capital Ltd. unless the context states otherwise.

 

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.

 

3


Table of Contents

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.

 

4


Table of Contents

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.

 

5


Table of Contents

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.

 

6


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 Company’s 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/Warrants—34.3%

              

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 Company’s 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 Company’s senior management purchased an additional 600,000 shares through a private placement, also at $18.50 per share.

The Company’s 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 period’s 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.

 

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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 Adviser’s 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 company’s 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 Company’s 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 Company’s 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 Company’s 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


Table of Contents

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 management’s 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 management’s 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.

 

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Table of Contents

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 components—a base management fee and a performance-based incentive fee. The base management fee is determined by taking the average value of Solar Capital’s 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 Company’s total net assets as of the immediately preceding quarter end and 1.00% on gross assets that exceed 200% of the Company’s 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 Capital’s 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 Capital’s 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 Capital’s 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 Capital’s 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 Capital’s pre-incentive fee net investment income does not exceed the hurdle rate; (2) 100% of Solar Capital’s 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 Capital’s 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 Capital’s 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 Capital’s 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 Capital’s 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


Table of Contents

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 Company’s 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 management’s and, if applicable, an independent third-party valuation firm’s 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


Table of Contents

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


Table of Contents

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


Table of Contents

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


Table of Contents

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 Company’s 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 Company’s 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 Company’s 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 Company’s 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.

 

27


Table of Contents

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 Facility’s 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 shareholder’s 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.

 

28


Table of Contents

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 LP’s 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 LLC’s 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 company’s 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. NEF’s 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 Company’s portfolio companies and, as a result, has had adverse effects on the Company’s 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 Company’s investments and negatively impact the Company’s 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 Company’s 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.

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

The information contained in this section should be read in conjunction with our 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 Company’s portfolio companies and, as a result, has had adverse effects on the Company’s 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 Company’s investments and negatively impact the Company’s 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 LP’s 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 LLC’s 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 LLC’s 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. NEF’s 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 NEF’s 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 Adviser’s 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 company’s 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 Company’s 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 management’s 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 management’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Facility’s 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 Facility’s 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 shareholder’s 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        —