UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2013
COMMISSION FILE NUMBER: 0-50398
TICC CAPITAL CORP.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
8 SOUND SHORE DRIVE, SUITE 255 GREENWICH, CONNECTICUT 06830
(Address of principal executive office)
(203) 983-5275
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 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 x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares of the issuer’s Common Stock, $0.01 par value, outstanding as of May 8, 2013 was 52,541,808.
TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(unaudited)
See Accompanying Notes.
(Continued on next page)
CONSOLIDATED SCHEDULE OF INVESTMENTS - (Continued)
MARCH 31, 2013
TICC CAPITAL CORP.CONSOLIDATED SCHEDULE OF INVESTMENTSDECEMBER 31, 2012
TICC CAPITAL CORP.CONSOLIDATED SCHEDULE OF INVESTMENTS – (continued)DECEMBER 31, 2012
% of NetAssets
TICC CAPITAL CORP.CONSOLIDATED SCHEDULE OF INVESTMENTS – (continued)
DECEMBER 31, 2012
CONSOLIDATED STATEMENTS OF OPERATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. UNAUDITED INTERIM FINANCIAL STATEMENTS
Interim consolidated financial statements of TICC Capital Corp. (“TICC” and, together with its subsidiaries, the “Company”) are prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of consolidated financial results for the interim periods have been included. The current period’s consolidated results of operations are not necessarily indicative of results that may be achieved for the year. The interim consolidated financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2012, as filed with the Securities and Exchange Commission (“SEC”).
NOTE 2. ORGANIZATION
TICC was incorporated under the General Corporation Laws of the State of Maryland on July 21, 2003 and is a non-diversified, closed-end investment company. TICC has elected to be treated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, TICC has elected to be treated for tax purposes as a regulated investment company (“RIC”), under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Company’s investment objective is to maximize its total return, by investing primarily in corporate debt securities.
TICC’s investment activities are managed by TICC Management, LLC, (“TICC Management”), a registered investment adviser under the Investment Advisers Act of 1940, as amended. BDC Partners, LLC (“BDC Partners”) is the managing member of TICC Management and serves as the administrator of TICC.
On August 10, 2011, the Company completed a $225.0 million debt securitization financing transaction. The Class A Notes and the subordinated notes offered in the debt securitization were issued by TICC CLO LLC (“2011 Securitization Issuer” or “TICC CLO”), a subsidiary of TICC Capital Corp. 2011-1 Holdings, LLC (“Holdings”), which is in turn a direct subsidiary of TICC. The Class A Notes are secured by the assets held by the 2011 Securitization Issuer. The securitization was executed through a private placement of $101.25 million of secured notes rated AAA/Aaa by Standard & Poor’s Rating Service (“S&P”) and Moody’s Investors Service Inc. (“Moody’s”), respectively, and bearing interest at the three-month LIBOR plus 2.25%. Holdings retained all of the subordinated notes, which totaled $123.75 million (the “2011 Subordinated Notes”), and retained all the membership interests in the 2011 Securitization Issuer. For further information on this securitization, see Note 4.
On August 23, 2012, the Company completed a $160 million debt securitization financing transaction. The secured and subordinated notes offered in the debt securitization were issued by TICC CLO 2012-1 LLC (“2012 Securitization Issuer” or “TICC CLO 2012-1”), a newly formed special purpose vehicle that is a wholly-owned subsidiary of the Company. The secured notes of the 2012 Securitization Issuer have an aggregate face amount of $120 million and were issued in four classes. The class A-1 notes have an initial face amount of $88 million, are rated AAA (sf) /Aaa (sf) by S&P and Moody’s, respectively, and bear interest at three-month LIBOR plus 1.75%. The class B-1 notes have an initial face amount of $10 million, are rated AA (sf) /Aa2 (sf) by S&P and Moody’s, respectively, and bear interest at three-month LIBOR plus 3.50%. The class C-1 notes have an initial face amount of $11.5 million, are rated A (sf)/A2 (sf) by S&P and Moody’s, respectively, and bear interest at three-month LIBOR plus 4.75%. The class D-1 notes have an initial face amount of $10.5 million, are rated BBB (sf) /Baa2 (sf) by S&P and Moody’s, respectively, and bear interest at three-month LIBOR plus 5.75%. The LIBOR portion of the interest rates on the secured notes that were issued by the 2012 Securitization Issuer were measured on a six-month basis until February 2013. On February 25, 2013, the special purpose vehicle issued additional secured notes of $60 million, pro rata across all classes, and subordinated notes of $20 million under the “accordion” feature of the debt securitization which allows, under certain circumstances and subject to the satisfaction of certain conditions, for an increase in the amount of secured and subordinated notes. TICC presently owns all of the subordinated notes, which totaled $60 million as of March 31, 2013. For further information on this securitization, see Note 4.
The Company consolidated the results of its subsidiaries, Holdings, TICC CLO and TICC CLO 2012-1, in its consolidated financial statements as the subsidiaries are operated solely for investment activities of the Company, and the Company has substantial equity at risk. The creditors of TICC CLO and TICC CLO 2012-1 have received security interests in the assets owned by TICC CLO and TICC CLO 2012-1, respectively, and such assets are not intended to be available to the creditors of TICC (or any other affiliate of TICC).
On September 26, 2012, the Company closed a private placement of 5-year unsecured 7.50% Senior Convertible Notes Due 2017 (the “Convertible Notes”). A total of $105 million aggregate principal amount of the Convertible Notes were issued at the closing. An additional $10 million aggregate principal amount of the Convertible Notes were issued on October 22, 2012 pursuant to the exercise of the initial purchasers’ option to purchase additional Convertible Notes. The Convertible Notes are convertible into shares of the Company’s common stock based on an initial conversion rate of 87.2448 shares of the Company’s common stock per $1,000 principal amount of Convertible Notes, which is equivalent to an initial conversion price of approximately $11.46 per share of common stock, representing an approximately 10.0% conversion premium over the last reported sale price of the Company’s common stock on September 20, 2012, which was $10.42 per share. The conversion price for the Convertible Notes will be reduced for quarterly cash dividends paid to common shares to the extent that the quarterly dividend exceeds $0.29 cents per share, subject to adjustment. The Convertible Notes bear interest at an annual rate of 7.50%, payable semiannually in arrears on May 1 and November 1 of each year, beginning May 1, 2013. The Convertible Notes mature on November 1, 2017, unless previously converted in accordance with their terms. The Convertible Notes are general unsecured obligations of the Company, rank equally in right of payment with the Company’s future senior unsecured debt, and rank senior in right of payment to any potential subordinated debt, should any be issued in the future.
NOTE 3. INVESTMENT VALUATION
The most significant estimate inherent in the preparation of our consolidated financial statements is the valuation of investments and the related amounts of unrealized appreciation and depreciation of investments recorded. There is no single method for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make. We are required to specifically fair value each individual investment on a quarterly basis.
ASC 820-10, Fair Value Measurements and Disclosure, defines fair value 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. ASC 820-10 also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, which includes inputs such as quoted prices for similar securities in active markets and quoted prices for identical securities in markets that are not active; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions. We have determined that due to the general illiquidity of the market for our investment portfolio, whereby little or no market data exists, substantially all of our investments are based upon “Level 3” inputs.
Our Board of Directors determines the value of our investment portfolio each quarter. In connection with that determination, members of TICC Management’s portfolio management team prepare portfolio company valuations using the most recent portfolio company financial statements and forecasts. Since March 2004, we have engaged third-party valuation firms to provide assistance in valuing our bilateral investments and, more recently, for certain of our syndicated loans, although our Board of Directors ultimately determines the appropriate valuation of each such investment.
Our process for determining the fair value of a bilateral investment begins with determining the enterprise value of the portfolio company. Enterprise value means the entire value of the company to a potential buyer, including the sum of the values of debt and equity securities used to capitalize the enterprise at a point in time. The fair value of our investment is based, in part, on the enterprise value at which the portfolio company could be sold in an orderly disposition over a reasonable period of time between willing parties other than in a forced or liquidation sale. The liquidity event whereby we exit a private investment is generally the sale, the recapitalization or, in some cases, the initial public offering of the portfolio company.
There is no one methodology to determine enterprise value and, in fact, for any one portfolio company, enterprise value is best expressed as a range of fair values, from which we derive a single estimate of enterprise value. To determine the enterprise value of a portfolio company, we analyze the historical and projected financial results, as well as the nature and value of any collateral. We also use industry valuation benchmarks and public market comparables. We also consider other events, including private mergers and acquisitions, a purchase transaction, public offering or subsequent debt or equity sale or restructuring, and include these events in the enterprise valuation process. We generally require portfolio companies to provide annual audited and quarterly unaudited financial statements, as well as annual projections for the upcoming fiscal year.
Typically, our bilateral debt investments are valued on the basis of a fair value determination arrived at through an analysis of the borrower’s financial and operating condition or other factors, as well as consideration of the entity’s enterprise value. The types of factors that we may take into account in valuing our investments include: 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 and its earnings and discounted cash flows, among other factors. The fair value of equity interests in portfolio companies is determined based on various factors, including the enterprise value remaining for equity holders after the repayment of the portfolio company’s debt and other preference capital, and other pertinent factors such as recent offers to purchase a portfolio company, recent transactions involving the purchase or sale of the portfolio company’s equity securities, or other liquidity events. The determined equity values are generally discounted when we have a minority position, restrictions on resale, specific concerns about the receptivity of the capital markets to a specific company at a certain time, or other factors.
We will record unrealized depreciation on bilateral investments when we believe that an investment has become impaired, including where collection of a loan or realization of an equity security is doubtful. To the extent that we believe that it has become probable that a loan is not collectible or probable that an equity investment is not realizable, we will classify that amount as a realized loss. We will record unrealized appreciation if we believe that the underlying portfolio company has appreciated in value and our equity security has also appreciated in value. Changes in fair value, other than such changes that are considered probable of non-collection or non-realization, as described above, are recorded in the statement of operations as net change in unrealized appreciation or depreciation.
Under the valuation procedures approved by our Board of Directors, upon the recommendation of the Valuation Committee, a third-party valuation firm will prepare valuations for each of our bilateral investments for which market quotations are not readily available that, when combined with all other investments in the same portfolio company, (i) have a value as of the previous quarter of greater than or equal to 2.5% of our total assets as of the previous quarter, and (ii) have a value as of the current quarter of greater than or equal to 2.5% of our total assets as of the previous quarter, after taking into account any repayment of principal during the current quarter. In addition, the frequency of those third-party valuations of our portfolio securities is based upon the grade assigned to each such security under our credit grading system as follows: Grade 1, at least annually; Grade 2, at least semi-annually; Grades 3, 4, and 5, at least quarterly. TICC Management also retains the authority to seek, on our behalf, additional third party valuations with respect to both our bilateral portfolio securities and our syndicated loan investments. Our Board of Directors retains ultimate authority as to the third-party review cycle as well as the appropriate valuation of each investment.
ASC 820-10-35, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” provides guidance on factors that should be considered in determining when a previously active market becomes inactive and whether a transaction is orderly. In accordance with ASC 820-10-35, our valuation procedures specifically provide for the review of indicative quotes supplied by the large agent banks that make a market for each security. However, the marketplace for which we obtain indicative bid quotes for purposes of determining the fair value of our syndicated loan investments have shown these attributes of illiquidity as described by ASC-820-10-35. Due to limited market liquidity in the syndicated loan market, TICC believes that the non-binding indicative bids received from agent banks for certain syndicated investments that we own may not be determinative of their fair value and therefore alternative valuation procedures may need to be undertaken. As a result, TICC has engaged third-party valuation firms to provide assistance in valuing certain syndicated investments that we own. In addition, TICC Management prepares an analysis of each syndicated loan, including a financial summary, covenant compliance review, recent trading activity in the security, if known, and other business developments related to the portfolio company. All available information, including non-binding indicative bids which may not be determinative of fair value, is presented to the Valuation Committee to consider in its determination of fair value. In some instances, there may be limited trading activity in a security even though the market for the security is considered not active. In such cases the Valuation Committee will consider the number of trades, the size and timing of each trade, and other circumstances around such trades, to the extent such information is available, in its determination of fair value. The Valuation Committee will evaluate the impact of such additional information, and factor it into its consideration of the fair value that is indicated by the analysis provided by third-party valuation firms. We have considered the factors described in ASC 820-10 and have determined that we are properly valuing the securities in our portfolio.
During the past few years, we have acquired a number of debt and equity positions in CLO investment vehicles. These investments are special purpose financing vehicles. In valuing such investments, we consider the operating metrics of the specific investment vehicle, including compliance with collateralization tests, defaulted and restructured securities, and payment defaults, if any. In addition, we consider the indicative prices provided by the broker who arranges transactions in such investment vehicles, as well as any available information on other relevant transactions in the market. TICC Management or the Valuation Committee may request an additional analysis by a third-party firm to assist in the valuation process of CLO investment vehicles. All information is presented to our Board of Directors for its determination of fair value of these investments.
The Company’s assets measured at fair value on a recurring basis at March 31, 2013, were as follows:
Significant Unobservable Inputs for Level 3 Investments
The following table provides quantitative information about the Company’s Level 3 fair value measurements as of March 31, 2013. The Company’s valuation policy, as described above, establishes parameters for the sources and types of valuation analysis, as well as the methodologies and inputs that the Company uses in determining fair value. If the Valuation Committee or TICC Management determines that additional techniques, sources or inputs are appropriate or necessary in a given situation, such additional work will be undertaken. The table, therefore, is not all-inclusive, but provides information on the significant Level 3 inputs that are pertinent to the Company’s fair value measurements. The weighted average calculations in the table below are based on principal balances for all debt related calculations and CLO equity.
Significant increases or decreases in any of the unobservable inputs in isolation may result in a significantly lower or higher fair value measurement.
The following table provides quantitative information about the Company’s Level 3 fair value measurements as of December 31, 2012:
($ in millions)
Financial Instruments Disclosed, But Not Carried, At Fair Value
The following table presents the carrying value and fair value of the Company's financial liabilities disclosed, but not carried, at fair value as of March 31, 2013 and the level of each financial liability within the fair value hierarchy.
The following table presents the carrying value and fair value of the Company's financial liabilities disclosed, but not carried, at fair value as of December 31, 2012 and the level of each financial liability within the fair value hierarchy:
Fair value is based upon the bid price provided by the placement agent at the measurement date.
A reconciliation of the fair value of investments for the three months ended March 31, 2013, utilizing significant unobservable inputs, is as follows:
Our assets measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820-10-35 at December 31, 2012, were as follows:
A reconciliation of the fair value of investments for the year ended December 31, 2012, utilizing significant unobservable inputs, is as follows:
The following table shows the fair value of TICC’s portfolio of investments by asset class as of March 31, 2013 and December 31, 2012:
NOTE 4. BORROWINGS
In accordance with the 1940 Act, with certain limited exceptions, the Company is only allowed to borrow amounts such that its asset coverage, as defined in the 1940 Act, is at least 200% after such borrowing. As of March 31 2013, the Company’s asset coverage for borrowed amounts was 231%.
The following are the Company’s outstanding principal amounts, carrying values and fair values of the Company’s notes payable as of March 31, 2013 and December 31, 2012. Fair values of our notes payable are based upon the bid price provided by the placement agent at the measurement date:
The weighted average stated interest rate and weighted average maturity on all our debt outstanding as of March 31, 2013 were 4.11% and 8.20 years, respectively, and as of December 31, 2012 were 4.50% and 8.1 years, respectively.
Debt Securitization
Notes Payable — TICC CLO LLC
On August 10, 2011, the Company completed a $225.0 million debt securitization financing transaction. The Class A Notes and the subordinated notes offered in the debt securitization were issued by TICC CLO, a subsidiary of Holdings, which is in turn a direct subsidiary of TICC. The Class A Notes are secured by the assets held by the 2011 Securitization Issuer. The securitization was executed through a private placement of $101.25 million of secured notes rated AAA/Aaa by S&P and Moody’s, respectively, and bearing interest at the three-month LIBOR plus 2.25%. Holdings retained all of the subordinated notes, which totaled $123.75 million, and retained all the membership interests in the 2011 Securitization Issuer. The notes were sold at a discount to par, and the amount of the discount is being amortized over the term of the notes. The Class A Notes are included in the March 31, 2013 consolidated statements of assets and liabilities. For the three months ended March 31, 2013, the Class A note holders were paid interest on the Class A notes of approximately $0.7 million. Holdings retained all of the 2011 Subordinated Notes totaling $123.75 million and all of the membership interests in the 2011 Securitization Issuer. The 2011 Subordinated Notes do not bear interest, but are entitled to the residual economic interest in the 2011 Securitization Issuer.
During a period of up to three years from the closing date, all principal collections received on the underlying collateral may be used by the Securitization Issuer to purchase new collateral under our direction in our capacity as collateral manager of the 2011 Securitization Issuer and in accordance with our investment strategy, allowing us to maintain the initial leverage in the securitization for such three-year period. The Class A Notes are scheduled to mature on July 25, 2021.
The proceeds of the private placement of the Class A Notes, net of discount and debt issuance costs, were used for investment purposes. As part of the securitization, we entered into a master loan sale agreement with Holdings and the 2011 Securitization Issuer under which we agreed to sell or contribute certain senior secured and second lien loans (or participation interests therein) to Holdings, and Holdings agreed to sell or contribute such loans (or participation interests therein) to the 2011 Securitization Issuer and to purchase or otherwise acquire subordinated notes issued by the Securitization Issuer. The Class A Notes are the secured obligations of the 2011 Securitization Issuer, and an indenture governing the Notes includes customary covenants and events of default.
We serve as collateral manager to the 2011 Securitization Issuer under a collateral management agreement. We are entitled to a deferred fee for our services as collateral manager. The deferred fee is eliminated in consolidation.
As of March 31, 2013, there were 48 investments in portfolio companies with a total fair value of approximately $230.2 million, securing the Class A Notes. The pool of loans in the securitization must meet certain requirements, including asset mix and concentration, collateral coverage, term, agency rating, minimum coupon, minimum spread and sector diversity requirements.
Effective January 1, 2013 and through January 24, 2013, the interest rate of 2.57% charged under the securitization was based on three-month LIBOR of 0.32%. Effective January 25, 2013 and through March 31, 2013, the interest rate of 2.55% charged under the securitization was based on three-month LIBOR of 0.30%. For the three months ended March 31, 2013, the effective annualized average interest rate, which includes amortization of discount and debt issuance costs on the securitization, was 3.05%. For the three months ended March 31, 2013, interest expense, including the amortization of deferred debt issuance costs and the discount on the face amount of the Class A Notes, was $760,360. Cash paid for interest during the three months ended March 31, 2012 was $663,758.
The amounts, ratings and interest rates (expressed as a spread to LIBOR) of the Class A Notes are as follows:
Deferred debt issuance costs represent fees and other direct incremental costs incurred in connection with the Company’s debt securitization. As of March 31, 2013, the Company had deferred debt issuance costs of approximately $2.5 million. Discount on the notes of the 2011 Securitization Issuer at the time of issuance totaled approximately $1.6 million. These amounts are being amortized and included in interest expense in the consolidated statements of operations over the term of the debt securitization. Amortization expense for the three months ended March 31, 2013 was approximately $114,000. Amortization expense for the three months ended March 31, 2012 was $128,000.
Notes Payable — TICC CLO 2012-1 LLC
On August 23, 2012, the Company completed a $160 million debt securitization financing transaction, consisting of $120 million in secured notes and $40 million of subordinated notes. On February 25, 2013, the TICC CLO 2012-1 issued additional secured notes totaling $60 million and subordinated notes totaling $20 million, which subordinated notes were purchased by the Company, under the “accordion” feature of the debt securitization which allows, under certain circumstances and subject to the satisfaction of certain conditions, for an increase in the amount of secured and subordinated notes. If the same classes of secured notes are to be issued, the increase must be pro rata to the existing secured and subordinated notes, and is limited to a total increase of $160 million in total size. Alternatively, the special purpose vehicle may issue a class of secured notes that is pari passu to the class D-1 notes or junior to all secured classes, without a cap on the amount of the notes. It is not necessary that the Company own all or any of the notes permitted by this feature, which may affect the accounting treatment of the debt securitization financing transaction. As of March 31, 2013 the secured notes of the 2012 Securitization Issuer have an aggregate face amount of $180 million and were issued in four classes. The class A-1 notes have a current face amount of $132 million, are rated AAA (sf) /Aaa (sf) by Standard & Poor’s Ratings Services (S&P) and Moody’s Investors Service, Inc. (Moody’s), respectively, and bear interest at three-month LIBOR plus 1.75%. The class B-1 notes have a current face amount of $15 million, are rated AA (sf) /Aa2 (sf) by S&P and Moody’s, respectively, and bear interest at three-month LIBOR plus 3.50%. The class C-1 notes have a current face amount of $17.25 million, are rated A (sf) /A2 (sf) by S&P and Moody’s, respectively, and bear interest at three-month LIBOR plus 4.75%. The class D-1 notes have a current face amount of $15.75 million, are rated BBB (sf) /Baa2 (sf) by S&P and Moody’s, respectively, and bear interest at three-month LIBOR plus 5.75%. TICC presently owns all of the subordinated notes, which totaled $60 million as of March 31, 2013.
During a period of up to four years from the closing date, all principal collections received on the underlying collateral may be used by the 2012 Securitization Issuer to purchase new collateral under the direction of TICC in its capacity as collateral manager of the 2012 Securitization Issuer and in accordance with the Company’s investment strategy, allowing the Company to maintain the initial leverage in the securitization for such four-year period. All note classes are scheduled to mature on August 25, 2023.
The proceeds of the private placement of the Classes A, B, C, D and 2012 Subordinated Notes of the 2012 Securitization Issuer, net of discount and debt issuance costs, were used for investment purposes. As part of the securitization, TICC entered into a master loan sale agreement with TICC CLO 2012-1 pursuant to which TICC agreed to sell or contribute certain senior secured and second lien loans (or participation interests therein) to TICC CLO 2012-1, and to purchase or otherwise acquire the 2012 Subordinated Notes. The Classes A, B, C, D and 2012 Subordinated Notes of the 2012 Securitization Issuer are the secured obligations of TICC CLO 2012-1, and an indenture governing the notes of the 2012 Securitization Issuer includes customary covenants and events of default.
As of March 31, 2013, there were 47 investments in portfolio companies with a total fair value of approximately $217.2 million, collateralizing the secured notes of the 2012 Securitization Issuer. The pool of loans in the securitization must meet certain requirements, including asset mix and concentration, collateral coverage, term, agency rating, minimum coupon, minimum spread and sector diversity requirements.
For the three months ended March 31, 2013, the effective annualized average interest rate, which includes amortization of discount and debt issuance costs on the securitization, was 3.62%. For the same period, interest expense, including the amortization of deferred debt issuance costs and the discount on the face amount of the notes under the securitization was $1,259,281 comprised of coupon interest expense ($1,089,856) and accreted discount ($105,149), as well as amortized deferred debt issuance costs ($64,276).
Effective February 25, 2013 and as of March 31, 2013, the interest charged under the securitization was based on three-month LIBOR, which was approximately 0.29%. The classes, interest rates, spread over LIBOR, stated interest expense and note discount expense are as follows:
The amounts, ratings and interest rates (expressed as a spread to LIBOR) of the Class A-1, B-1, C-1, D-1 and 2012 Subordinated Notes are as follows:
TICC serves as collateral manager to the 2012 Securitization Issuer under a collateral management agreement. TICC is entitled to a deferred fee for its services as collateral manager. The deferred fee is eliminated in consolidation.
2017 Convertible Notes
On September 26, 2012, the Company issued $105,000,000 aggregate principal amount of the Convertible Notes and an additional $10,000,000 aggregate principal amount of the Convertible Notes was issued on October 22, 2012 pursuant to the exercise of the initial purchasers’ option to purchase additional Convertible Notes. The Convertible Notes bear interest at a rate of 7.50% per year, payable semi-annually in arrears on May 1 and November 1 of each year, commencing on May 1, 2013. The accrued interest payable on the Convertible Notes during the first quarter of 2013 was approximately $4.4 million. Additionally, for the quarter ended March 31, 2013, the amortization of deferred issuance costs was approximately $151,000. The Convertible Notes are convertible into shares of our common stock based on an initial conversion rate of 87.2448 shares of our common stock per $1,000 principal amount of Convertible Notes, which is equivalent to an initial conversion price of approximately $11.46 per share of common stock. The conversion price for the Convertible Notes will be reduced for quarterly cash dividends paid to common shares to the extent that the quarterly dividend exceeds $0.29 cents per share, subject to adjustment. The Convertible Notes mature on November 1, 2017, unless previously converted in accordance with their terms. The Company does not have the right to redeem the Convertible Notes prior to maturity.
In certain circumstances, the Convertible Notes will be convertible into shares of the Company’s common stock at its initial conversion rate (listed below) subject to customary anti-dilution adjustments and the requirements of its indenture, at any time on or prior to the close of business on the business day immediately preceding the maturity date. We will in certain circumstances increase the conversion rate by a number of additional shares.
As of March 31, 2013, the principal amount of the Convertible Notes exceeded the value of the underlying shares multiplied by the per share closing price of the Company’s common stock.
The Convertible Notes are the Company’s general, unsecured obligations and rank equal in right of payment with all of the Company’s existing and future senior, unsecured indebtedness and senior in right of payment to any of the Company’s subordinated indebtedness. As a result, the Convertible Notes will be effectively subordinated to the Company’s existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness and structurally subordinated to any existing and future liabilities and other indebtedness of the Company’s subsidiaries.
NOTE 5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net increase in net assets resulting from investment income per share for the three months ended March 31, 2013 and 2012, respectively:
The following table sets forth the computation of basic and diluted net increase in net assets resulting from operations per share for the three months ended March 31, 2013 and 2012, respectively:
NOTE 6. RELATED PARTY TRANSACTIONS
TICC has entered into an investment advisory agreement with TICC Management (the “Investment Advisory Agreement”) under which TICC Management, subject to the overall supervision of TICC’s Board of Directors, manages the day-to-day operations of, and provides investment advisory services to, TICC. For providing these services TICC Management receives a fee from TICC, consisting of two components: a base management fee (the “Base Fee”) and an incentive fee. The Base Fee is calculated at an annual rate of 2.00%. The Base Fee is payable quarterly in arrears, and is calculated based on the average value of TICC’s gross assets at the end of the two most recently completed calendar quarters, and appropriately adjusted for any equity or debt capital raises, repurchases or redemptions during the current calendar quarter. Accordingly, the Base Fee will be payable regardless of whether the value of TICC’s gross assets have decreased during the quarter.
The incentive fee has two parts. The first part is calculated and payable quarterly in arrears based on the Company’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, such as commitment, origination, structuring, diligence and consulting fees or other fees that TICC receives from portfolio companies) accrued during the calendar quarter, minus the Company’s operating expenses for the quarter (including the Base Fee, expenses payable under the Company’s administration agreement with BDC Partners (the “Administration Agreement”), and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-Incentive Fee Net Investment Income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities), accrued income that the Company has not yet received in cash. Pre-Incentive Fee Net Investment Income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Pre-Incentive Fee Net Investment Income, expressed as a rate of return on the value of the Company’s net assets at the end of the immediately preceding calendar quarter, is compared to one- fourth of an annual “hurdle rate.” Given that this portion of the incentive fee is payable without regard to any capital gain, capital loss or unrealized depreciation that may occur during the quarter, this portion of TICC Management’s incentive fee may also be payable notwithstanding a decline in net asset value that quarter.
For each year commencing on or after January 1, 2005, the annual hurdle rate has been determined as of the immediately preceding December 31st by adding 5.0% to the interest rate then payable on the most recently issued five-year U.S. Treasury Notes, up to a maximum annual hurdle rate of 10.0%. The annual hurdle rates for the 2012, 2011 and 2010 calendar years were 5.83% 7.01% and 7.69%, respectively. The current hurdle rate for the 2013 calendar year, calculated as of December 31, 2012, is 5.72%.
The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date), and equals 20% of the Company’s “Incentive Fee Capital Gains,” which consist of the Company’s realized capital gains for each calendar year, computed net of all realized capital losses and unrealized capital depreciation for that calendar year. For accounting purposes only, in order to reflect the theoretical capital gains incentive fee that would be payable for a given period as if all unrealized gains were realized, we will accrue a capital gains incentive fee based upon net realized capital gains and unrealized capital depreciation for that calendar year (in accordance with the terms of the Investment Advisory Agreement), plus unrealized capital appreciation on investments held at the end of the period. It should be noted that a fee so calculated and accrued would not necessarily be payable under the Investment Advisory Agreement, and may never be paid based upon the computation of capital gains incentive fees in subsequent periods. Amounts paid under the Investment Advisory Agreement will be consistent with the formula reflected in the Investment Advisory Agreement.
Incentive fees, based upon pre-incentive fee net investment income, were approximately $1.3 million and $1.2 million for the quarters ended March 31, 2013 and 2012, respectively. The net investment income incentive fee payable to TICC Management as of March 31, 2013 and 2012, was approximately $1.3 million and $1.2 million, respectively.
For the quarter ended March 31, 2013, the capital gains incentive fee was approximately $215,000 compared with an expense of approximately $1.1 million for the quarter ended March 31, 2012. The amount of capital gains incentive fee related to the hypothetical liquidation of the portfolio (and assuming no other changes in realized or unrealized gains and losses) would only become payable to TICC Management in the event of a complete liquidation of TICC’s portfolio as of period end and the termination of the Investment Advisory Agreement on such date. Also, it should be noted that the capital gains incentive fee fluctuates with the Company’s overall investment results. The accrued capital gains incentive fee payable as of March 31, 2013 and 2012, was approximately $5.3 million and $2.2 million, respectively.
In addition, in the event the Company recognizes payment-in-kind, or “PIK,” interest income in excess of its available capital, the Company may be required to liquidate assets in order to pay a portion of the incentive fee. TICC Management, however, is not required to reimburse the Company for the portion of any incentive fees attributable to PIK loan interest income in the event of a subsequent default.
TICC Management is controlled by BDC Partners, its managing member. Charles M. Royce, as the non-managing member, holds a minority, non-controlling interest in TICC Management. BDC Partners, as the managing member of TICC Management, manages the business and internal affairs of TICC Management. In addition, BDC Partners provides TICC with office facilities and administrative services pursuant to an amended and restated administration agreement (the “Administration Agreement”). Jonathan H. Cohen, the Company’s Chief Executive Officer, as well as a Director, is the managing member of BDC Partners. Saul B. Rosenthal, the Company’s President and Chief Operating Officer, is also the President and Chief Operating Officer of TICC Management and a member of BDC Partners. Messrs. Cohen and Rosenthal have an equal equity interest in BDC Partners. Charles M. Royce, the Company’s non-executive Chairman of the Board of Directors, does not take part in the management or participate in the operations of TICC Management; however, Mr. Royce is expected to be available from time to time to TICC Management to provide certain consulting services without compensation. BDC Partners is also the managing member of Oxford Gate Capital, LLC, a private fund in which Messrs. Cohen and Rosenthal are invested.
Messrs. Cohen and Rosenthal also currently serve as Chief Executive Officer and President, respectively, for T2 Advisers, LLC, which serves as the Collateral Manager of T2 Income Fund CLO I Ltd. BDC Partners is the managing member of T2 Advisers, LLC. Further, Messrs. Cohen and Rosenthal currently serve as Chief Executive Officer and President, respectively, of Oxford Lane Capital Corp., a non-diversified closed-end management investment company that currently invests primarily in CLO debt and equity tranches, and its investment adviser, Oxford Lane Management. BDC Partners provides Oxford Lane Capital Corp. with office facilities and administrative services pursuant to an administration agreement and also serves as the managing member of Oxford Lane Management. In addition, Patrick F. Conroy, the Chief Financial Officer, Chief Compliance Officer and Corporate Secretary of TICC Management, BDC Partners and TICC, serves in the same capacities for Oxford Lane Capital Corp. and Oxford Lane Management and also serves as the Chief Financial Officer, Chief Compliance Officer and Treasurer of T2 Advisers, LLC. Because of these possible conflicts of interest, these individuals may direct potential business and investment opportunities to other entities rather than to the Company or such individuals may undertake or otherwise engage in activities or conduct on behalf of such other entities that is not in, or which may be adverse to, the Company’s best interests.
BDC Partners has adopted a written policy with respect to the allocation of investment opportunities among the Company, Oxford Lane Capital Corp., T2 Income Fund CLO I Ltd. and Oxford Gate Capital, LLC in view of the potential conflicts of interest raised by the relationships described above.
Under the Administration Agreement, BDC Partners provides administrative services for TICC. The Company pays BDC Partners an allocable portion of overhead and other expenses incurred by BDC Partners in performing its obligations under the Administration Agreement, including a portion of the rent and the compensation of the chief financial officer, chief compliance officer, controller and other administrative support personnel, which creates potential conflicts of interest that the Board of Directors must monitor.
For the quarters ended March 31, 2013 and 2012, respectively, TICC incurred base investment advisory fees of approximately $4.1 million and $2.1 million in accordance with the terms of the Investment Advisory Agreement, of which amounts $4.1 million and $2.1 million remained payable to TICC Management at the end of each respective period. For the quarters ended March 31, 2013 and 2012, respectively, TICC incurred approximately $311,000 and $270,000, respectively, in compensation expenses for the services of employees allocated to the administrative activities of TICC, pursuant to the Administration Agreement with BDC Partners, of which amounts approximately $191,000 and $150,000 were accrued for compensation expense at the end of each respective period. In addition, TICC incurred approximately $22,000 and $16,000 for reimbursement of facility costs allocated under the Administration Agreement for the quarters ended March 31, 2013 and 2012, respectively, of which $6,600 and $0 remained payable at the end of each respective period.
NOTE 7. DIVIDENDS
The Company intends to continue to operate so as to qualify to be taxed as a RIC under the Code and, as such, the Company would not be subject to federal income tax on the portion of its taxable income and gains distributed to stockholders. To qualify as a RIC, the Company is required, among other requirements, to distribute at least 90% of its annual investment company taxable income, as defined by the Code. The amount to be paid out as a dividend is determined by the Board of Directors each quarter and is based upon the annual earnings estimated by the management of the Company. To the extent that the Company’s investment company taxable income falls below the amount of dividends declared, however, a portion of the total amount of the Company’s dividends for the fiscal year may be deemed a return of capital for tax purposes to the Company’s stockholders.
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 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 estimated excess taxable income, if any, as required.
On March 28, 2013, the Company paid a dividend of $0.29 per share. The Company has a dividend reinvestment plan under which all distributions are paid to stockholders in the form of additional shares, unless a stockholder elects to receive cash. The plan was recently amended to provide a 5% discount for shares purchased under the dividend reinvestment plan.
NOTE 8. NET ASSET VALUE PER SHARE
The Company’s net asset value per share at March 31, 2013 was $10.02, and at December 31, 2012 was $9.90. In determining the Company’s net asset value per share, the Board of Directors determined in good faith the fair value of the Company’s portfolio investments for which reliable market quotations are not readily available.
NOTE 9. PAYMENT-IN-KIND
The Company has investments in its portfolio which contain a payment-in-kind, or PIK, provision. The PIK interest and PIK fee is added to the cost basis of the investment and recorded as income. To maintain the Company’s status as a RIC (as discussed in Note 7 above), this non-cash source of income must be paid out to stockholders in the form of dividends, even though the Company has not yet collected the cash. Amounts necessary to pay these dividends may come from available cash or the liquidation of certain investments. For the three months ended March 31, 2013 and 2012, the Company recorded approximately $221,000 and $198,000 in PIK income, respectively.
In addition, the Company recorded original issue discount income of approximately $1.2 million and $1.4 million for the three months ended March 31, 2013 and 2012, respectively, representing the amortization of the discount attributed to certain debt securities purchased by the Company, including original issue discount (“OID”) and market discount.
NOTE 10. OTHER INCOME
Other income includes primarily closing fees or origination fees associated with investments in portfolio companies. Such fees are normally paid at closing of the Company’s investments, are fully earned and non-refundable, and are generally non-recurring.
For the three months ended March 31, 2013 and 2012, respectively, the Company recorded approximately $715,000 and $107,000 in other income.
The 1940 Act requires that a business development company make available managerial assistance to its portfolio companies. The Company may receive fee income for managerial assistance it renders to portfolio companies in connection with its investments. For the three months ended March 31, 2013 and 2012, respectively, the Company received no fee income for managerial assistance.
NOTE 11. DISTRIBUTIONS FROM SECURITIZATION VEHICLES AND EQUITY INVESTMENTS
The Company also receives distributions on the “equity” tranches of securitization vehicles in which it invests. These tranches represent the residual economic interests in such securitization vehicles, and those distributions are determined by the respective trustee on a quarterly basis. The distributions are recognized in the period that they are finally determined and payable. The Company earned approximately $8.8 million in such distributions during the quarter ended March 31, 2013, compared to approximately $5.5 million during the quarter ended March 31, 2012.
NOTE 12. FINANCIAL HIGHLIGHTS
Financial highlights for the three months ending March 31, 2013 and 2012, respectively, are as follows:
NOTE 13. CASH AND CASH EQUIVALENTS
At March 31, 2013 and December 31, 2012, respectively, cash and cash equivalents consisted of:
Restricted cash represents amounts that are collected and are held by Bank of New York as trustee and custodian of the assets for both of the Company’s debt securitization vehicles. Restricted cash is held by the trustee for payment of interest expense and principal on the outstanding borrowings or reinvestment in new assets.
NOTE 14. COMMITMENTS
In the normal course of business, the Company enters into a variety of undertakings containing warranties and indemnifications that may expose the Company to some risk of loss. The risk of future loss arising from such undertakings, while not quantifiable, is expected to be remote.
As of March 31, 2013, the Company had commitments of approximately $14 million to purchase additional debt investments.
The Company is not currently subject to any material legal proceedings. From time to time, the Company may be a party to certain legal proceedings in the ordinary course of business, including proceedings related to the enforcement of the Company’s rights under contracts with its portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, the Company does not expect that these proceedings will have a material impact upon its financial condition or results of operations.
NOTE 15. SUBSEQUENT EVENTS
On April 30, 2013, the Board of Directors declared a distribution of $0.29 per share for the second quarter, payable on June 28, 2013 to shareholders of record as of June 14, 2013.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about TICC, our current and prospective portfolio investments, our industry, our beliefs, and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “will,” “may,” “continue,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” “targets,” “projects,” and variations of these words and similar expressions are intended to identify forward-looking statements. The forward-looking statements contained in this Quarterly Report on Form 10-Q involve risks and uncertainties, including statements as to:
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:
Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. Important assumptions include our ability to originate new loans and investments, certain margins and levels of profitability and the availability of additional capital. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly Report on Form 10-Q should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in Item 1A.—Risk Factors contained in our Annual Report on Form 10-K for the year ended December 31, 2012, and elsewhere in this Quarterly Report on Form 10-Q. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q.
Except where the context requires otherwise, the terms “TICC,” “Company,” “we,” “us” and “our” refer to TICC Capital Corp. together with its subsidiaries, TICC Capital Corp. 2011-1 Holdings LLC (“Holdings”), TICC CLO LLC (“2011 Securitization Issuer” or “TICC CLO”) and TICC CLO 2012-1 LLC (“2012 Securitization Issuer” or “TICC CLO 2012-1”); “TICC Management” refers to TICC Management, LLC; and “BDC Partners” refers to BDC Partners, LLC.
The following analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes thereto contained elsewhere in this Quarterly Report on Form 10-Q.
OVERVIEW
Our investment objective is to maximize our portfolio’s total return. Our primary focus is to seek current income by investing in corporate debt securities. We have also invested and may continue to invest in structured finance investments, including CLO vehicles, which own debt securities. We may also invest in publicly traded debt and/or equity securities. We operate as a closed-end, non-diversified management investment company and have elected to be treated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”). We have elected to be treated for tax purposes as a regulated investment company (“RIC”), under the Internal Revenue Code of 1986, as amended (the “Code”), beginning with our 2003 taxable year.
Our investment activities are managed by TICC Management, a registered investment adviser under the Investment Advisers Act of 1940, as amended. TICC Management is owned by BDC Partners, its managing member, and Charles M. Royce, our non-executive Chairman, who holds a minority, non-controlling interest in TICC Management. Jonathan H. Cohen, our Chief Executive Officer, and Saul B. Rosenthal, our President and Chief Operating Officer, are the members of BDC Partners. Under an investment advisory agreement (the “Investment Advisory Agreement”), we have agreed to pay TICC Management an annual base fee calculated on gross assets, and an incentive fee based upon our performance. Under an amended and restated administration agreement (the “Administration Agreement”), we have agreed to pay or reimburse BDC Partners, as administrator, for certain expenses incurred in operating TICC. Our executive officers and directors, and the executive officers of TICC Management and BDC Partners, serve or may serve as officers and directors of entities that operate in a line of business similar to our own. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might not be in the best interests of us or our stockholders.
On August 10, 2011, we completed a $225.0 million debt securitization financing transaction. On August 23, 2012, we completed our second such transaction, a $160.0 million debt securitization financing. On February 25, 2013, we completed the sale of $60.0 million of additional secured notes and $20 million of subordinated notes in connection with this transaction. On September 26, 2012, we completed a private placement of 5-year unsecured 7.50% Senior Convertible Notes Due 2017 (the “Convertible Notes”). A total of $105.0 million aggregate principal amount of the Convertible Notes were issued at the closing. An additional $10.0 million aggregate principal amount of the Convertible Notes were issued on October 22, 2012 pursuant to the exercise of the initial purchasers’ option to purchase additional Convertible Notes. For more information about these transactions, see “— Liquidity and Capital Resources — Borrowings.”
We generally expect to invest between $5 million and $50 million in each of our portfolio companies, although this investment size may vary proportionately as the size of our capital base changes and market conditions warrant, and accrue interest at fixed or variable rates. We expect that our investment portfolio will be diversified among a large number of investments with few investments, if any, exceeding 5% of the total portfolio. As of March 31, 2013, our debt investments had stated interest rates of between 3.98% and 13.00% (excluding our investment in GenuTec Business Solutions, Inc. which carries a zero interest rate through October 30, 2014) and maturity dates of between 1 and 145 months. In addition, our total portfolio had a weighted average yield on debt investments of approximately 9.2% including GenuTec Business Solutions, Inc.
Our loans may carry a provision for deferral of some or all of the interest payments and amendment fees, which will be added to the principal amount of the loan. This form of deferred income is referred to as “payment-in-kind,” or “PIK,” interest or other income and, when earned, is recorded as interest or other income and an increase in the principal amount of the loan. For the quarter ended March 31, 2013, we recognized approximately $221,000 from PIK interest and dividend income associated with our investments in Pegasus Solutions, Inc. and Merrill Communications, LLC, compared to PIK interest of approximately $198,000 for the quarter ended March 31, 2012. In the event we recognize deferred loan interest income in excess of our available capital as a result of our receipt of PIK income, we may be required to liquidate assets in order to pay a portion of the incentive fee due to TICC Management.
We have historically and may continue to borrow funds to make investments. As a result, we are exposed to the risks of leverage, which may be considered a speculative investment technique. Borrowings, also known as leverage, magnify the potential for gain and loss on amounts invested and therefore increase the risks associated with investing in our securities. In addition, the costs associated with our borrowings, including any increase in the management fee payable to TICC Management, will be borne by our common stockholders.
In addition, as a BDC under the 1940 Act, we are required to make available significant managerial assistance, for which we may receive fees, to our portfolio companies. These fees would be generally non-recurring, however in some instances they may have a recurring component. We have received no fee income for managerial assistance to date.
Prior to making an investment, we may enter into a non-binding term sheet with the potential portfolio company. These term sheets are generally subject to a number of conditions, including but not limited to the satisfactory completion of our due diligence investigations of the company’s business and legal documentation for the loan.
To the extent possible, our loans will be collateralized by a security interest in the borrower’s assets or guaranteed by a principal to the transaction. Interest payments, if not deferred, are normally payable quarterly with most debt investments having scheduled principal payments on a monthly or quarterly basis. When we receive a warrant to purchase stock in a portfolio company, the warrant will typically have a nominal strike price, and will entitle us to purchase a modest percentage of the borrower’s stock.
During the quarter ended March 31, 2013, we closed approximately $216.5 million in portfolio investments, including additional investments of approximately $99.2 million in existing portfolio companies and approximately $117.3 million in new portfolio companies. During the quarter ended March 31, 2013, we recognized a total of $29.8 million from repayments on debt investments, and we recognized approximately $35.0 million from the sale of portfolio investments. We realized net gains on investments during the quarter ended March 31, 2013 in the amount of approximately $6.6 million. For the quarter ended March 31, 2013, we had net unrealized appreciation of approximately $3.6 million.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity with generally accepted accounting principles in the United States 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 financial statements, and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified our investment valuation policy as a critical accounting policy.
Investment Valuation
ASC 820-10, Fair Value Measurements and Disclosure, defines fair value 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. ASC 820-10 also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, which includes inputs such as quoted prices for similar securities in active markets and quoted prices for identical securities in markets that are not active; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions. We have determined that due to the general illiquidity of the market for our investment portfolio, whereby little or no market data exists, all of our investments are based upon “Level 3” inputs.
ASC 820-10-35, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” which provides guidance on factors that should be considered in determining when a previously active market becomes inactive and whether a transaction is orderly. In accordance with ASC 820-10-35, our valuation procedures specifically provide for the review of indicative quotes supplied by the large agent banks that make a market for each security. However, the marketplace for which we obtain indicative bid quotes for purposes of determining the fair value of our syndicated loan investments have shown these attributes of illiquidity as described by ASC-820-10-35. Due to limited market liquidity in the syndicated loan market, TICC believes that the non-binding indicative bids received from agent banks for certain syndicated investments that we own may not be determinative of their fair value and therefore alternative valuation procedures may need to be undertaken. As a result, TICC has engaged third-party valuation firms to provide assistance in valuing certain syndicated investments that we own. In addition, TICC Management prepares an analysis of each syndicated loan, including a financial summary, covenant compliance review, recent trading activity in the security, if known, and other business developments related to the portfolio company. All available information, including non-binding indicative bids which may not be determinative of fair value, is presented to the Valuation Committee to consider in its determination of fair value. In some instances, there may be limited trading activity in a security even though the market for the security is considered not active. In such cases the Valuation Committee will consider the number of trades, the size and timing of each trade, and other circumstances around such trades, to the extent such information is available, in its determination of fair value. The Valuation Committee will evaluate the impact of such additional information, and factor it into its consideration of the fair value that is indicated by the analysis provided by third-party valuation firms. We have considered the factors described in ASC 820-10 and have determined that we are properly valuing the securities in our portfolio.
Our assets measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820-10 at March 31, 2013, were as follows:
A reconciliation of the fair value of investments for the three months ending March 31, 2013, utilizing significant unobservable inputs, is as follows:
(1) Includes rounding adjustments to reconcile period balances.
Our assets measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820-10 at December 31, 2012, were as follows:
PORTFOLIO COMPOSITION AND INVESTMENT ACTIVITY
The total fair value of our investment portfolio was approximately $830.9 million and $667.5 million as of March 31, 2013 and December 31, 2012, respectively. The increase in investments during the three month period was due primarily to new investments of approximately $216.5 million and net unrealized appreciation of approximately $3.6 million. These increases were partially offset by debt repayments and sales of securities totaling approximately $64.8 million. Funding for these new investments was provided by equity capital raises, the issuance by TICC CLO 2012-1 of additional secured notes totaling $60 million and the deployment of capital available as of December 31, 2012.
In certain instances, we receive payments based on scheduled amortization of the outstanding balances and sales of portfolio investments. In addition, we receive repayments of some of our debt investments prior to their scheduled maturity date. The frequency or volume of these repayments may fluctuate significantly from period to period. For the quarter ended March 31, 2013, we recognized approximately $35.0 million largely from the sales of our debt investment in SkillSoft Corporation ($5.0million), CHS Community Health Systems ($5.1 million) and aggregate proceeds from the sale of several of our CLO debt investments ($18.6 million), whereas for the year ended December 31, 2012, we recognized proceeds of approximately $191.2 million from the sales of securities. Also, during the quarter ended March 31, 2013, we had repayments and amortization payments of approximately $29.8 million, whereas, for the year ended December 31, 2012, we had repayments and amortization payments of approximately $69.3 million.
As of March 31, 2013, we had investments in debt securities of, or loans to, 72 portfolio companies, with a fair value of approximately $624.5 million, and equity investments in 34 portfolio companies, with a fair value of approximately $206.4 million. As of December 31, 2012, we had investments in debt securities of, or loans to, 73 portfolio companies, with a fair value of approximately $550.6 million, and equity investments in 26 portfolio companies, with a fair value of approximately $116.9 million.
A reconciliation of the investment portfolio for the three months ended March 31, 2013 and the year ended December 31, 2012 follows:
(1) table includes rounding adjustments to reconcile period balances.
The following table indicates the quarterly portfolio investment activity for the past five quarters:
The following table shows the fair value of our portfolio of investments by asset class as of March 31, 2013 and December 31, 2012:
The following table shows our portfolio of investments by industry at fair value, as of March, 2013 and December 31, 2012:
PORTFOLIO GRADING
We have adopted a credit grading system to monitor the quality of our debt investment portfolio. As of March, 2013 and December 31, 2012, our portfolio had a weighted average grade of 2.1 and 2.1, respectively, based upon the fair value of the debt investments in the portfolio. Equity securities are not graded.
At March 31, 2013, and December 31, 2012, our debt investment portfolio was graded as follows:
We expect that a portion of our investments will be in the grades 3, 4 or 5 categories from time to time, and, as such, we will be required to work with troubled portfolio companies to improve their business and protect our investment. The number and amount of investments included in grades 3, 4 or 5 may fluctuate from period to period.
During the quarter ending March 31, 2013, we purchased an additional $17.8 million par value of RBS International Direct Marketing, at a price of approximately 32% of par value. At the time of the purchase, the loan was expected to be on non-accrual status and was graded a 5.
Further discussion regarding the other investments which experienced significant unrealized depreciation is presented in “Results of Operations.”
RESULTS OF OPERATIONS
Set forth below is a comparison of our results of operations for the three months ended March 31, 2013 to the three months ended March 31, 2012.
Investment Income
As of March 31, 2013, our debt investments had stated interest rates of between 3.98% and 13.00% (excluding our investment in GenuTec Business Solutions, Inc. which carries a zero interest rate through October 30, 2014) and maturity dates of between 1 and 145 months. In addition, our total portfolio had a weighted average yield on debt investments of approximately 9.2% including GenuTec Business Solutions, Inc., compared with 11.6% as of March 31, 2012. The reduction in the weighted average yield on our debt portfolio over the past year is primarily a result of the investment restrictions of the securitization vehicles that we have sponsored, which require us to generally invest in higher-rated and/or larger corporate loans which carry correspondingly lower yields, as well as the refinancing and repricing of many of those loans at lower rates due to current market conditions.
Investment income for the three months ended March 31, 2013 was approximately $21.7 million compared to approximately $14.7 million for the three months ended March 31, 2012. This increase was due in part to an increase in the amount of distributions from the equity interests in our CLO vehicle investments and the amount of performing assets in the portfolio. The total principal value of income producing debt investments as of March 31, 2013 and March 31, 2012 was approximately $620.6 million and $414.9 million, respectively. For the quarter ended March 31, 2013, investment income consisted of approximately $10.8 million in cash interest from portfolio investments, approximately $1.2 million in amortization of original issue and market discount, approximately $8.8 million in distributions from the equity interest in securitized vehicle investments and an equity investment, as well as approximately $0.2 million in PIK interest income.
For the quarter ended March 31, 2013 we had two loans on non-accrual status, Band Digital and RBS International Direct Marketing. During the quarter we purchased an additional $17.8 million par value of RBS’ first lien term loan, at a price of approximately 32% of par value. At the time of the purchase, the loan was expected to be on non-accrual status. While we do not generally focus on distressed debt investments, we have been and remain open to those opportunities where the potential for highly attractive risk-adjusted returns exist.
For the quarter ended March 31, 2013, fee income of approximately $715,000 was recorded, compared to fee income of approximately $107,000 for the quarter ended March 31, 2012. Fee income consists of non-recurring fees in connection with our investments in portfolio companies, including commitment fees, origination fees and amendment fees.
Operating Expenses
Total expenses for the quarter ended March 31, 2013 were approximately $11.1 million, which includes the accrued capital gains incentive fee of approximately $215,000.
Expenses before incentive fees, for the quarter ended March 31, 2013, were approximately $9.6 million. This amount consisted of investment advisory fees, interest expense and other debt financing expenses, professional fees, compensation expense, and general and administrative expenses. Expenses before incentive fees increased approximately $5.3 million from the quarter ended March 31, 2012, attributable primarily to higher interest expense associated with the senior notes issued under our debt securitization transactions and convertible notes issued in September 2012 and increased investment advisory fees (consisting of the base management fee). Expenses before incentive fees for the quarter ended March 31, 2012 were approximately $4.3 million.
The investment advisory fee for the first quarter of 2013 was approximately $4.1 million, representing the base fee as provided for in the Investment Advisory Agreement. The investment advisory fee in the comparable period in 2012 was approximately $2.1 million. The increase of approximately $2.0 million is due to an increase in average gross assets. At each of March 31, 2013 and December 31, 2012, respectively, approximately $4.1 million and $4.9 million of investment advisory fees remained payable to TICC Management, including the net investment income incentive fee discussed below.
Interest expense and other debt financing expenses for the first quarter of 2013 was approximately $4.3 million, which was directly related to our debt securitization financing transactions as well as our convertible note transaction. Interest expense for the first quarter of 2012 was approximately $837,000.
TICC CLO LLC
In August 2011, senior notes in the amount of $101,250,000 were issued by a newly formed special purpose vehicle in which a wholly-owned subsidiary of TICC owns all of the equity. Under this structure, the notes bear interest, after the effective date, at three-month London Inter Bank Offered Rate (“LIBOR”) plus 2.25% (prior to the effective date, the Class A Notes bear interest at five-month LIBOR plus 2.25%). The accrued interest payable on these notes during the first quarter of 2013 was approximately $474,000. Additionally, for the quarter ended March 31, 2013, the amortization of discount on the issued notes was approximately $39,000 and the amortization of deferred debt issuance costs was approximately $75,000. At December 31, 2012, interest expense of approximately $491,000 million remained payable.
TICC CLO 2012-1 LLC
On August 23, 2012, the Company completed a $160 million debt securitization financing transaction, consisting of $120 million in secured notes and $40 million of subordinated notes. On February 25, 2013, the TICC CLO 2012-1 issued additional secured notes totaling $60 million and subordinated notes totaling $20 million, which subordinated notes were purchased by the Company, under the “accordion” feature of the debt securitization which allows, under certain circumstances and subject to the satisfaction of certain conditions, for an increase in the amount of secured and subordinated notes. If the same classes of secured notes are to be issued, the increase must be pro rata to the existing secured and subordinated notes, and is limited to a total increase of $160 million in total size. Alternatively, the special purpose vehicle may issue a class of secured notes that is pari passu to the class D-1 notes or junior to all secured classes, without a cap on the amount of the notes. It is not necessary that the Company own all or any of the notes permitted by this feature, which may affect the accounting treatment of the debt securitization financing transaction. As of March 31, 2013 the secured notes of the 2012 Securitization Issuer have an aggregate face amount of $180 million and were issued in four classes. The class A-1 notes have a current face amount of $132 million, are rated AAA (sf) /Aaa (sf) by Standard & Poor’s Ratings Services (S&P) and Moody’s Investors Service, Inc. (Moody’s), respectively, and bear interest at three-month LIBOR plus 1.75%. The class B-1 notes have a current face amount of $15 million, are rated AA (sf) /Aa2 (sf) by S&P and Moody’s, respectively, and bear interest at three-month LIBOR plus 3.50%. The class C-1 notes have a current face amount of $17.25 million, are rated A (sf) /A2 (sf) by S&P and Moody’s, respectively, and bear interest at three-month LIBOR plus 4.75%. The class D-1 notes have a current face amount of $15.75 million, are rated BBB (sf) /Baa2 (sf) by S&P and Moody’s, respectively, and bear interest at three-month LIBOR plus 5.75%. TICC presently owns all of the subordinated notes, which totaled $60 million as of March 31, 2013. For further information on this securitization, see Note 4.
The aggregate accrued interest payable on the notes of the 2012 Securitization Issuer during the first quarter of 2013 was approximately $494,000. Additionally, for the quarter ended March 31, 2013, the aggregate amortization of discount on the issued notes of the 2012 Securitization Issuer was approximately $105,000 and the amortization of deferred debt issuance costs was approximately $64,000.
On September 26, 2012, we issued $105,000,000 aggregate principal amount of the Convertible Notes. An additional $10.0 million aggregate principal amount of the Convertible Notes were issued on October 22, 2012 pursuant to the exercise of the initial purchasers’ option to purchase additional Convertible Notes. The Convertible Notes mature on November 1, 2017. The Convertible Notes bear interest at a rate of 7.50% per year, payable semi-annually in arrears on May 1 and November 1 of each year, commencing on May 1, 2013. The accrued interest payable on the Convertible Notes during the first quarter of 2013 was approximately $4.4 million. Additionally, for the quarter ended March 31, 2013, the amortization of deferred issuance costs was approximately $151,000.
The table below summarizes the components of interest expense for the three months ended March 31, 2013 and 2012:
Professional fees, consisting of legal, valuation, audit and tax fees, were approximately $637,000 for the quarter ended March 31, 2013, compared to approximately $791,000 for the quarter ended March 31, 2012. This decrease was the result of legal fees which were lower by approximately $283,000 and valuation costs which were lower by approximately $26,000, partially offset by audit fees which were higher by approximately $158,000.
Compensation expenses were approximately $311,000 for the quarter ended March 31, 2013 compared to approximately $270,000 for the quarter ended March 31, 2012 reflecting the allocation of compensation expenses for the services of our chief financial officer, chief compliance officer, controller and senior accountants, and other administrative support personnel. At March 31, 2013 and December 31, 2012, respectively, approximately $191,000 and $0 of compensation expenses remained payable.
General and administrative expenses, consisting primarily of directors’ fees, insurance, listing fees, transfer agent and custodian fees, office supplies, facilities costs and other expenses, were approximately $288,000 for the three months ended March 31, 2013 compared to approximately $293,000 for the same period in 2012. Office supplies, facilities costs and other expenses are allocated to us under the terms of the Administration Agreement.
Incentive Fees
The net investment income incentive fee for the first quarter of 2013 was approximately $1.3 million compared to $1.2 million in the first quarter of 2012. The net investment income incentive fee is calculated and payable quarterly in arrears based on our “Pre-Incentive Fee Net Investment Income” for the immediately preceding calendar quarter subject to a hurdle rate which is determined as of December 31 of the preceding year. For this purpose, “Pre-Incentive Fee Net Investment Income” means interest income, dividend income and any other income accrued during the calendar quarter minus our operating expenses for the quarter (including the base fee, expenses payable under the Administration Agreement with BDC Partners, and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee).
The capital gains incentive fee expense for the first quarter ended March 31, 2013 was approximately $215,000. The capital gains incentive fee expense, as reported under generally accepted accounting principles, is calculated on the basis of net realized and unrealized gains and losses at the end of each period. The expense related to the hypothetical liquidation of the portfolio (and assuming no other changes in realized or unrealized gains and losses) would only become payable to our investment adviser in the event of a complete liquidation of our portfolio as of period end and the termination of the Investment Advisory Agreement on such date. The $5.3 million capital gains incentive fee accrual as of March 31, 2013 relates entirely this hypothetical liquidation calculation. For the quarter ended March 31, 2012, an expense of approximately $1.1 million was recorded under the hypothetical liquidation calculation.
The amount of the capital gains incentive fee which will actually be payable is determined in accordance with the terms of the Investment Advisory Agreement and is calculated as of the end of each calendar year (or upon termination of the Investment Advisory Agreement). The terms of the Investment Advisory Agreement state that the capital gains incentive fee calculation is based on net realized gains, if any, offset by gross unrealized depreciation for the calendar year. No effect is given to gross unrealized appreciation in this calculation. For the year ended December 31, 2012, the amount calculated, and payable, under the terms of the Investment Advisory Agreement was approximately $1,553,000.
Realized and Unrealized Gains/Losses on Investments
For the quarter ended March 31, 2013, we recorded net realized gains on investments of approximately $6.6 million, which primarily represents the gain on the sale of several of our CLO debt investments which totaled approximately $5.2 million.
Based upon the fair value determinations made in good faith by the Board of Directors, during the quarter ended March 31, 2013, we had net unrealized appreciation of approximately $3.6 million, comprised of $16.0 million in gross unrealized appreciation, $8.4 million in gross unrealized depreciation and approximately $4.0 million relating to the reversal of prior period net unrealized appreciation as investments were realized. During the quarter, Merrill Communications completed a capital restructuring. The Company's original investment in Merrill's second lien term loan was partially paid down, and the balance converted into an unsecured PIK note and common equity. As a result of this restructuring, the Company recognized approximately $576,000 in realized gains and $7.3 million in unrealized appreciation. The most significant changes in net unrealized appreciation and depreciation during the quarter ended March 31, 2013 were as follows (in millions):
For the quarter ended March 31, 2012, we recorded net realized gains on investments of approximately $294,000.
Based upon the fair value determinations made in good faith by the Board of Directors, during the quarter ended March 31, 2012, we had net unrealized appreciation of approximately $8.6 million, comprised of $15.8 million in gross unrealized appreciation, $7.0 million in gross unrealized depreciation and approximately $0.2 million relating to the reversal of prior period net unrealized appreciation as an investment was realized. The most significant changes in net unrealized appreciation and depreciation during the quarter ended March 31, 2012 were as follows (in millions):
Please see “—Portfolio Grading” for more information.
Net Increase in Net Assets Resulting from Net Investment Income
Net investment income for the quarter ended March 31, 2013 and 2012 was $10.7 million and $8.2 million, respectively. This increase was due to an increase in the amount of performing assets in the portfolio and distributions from the CLO equity investments in our portfolio as well as lower capital gains incentive fees. These were partially offset by increased interest expense as well as higher management fees (which are comprised of the base management fee and the net investment income incentive fee).
Excluding the impact of the capital gains incentive fee of approximately $215,000, core net investment income for the quarter ended March 31, 2013 was approximately $10.9 million compared to approximately $9.2 million for the same period in 2012.
Based on weighted-average shares outstanding of 45,565,784 (basic) and 55,598,936 (diluted), the net increase in net assets resulting from net investment income per common share for the quarter ended March 31, 2013 was approximately $0.23 (basic) and $0.22 (diluted), compared to approximately $0.24 per share (basic and diluted) for the same period in 2012.
Excluding the impact of the accrued capital gains incentive fee, the net increase in net assets resulting from core net investment income per common share would have been $0.24 (basic) and $0.23 (diluted), compared to $0.28 per share (basic and diluted), for the same period in 2012.
Please see “—Supplemental Information Regarding Core Net Investment Income and Core Net Increase in Net Assets Resulting from Operations” below for more information.
Net Increase in Net Assets Resulting from Operations
We had a net increase in net assets resulting from operations of approximately $20.8 million for the quarter ended March 31, 2013, compared to a net increase of approximately $17.1 million for the comparable period in 2012. This increase was attributable to greater realized gains, an increase in the amount of performing assets in the portfolio and distributions from the CLO equity investments in our portfolio and lower capital gains incentive fees. This increase was partially offset by greater interest expense, increased management fees as well as lower unrealized appreciation.
Based on weighted-average shares outstanding of 45,565,784 (basic) and 55,598,936 (diluted), the net increase in net assets resulting from operations per common share for the quarter ended March 31, 2013 was approximately $0.46 (basic) and approximately $0.41 (diluted), compared to a net increase in net assets resulting from operations of approximately $0.51 per share (basic and diluted) for the same period in 2012.
Excluding the impact of the accrued capital gains incentive fee, the core net increase in net assets resulting from operations per common share would have remained at $0.46 (basic) and $0.41 (diluted), compared to $0.54 per share (basic and diluted) for the same period in 2012.
On a supplemental basis, we provide information relating to core net investment income, its ratio to net assets, and core net increase in net assets resulting from operations, which are non-GAAP measures. These measures are provided in addition to, but not as a substitute for, net investment income and net increase in net assets resulting from operations. The Company’s non-GAAP measures may differ from similar measures by other companies, even if similar terms are used to identify such measures. Core net investment income represents net investment income excluding our capital gains incentive fee. Core net increase in net assets resulting from operations represents net increase in net assets resulting from operations excluding the capital gains incentive fee. As the capital gains incentive fee is based on a hypothetical event that did not occur, we believe that core net investment income and core net increase in net assets resulting from operations are useful indicators of performance during this period. Further, as the capital gains incentive fee is not a currently tax deductible expense and as the RIC requirements are to distribute taxable earnings, the core net investment income provides an indication of taxable income for the year to date.
The following tables provide a reconciliation of net investment income to core net investment income (for the months ended March 31, 2013 and 2012, respectively):
The following tables provide a reconciliation of net increase in net assets resulting from operations to core net increase in net assets resulting from operations (for the three months ended March 31, 2013 and 2012, respectively):
In addition, the following ratio is presented to supplement the financial highlights included in Note 10 to the financial statements:
The following table provides a reconciliation of the ratio of net investment income to average net assets to the ratio of core net investment income to average net assets, for the three month periods ended March 31, 2013 and 2012, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 2013, we issued approximately 11.1 million shares in two equity offerings and in connection with an “at-the-market” share issuance plan.
During the three months ended March 31, 2013, cash and cash equivalents increased from approximately $51.4 million at the beginning of the period to approximately $60.2 million at the end of the period. Net cash used by operating activities for the period, consisting primarily of the items described in “—Results of Operations,” was approximately $140.4 million, largely reflecting purchases of new investments of approximately $196.8 million partially offset by proceeds from principal repayments and sales of investments of approximately $47.4 million. Net cash used by investing activities reflects the change in restricted cash in the debt securitization entity. During the period, net cash provided by financing activities was approximately $155.1 million reflecting primarily the net proceeds of approximately $59.1 million from the February 11, 2013 sale of $60.0 million of incremental senior debt in connection with the collateralized loan obligation transaction that originally closed on August 23, 2012 and $110.4 million resulting from two equity offerings and participation in an “at-the-market” share issuance plan, partially offset by the distribution of dividends and deferred debt issuance costs.
Equity Follow-On Offerings
On February 11, 2013, we completed a public offering of 6,325,000 shares of our common stock at a public offering price of $10.36 per share for total gross proceeds of approximately $65.5 million.
On March 22, 2013, we completed a public offering of 3,450,000 shares of our common stock at a public offering price of $10.20 per share for total gross proceeds of approximately $35.2 million.
“At-the-Market” Share Issuance Plan
During the first quarter of 2013, we sold 1,312,828 shares of our common stock pursuant to an “at-the-market” share issuance plan. Barclays Capital Inc. acted as the sales agent. The total amount of capital raised under these issuances was approximately $13.7 million and net proceeds were approximately $13.5 million after deducting sales agent’s commissions and offering expenses. We have used, and will continue to use, the net proceeds from these offerings for investing in debt or equity securities, and other general corporate purposes.
Contractual Obligations
We have certain obligations with respect to the investment advisory and administration services we receive. See “–Overview”. We incurred approximately $4.1 million for investment advisory services, excluding pre-incentive net investment income incentive fees and approximately $288,000 for administrative services for the three months ended March 31, 2013.
TICC CLO is obligated to repay the notes issued in connection with the debt securitization financing that we completed in August 2011. The notes of the 2011 Securitization Issuer mature in 2021, in the total amount of $101,250,000. There are no amortization payments due on the notes of the 2011 Securitization Issuer prior to maturity. See “Borrowings” below.
TICC CLO 2012-1 is obligated to repay the notes issued in connection with the debt securitization financing that we completed in August 2012 and February 2013. The notes of the 2012 Securitization Issuer mature in 2023, in the total amount of $180,000,000. There are no amortization payments due on the notes of the 2012 Securitization Issuer prior to maturity. See “Borrowings” below.
TICC is obligated to repay the Convertible Notes, which mature in 2017, in the total amount of $115,000,000, unless previously converted in accordance with their terms.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices.
Borrowings
On August 10, 2011, the Company completed a $225.0 million debt securitization financing transaction. The Class A Notes offered in the securitization were issued by TICC CLO, and are secured by the assets held by the trustee on behalf of the 2011 Securitization Issuer. The notes are an obligation of TICC CLO. The securitization was executed through a private placement of $101.25 million of Aaa/AAA Class A Notes which bear interest, after the effective date, at three-month LIBOR plus 2.25% (prior to the effective date, the Class A Notes bear interest at five-month LIBOR plus 2.25%). The notes were sold at a discount to par, and the amount of the discount is being amortized over the term of the notes. The Class A Notes are included in the March 31, 2013 consolidated statements of assets and liabilities. For the three months period ended March 31, 2013, the Class A note holders were paid interest on the Class A notes of approximately $0.7 million. Holdings retained all of the 2011 Subordinated Notes totaling $123.75 million and all of the membership interests in the 2011 Securitization Issuer. The 2011 Subordinated Notes do not bear interest, but are entitled to the residual economic interest in the 2011 Securitization Issuer.
On September 26, 2012, the Company issued $105,000,000 aggregate principal amount of the Convertible Notes and an additional $10,000,000 aggregate principal amount of the Convertible Notes was issued on October 22, 2012. The Convertible Notes are convertible into shares of our common stock based on an initial conversion rate of 87.2448 shares of our common stock per $1,000 principal amount of Convertible Notes, which is equivalent to an initial conversion price of approximately $11.46 per share of common stock. The conversion price for the Convertible Notes will be reduced for quarterly cash dividends paid to common shares to the extent that the quarterly dividend exceeds $0.29 cents per share, subject to adjustment. The Convertible Notes mature on November 1, 2017, unless previously converted in accordance with their terms. The Convertible Notes are our general unsecured obligations, rank equally in right of payment with our future senior unsecured debt, and rank senior in right of payment to any potential subordinated debt, should any be issued in the future.
Distributions
In order to qualify as a regulated investment company and to avoid corporate level tax on the income we distribute to our stockholders, we are required, under Subchapter M of the Code, to distribute at least 90% of our ordinary income and short-term capital gains to our stockholders on an annual basis.
The following table reflects the cash distributions, including dividends and returns of capital, if any, per share that we have declared on our common stock since the beginning of 2010:
Related Parties
We have a number of business relationships with affiliated or related parties, including the following:
BDC Partners has adopted a written policy with respect to the allocation of investment opportunities among TICC, Oxford Lane Capital Corp. and T2 Income Fund CLO I Ltd in view of the potential conflicts of interest raised by the relationships described above.
In the ordinary course of business, we may enter into transactions with portfolio companies that may be considered related party transactions. In order to ensure that we do not engage in any prohibited transactions with any persons affiliated with us, we have implemented certain policies and procedures whereby our executive officers screen each of our transactions for any possible affiliations between the proposed portfolio investment, us, companies controlled by us and our employees and directors. We will not enter into any agreements unless and until we are satisfied that doing so will not raise concerns under the 1940 Act or, if such concerns exist, we have taken appropriate actions to seek board review and approval or exemptive relief for such transaction. Our Board of Directors reviews these procedures on an annual basis.
We have also adopted a Code of Ethics which applies to, among others, our senior officers, including our Chief Executive Officer and Chief Financial Officer, as well as all of our officers, directors and employees. Our Code of Ethics requires that all employees and directors avoid any conflict, or the appearance of a conflict, between an individual’s personal interests and our interests. Pursuant to our Code of Ethics, each employee and director must disclose any conflicts of interest, or actions or relationships that might give rise to a conflict, to our Chief Compliance Officer. Our Audit Committee is charged with approving any waivers under our Code of Ethics. As required by the NASDAQ Global Select Market corporate governance listing standards, the Audit Committee of our Board of Directors is also required to review and approve any transactions with related parties (as such term is defined in Item 404 of Regulation S-K).
RECENT DEVELOPMENTS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to financial market risks, including changes in interest rates. As of March 31, 2013, five debt investments in our portfolio were at a fixed rate, and the remaining eighty-three debt investments were at variable rates, representing approximately $33.3 million and $615.4 million in principal debt, respectively. At March 31, 2013, $590.8 million of our variable rate investments were income producing. The variable rates are based upon the five-year Treasury note, the Prime rate or LIBOR, and, in the case of our bilateral investments, are generally reset annually, whereas our non-bilateral investments generally reset quarterly. We expect that future debt investments will generally be made at variable rates. Many of the variable rate investments contain floors.
To illustrate the potential impact of a change in the underlying interest rate on our net increase in net assets resulting from operations, we have assumed a 1% increase or decrease in the underlying five-year Treasury note, the Prime rate or LIBOR, and no other change in our portfolio as of March 31, 2013. We have also assumed outstanding borrowings, which bear interest at variable rates, of $281,250,000. Under this analysis, net investment income would decrease by approximately $1.9 million on an annual basis, due to the amount of investments in our portfolio which have implied floors that would be unaffected by a 1% change in the underlying interest rate. However, if the increase in rates was more significant, such as 5%, the net effect on the net increase in net assets resulting from operations would be an increase of approximately $9.7 million. To the extent that the rate underlying certain investments, as well as our borrowings, is at an historic low, it may not be possible for the underlying rate to decrease by 1% or 5%, and the impact of that reality is reflected in this analysis. It should also be noted that as the available cash is invested, the impact of this analysis will change. Although management believes that this analysis is indicative of our existing interest rate sensitivity, it does not adjust for changes in the credit quality, size and composition of our portfolio, and other business developments, including a change in the level of our borrowings, that could affect the net increase in net assets resulting from operations. Accordingly, no assurances can be given that actual results would not differ materially from the results under this hypothetical analysis.
We may in the future hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to the investments in our portfolio with fixed interest rates.
ITEM 4. CONTROLS AND PROCEDURES.
As of March 31, 2013, we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in timely alerting management, including the Chief Executive Officer and Chief Financial Officer, of material information about us required to be included in periodic SEC filings.
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that occurred during the quarter ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are not currently subject to any material legal proceedings. From time to time, we may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.
Item 1A. Risk Factors
We are permitted to borrow money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us.
On August 10, 2011, we completed a $225.0 million debt securitization financing transaction. The Class A Notes and the subordinated notes offered in the debt securitization were issued by TICC CLO LLC (“2011 Securitization Issuer” or “TICC CLO”), a subsidiary of TICC Capital Corp. 2011-1 Holdings, LLC (“Holdings”), which is in turn a direct subsidiary of TICC. The Class A Notes are secured by the assets held by the 2011 Securitization Issuer. The securitization was executed through a private placement of $101.25 million of secured notes rated AAA/Aaa by Standard & Poor’s Rating Service (“S&P”) and Moody’s Investors Service Inc. (“Moody’s”), respectively, and bearing interest at the three-month LIBOR plus 2.25%. Holdings retained all of the subordinated notes, which totaled $123.75 million (the “2011 Subordinated Notes”), and retained all the membership interests in the 2011 Securitization Issuer.
On September 26, 2012, we completed a private placement of Convertible Notes. A total of $105.0 million aggregate principal amount of the Convertible Notes were issued at the closing. An additional $10.0 million aggregate principal amount of the Convertible Notes were issued on October 22, 2012 pursuant to the exercise of the initial purchasers’ option to purchase additional Convertible Notes. The Convertible Notes are convertible into shares of our common stock based on an initial conversion rate of 87.2448 shares of our common stock per $1,000 principal amount of Convertible Notes, which is equivalent to an initial conversion price of approximately $11.46 per share of common stock. The conversion price for the Convertible Notes will be reduced for quarterly cash dividends paid to common shares to the extent that the quarterly dividend exceeds $0.29 cents per share, subject to adjustment. The Convertible Notes will bear interest at an annual rate of 7.50%, payable semiannually in arrears on May 1 and November 1 of each year, beginning May 1, 2013. The Convertible Notes bear interest at an annual rate of 7.50%, payable semiannually in arrears on May 1 and November 1 of each year, beginning May 1, 2013. The Convertible Notes mature on November 1, 2017, unless previously converted in accordance with their terms. The Convertible Notes are our general unsecured obligations, rank equally in right of payment with our future senior unsecured debt, and rank senior in right of payment to any potential subordinated debt, should any be issued in the future.
Borrowings (including through the securitization transactions described above, which are consolidated in our financial statements), also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in our securities. We may borrow from and issue senior debt securities to banks, insurance companies, and other lenders. Lenders of these senior securities have fixed dollar claims on our assets that are superior to the claims of our common stockholders. If the value of our assets increases, then leveraging would cause the net asset value attributable to our common stock to increase more sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged. Similarly, any increase in our income in excess of interest payable on the borrowed funds would cause our net income to increase more than it would without the leverage, while any decrease in our income would cause net income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to make common stock dividend payments. Leverage is generally considered a speculative investment technique. Our ability to service any debt that we incur will depend largely on our financial performance and will be subject to prevailing economic conditions and competitive pressures. Moreover, as the management fee payable to TICC Management will be payable on our gross assets, including those assets acquired through the use of leverage, TICC Management may have a financial incentive to incur leverage which may not be consistent with our stockholders’ interests. In addition, our common stockholders will bear the burden of any increase in our expenses as a result of leverage, including any increase in the management fee payable to TICC Management.
Illustration. The following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns on the portfolio, net of expenses. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing in the table below.
There are significant potential conflicts of interest between TICC and our management team.
In the course of our investing activities, we pay management and incentive fees to TICC Management, and reimburse BDC Partners for certain expenses it incurs. As a result, investors in our common stock invest on a “gross” basis and receive distributions on a “net” basis after expenses, resulting in, among other things, a lower rate of return than one might achieve through direct investments. As a result of this arrangement, there may be times when the management team of TICC Management has interests that differ from those of our stockholders, giving rise to a conflict.
TICC Management receives a quarterly incentive fee based, in part, on our “Pre-Incentive Fee Net Investment Income,” if any, for the immediately preceding calendar quarter. This incentive fee is subject to a quarterly hurdle rate before providing an incentive fee return to TICC Management. To the extent we or TICC Management are able to exert influence over our portfolio companies, the quarterly pre-incentive fee may provide TICC Management with an incentive to induce our portfolio companies to accelerate or defer interest or other obligations owed to us from one calendar quarter to another.
In addition, our executive officers and directors, and the executive officers of TICC Management, and its managing member, BDC Partners, serve or may serve as officers and directors of entities that operate in a line of business similar to our own. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might not be in the best interests of us or our stockholders. Charles M. Royce, the non-executive Chairman of our Board of Directors, holds a minority, non-controlling interest in our investment adviser. BDC Partners is the managing member of Oxford Gate Capital, LLC, a private fund in which Messrs. Cohen and Rosenthal are currently the sole investors.
Messrs. Cohen and Rosenthal also currently serve as Chief Executive Officer and President, respectively, for T2 Advisers, LLC, which serves as the Collateral Manager of T2 Income Fund CLO I Ltd. BDC Partners is the managing member of T2 Advisers, LLC. Further, Messrs. Cohen and Rosenthal currently serve as Chief Executive Officer and President, respectively, of Oxford Lane Capital Corp., a non-diversified closed-end management investment company that currently invests primarily in CLO debt and equity tranches, and its investment adviser, Oxford Lane Management. BDC Partners provides Oxford Lane Capital Corp. with office facilities and administrative services pursuant to an administration agreement and also serves as the managing member of Oxford Lane Management. In addition, Patrick F. Conroy, the Chief Financial Officer, Chief Compliance Officer and Corporate Secretary of TICC Management, BDC Partners and TICC, serves in the same capacities for Oxford Lane Capital Corp. and Oxford Lane Management and also serves as the Chief Financial Officer, Chief Compliance Officer and Treasurer of T2 Advisers, LLC. Because of these possible conflicts of interest, these individuals may direct potential business and investment opportunities to other entities rather than to us or such individuals may undertake or otherwise engage in activities or conduct on behalf of such other entities that is not in, or which may be adverse to, our best interests.
BDC Partners has adopted a written policy with respect to the allocation of investment opportunities among TICC, Oxford Lane Capital Corp., T2 Income Fund CLO Ltd. and Oxford Gate Capital, LLC in view of the potential conflicts of interest raised by the relationships described above.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, which could materially affect our business, financial condition and/or operating results. The risks described above and in our Annual Report on Form 10-K are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results. There have been no other material changes during the three months ended March 31, 2013 to the risk factors discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2012.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
While we did not engage in unregistered sales of equity securities during the three months ended March 31, 2013, we issued a total of 82,694 shares of common stock under our dividend reinvestment plan. This issuance was not subject to the registration requirements of the Securities Act of 1933, as amended. The aggregate valuation price for the shares of common stock issued under the dividend reinvestment plan was approximately $781,284.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION.
ITEM 6. EXHIBITS.
The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:
10.14
Collateral Administration Agreement, dated August 23, 2012, by and among TICC CLO 2012-1 LLC, TICC Capital Corp. and The Bank of New York Mellon Trust Company, National Association (Incorporated by reference to Exhibit 10.5 to the Registrant’s report on Form 8-K filed on August 23, 2012).
10.15
Upsize Purchase Agreement, dated January 24, 2013, by and among TICC Capital Corp., TICC CLO 2012-1 LLC and Guggenheim Securities, LLC (Incorporated by reference to the Registrant’s report on Form 8-K filed on February 26, 2013).
11
Computation of Per Share Earnings (included in the notes to the financial statements contained in this report).
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Jonathan H. CohenChief Executive Officer
(Principal Executive Officer)