(Exact name of registrant as specified in its charter)
(Address of principal executive office)
(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 o
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 o No o
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 o 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 November 5, 2014 was 60,357,746.
TABLE OF CONTENTS
Item 1.
Financial Statements (Unaudited)
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
Item 4.
Controls and Procedures
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
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See Accompanying Notes.
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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, 2013, as filed with the Securities and Exchange Commission (“SEC”).
Certain less significant amounts in prior period financial statements have been reclassified to conform to current period presentation.
The Company 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 regulated 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. As of July 25, 2014, TICC CLO ended its reinvestment period. For further information on this securitization, see Note 4.
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. The secured notes and subordinated notes offered in the debt securitization were issued by TICC CLO 2012-1, a subsidiary of TICC. On February 25, 2013 and May 28, 2013, TICC CLO 2012-1 issued additional secured notes totaling an aggregate of $120 million and subordinated notes totaling an aggregate of $40 million, which subordinated notes were purchased by the Company. 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).
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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 was 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. For further information on these Convertible Notes, see Note 4.
The most significant estimates made in the preparation of TICC’s consolidated financial statements are the valuation of investments and the related amounts of unrealized appreciation and depreciation of investments recorded. TICC believes that there is no single definitive 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 TICC makes. TICC is required to specifically fair value each individual investment on a quarterly basis.
ASC 820-10, Fair Value Measurements and Disclosure, clarified the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. ASC 820-10 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. TICC has determined that due to the general illiquidity of the market for its investment portfolio, whereby little or no market data exists, almost all of TICC’s investments are based upon “Level 3” inputs.
TICC’s Board of Directors determines the value of its 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, TICC has engaged third-party valuation firms to provide assistance in valuing its certain of its syndicated loans and bilateral investments, although TICC’s Board of Directors ultimately determines the appropriate valuation of each such investment.
To the extent that TICC believes that it has become probable that a loan is not collectible or probable that an equity investment is not realizable, TICC will classify that amount as a realized loss. 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.
In accordance with ASC 820-10-35, TICC’s 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 TICC obtains indicative bid quotes for purposes of determining the fair value of its 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 TICC owns 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 TICC owns. In addition, TICC Management prepares an analysis of each syndicated loan, including a
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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, if any. TICC has considered the factors described in ASC 820-10 and has determined that TICC is properly valuing the securities in its portfolio.
During the past several years, TICC has acquired a number of debt and equity positions in collateralized loan obligation (“CLO”) investment vehicles and more recently CLO warehouse investments. These investments are special purpose financing vehicles. In valuing such investments, TICC considers the operating metrics of the specific investment vehicle, including compliance with collateralization tests, defaulted and restructured securities, and payment defaults, if any. In addition, TICC considers the indicative prices provided by a recognized industry pricing service as a primary source, and the implied yield of such marks, supplemented by actual trades executed in the market at or around period-end, as well as the indicative prices provided by the broker who arranges transactions in such investment vehicles. Additional factors include any available information on other relevant transactions including firm bids and offers in the market and information resulting from bids-wanted-in-competition. 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 TICC’s Board of Directors for its determination of fair value of these investments.
Under the valuation procedures approved by TICC’s Board of Directors, upon the recommendation of the Valuation Committee, a third-party valuation firm will prepare valuations for each of TICC’s 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 its 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 its 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 TICC’s portfolio securities is based upon the grade assigned to each such security under its 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 TICC’s behalf, additional third party valuations with respect to both TICC’s bilateral portfolio securities and TICC’s syndicated loan investments. TICC’s Board of Directors retains ultimate authority as to the third-party review cycle as well as the appropriate valuation of each investment.
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The Company’s assets measured at fair value on a recurring basis at September 30, 2014, were as follows:
Level 2 securities are valued based on quotations for those identical securities received from independent pricing services or from dealers who make markets in such securities in markets that are not considered active. If there are several different sources of quotations and there is a reasonable level of trading activity, we will categorize these investments as Level 2 in the hierarchy.
The following table provides quantitative information about the Company’s Level 3 fair value measurements as of September 30, 2014. 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.
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Significant increases or decreases in any of the unobservable inputs in isolation may result in a significantly lower or higher fair value measurement.
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The following table provides quantitative information about the Company’s Level 3 fair value measurements as of December 31, 2013:
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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 September 30, 2014 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, 2013 and the level of each financial liability within the fair value hierarchy:
The fair values of the Company’s debt are determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. Fair value is based upon quotations received from dealers who make markets in these securities. Such quotations are based upon actual trades or actual bids and offers, to the extent that they are available, or by reference to comparable securities in the marketplace. As of September 30, 2014 and December 31, 2013, the debt would be deemed to be level 3 of the fair value hierarchy due to the general illiquidity of the market for these instruments.
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A reconciliation of the fair value of investments for the three months ended September 30, 2014, utilizing significant unobservable inputs, is as follows:
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A reconciliation of the fair value of investments for the nine months ended September 30, 2014, 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, 2013, were as follows:
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A reconciliation of the fair value of investments for the three months ended September 30, 2013, utilizing significant unobservable inputs, is as follows:
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A reconciliation of the fair value of investments for the nine months ended September 30, 2013, 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 September 30, 2014 and December 31, 2013:
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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 September 30, 2014, the Company’s asset coverage for borrowed amounts was 223.2%.
The following are the Company’s outstanding principal amounts, carrying values and fair values of the Company’s notes payable as of September 30, 2014 and December 31, 2013. 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 September 30, 2014 were 3.90% and 6.98 years, respectively, and as of December 31, 2013 were 3.90% and 7.73 years, respectively.
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. 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 September 30, 2014 consolidated statements of assets and liabilities. For the three and nine months ended September 30, 2014, the Class A note holders were paid interest on the Class A notes of approximately $0.6 million and $1.9 million, respectively. The 2011 Subordinated Notes do not bear interest, but are entitled to the residual economic interest in the 2011 Securitization Issuer.
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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 the Company’s direction in its capacity as collateral manager of the 2011 Securitization Issuer and in accordance with its investment strategy, allowing it 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, the Company entered into a master loan sale agreement with Holdings and the 2011 Securitization Issuer under which it 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.
The Company serves as collateral manager to the 2011 Securitization Issuer under a collateral management agreement. The Company is entitled to a deferred fee for our services as collateral manager. The deferred fee is eliminated in consolidation.
As of September 30, 2014, there were 41 investments in portfolio companies with a total fair value of approximately $218.3 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.
Deferred debt issuance costs represent fees and other direct incremental costs incurred in connection with the Company’s debt securitization. As of September 30, 2014, the Company had a deferred debt issuance balance of approximately $2.1 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.
The following table sets forth the components of interest expense, effective annualized average interest rates and cash paid for interest for the three and nine months ended September 30, 2014 and 2013, respectively:
Effective January 1, 2014 and through January 26, 2014, the interest rate of approximately 2.488% charged under the securitization was based on three-month LIBOR of 0.238%. Effective January 27, 2014 and through April 24, 2014, the interest rate of approximately 2.489% charged under the securitization was based on three-month LIBOR of 0.239%. Effective April 25, 2014 and through July 24, 2014, the interest rate of approximately 2.479% charged under the securitization was based on three-month LIBOR of 0.229%. Effective July 25, 2014 and through September 30, 2014, the interest rate of approximately 2.484% charged under the securitization was based on three-month LIBOR of 0.234%.
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The amounts, ratings and interest rates (expressed as a spread to LIBOR) of the Class A Notes are as follows:
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 and May 28, 2013, TICC CLO 2012-1 LLC issued additional secured notes totaling an aggregate of $120 million and subordinated notes totaling an aggregate of $40 million, which subordinated notes were purchased by us, under the “accordion” feature of the debt securitization which allowed, under certain circumstances and subject to the satisfaction of certain conditions, for an increase in the amount of secured and subordinated notes. It is not necessary that the Company owns all or any of the notes permitted by this feature, which may affect the accounting treatment of the debt securitization financing transaction. As of September 30, 2014 the secured notes of the 2012 Securitization Issuer have an aggregate face amount of $240 million and were issued in four classes. The class A-1 notes have a current face amount of $176 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 $20 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 $23 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 $21 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 $80 million as of September 30, 2014.
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 our direction in our capacity as collateral manager of the 2012 Securitization Issuer and in accordance with our investment strategy, allowing us 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, the Company 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.
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As of September 30, 2014, there were 40 investments in portfolio companies with a total fair value of approximately $290.2 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.
Deferred debt issuance costs represent fees and other direct incremental costs incurred in connection with our debt securitization. As of September 30, 2014, TICC had deferred debt issuance balance of approximately $3.1 million. Aggregate net discount on the notes of the 2012 Securitization Issuer at the time of issuance totaled approximately $4.9 million. These amounts are being amortized and included in interest expense in the consolidated statements of operations over the term of the debt securitization. The following table sets forth the components of interest expense, effective annualized average interest rates and cash paid for interest of the Class A-1, B-1, C-1 and D-1 for the three and nine months ended September 30, 2014 and 2013, respectively:
Effective January 1, 2014 and through February 24, 2014, the interest charged under the securitization was based on three-month LIBOR, which was 0.238%. Effective February 25, 2014 and through May 26, 2014, the interest charged under the securitization was based on three month LIBOR, which was approximately 0.235%. Effective May 27, 2014 and through August 24, 2014, the interest charged was based on three month LIBOR, which was approximately 0.227%. Effective August 25, 2014, the interest charged was based on three month LIBOR, which was approximately 0.235%.
The classes, interest rates, spread over LIBOR, cash paid for interest, stated interest expense and note discount expense of each of the Class A-1, B-1, C-1 and D-1 for the three and nine months ended September 30, 2014 are as follows:
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The classes, interest rates, spread over LIBOR, cash paid for interest, stated interest expense and note discount expense of each of the Class A-1, B-1, C-1 and D-1 for the three and nine months ended September 30, 2013 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 as of September 30, 2014 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 as of December 31, 2013 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.
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 Convertible Notes are
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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. Deferred debt issuance costs represent fees and other direct incremental costs incurred in connection with the Convertible Notes. As of September 30, 2014, the Company had deferred debt issuance balance of approximately $1.9 million. This amount is being amortized and is included in interest expense in the consolidated statements of operations over the term of the Convertible Notes.
The following table sets forth the components of interest expense, effective annualized average interest rates and cash paid for interest of the 2017 Convertible Notes for the three and nine months ended September 30, 2014 and 2013, respectively:
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 September 30, 2014, 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.
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The following table sets forth the computation of basic and diluted net increase in net assets resulting from net investment income per share for the three and nine months ended September 30, 2014 and 2013, respectively:
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The following table sets forth the computation of basic and diluted net (decrease) and increase in net assets resulting from operations per share for the three and nine months ended September 30, 2014 and 2013, respectively:
Due to the anti-dilutive effect on the computation of diluted earnings per share for the three months and nine months ended September 30, 2014, the adjustments for interest on convertible senior notes, base management fees, deferred issuance costs and incentive fees as well as adjustments for dilutive effect of convertible notes were excluded from the respective periods’ diluted earnings per share computation.
The Company 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 the Company’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
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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 rate for the 2013, 2012 and 2011 calendar year was 5.72%, 5.83% and 7.01%, respectively. The current hurdle rate for the 2014 calendar year, calculated as of December 31, 2013, is 6.75%.
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 our “Incentive Fee Capital Gains,” which consist of our 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 $1.7 million and $1.8 million for the quarters ended September 30, 2014 and 2013, respectively; for the nine months ended September 30, 2014 and 2013, TICC incurred pre-incentive fee net investment income incentive fees of approximately $4.8 million and $4.4 million, respectively. The net investment income incentive fee payable to TICC Management as of September 30, 2014 and December 31, 2013, was approximately $1.7 million and $2.2 million, respectively.
The capital gains incentive fee expense recorded under the hypothetical liquidation calculation for the quarter ended September 30, 2014 resulted in an accrual reversal of approximately $0.8 million compared with an expense of approximately $2.3 million for the quarter ended September 30, 2013. For the nine months ended September 30, 2014, the capital gains incentive fee liability under the hypothetical liquidation calculation was reduced by approximately $3.9 million compared with a reduction of approximately $0.4 million for the nine months ended September 30, 2013. The amount of capital gains incentive fee 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 TICC Management in the event of a complete liquidation of our portfolio as of period end and the termination of the Investment Advisory Agreement on
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such date. Also, it should be noted that the capital gains incentive fee expense fluctuates with our overall investment results. The accrued capital gains incentive fee payable as of September 30, 2014 and December 31, 2013 was approximately $0.0 million and $3.9 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.
The Company has also entered into the Administration Agreement with BDC Partners under which 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.
TICC Management is controlled by BDC Partners, its managing member. Charles M. Royce 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. 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.
For the quarters ended September 30, 2014 and 2013, respectively, TICC incurred base investment advisory fees of approximately $5.4 million and $4.9 million in accordance with the terms of the Investment Advisory Agreement; for the nine months ending September 30, 2014 and 2013, TICC incurred investment advisory fees of approximately $15.8 million and $13.9 million, respectively. The base investment advisory fee payable as of September 30, 2014 and December 31, 2013 was approximately $5.4 million and $5.0 million, respectively. For the quarters ended September 30, 2014 and 2013, TICC incurred approximately $473,000 and $310,000, respectively, in compensation expenses for the services of employees allocated to the administrative activities of TICC, pursuant to the Administration Agreement with BDC Partners; for the nine months ended September 30, 2014 and 2013, TICC incurred compensation expenses of approximately $1.4 million and $925,000, respectively. As of September 30, 2014 and December 31, 2013 approximately $407,000 and $24,000 were accrued for compensation expense at the end of each respective period. In addition, TICC incurred approximately $18,000 and $20,000 for reimbursement of facility costs allocated under the Administration Agreement for the quarters ended September 30, 2014 and 2013, respectively; for the nine months ended September 30, 2014 and 2013, TICC incurred approximately $55,000 and $62,000, respectively. As of September 30, 2014 and December 31, 2013 approximately $6,000 and $0 remained payable for facility costs at the end of each respective period.
Messrs. Cohen and Rosenthal 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. In addition, Mr. Conroy serves as the Chief Financial Officer, Chief Compliance Officer and Treasurer of T2 Advisers, LLC.
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 invests primarily in leveraged corporate loans, and its investment adviser, Oxford Lane Management, LLC
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(“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 serves as the Chief Financial Officer, Chief Compliance Officer and Corporate Secretary of Oxford Lane Capital Corp. and Chief Financial Officer, Chief Compliance Officer and Treasurer of Oxford Lane Management.
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.
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 taxable earnings fall 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.
The Company paid a dividend of $0.29 per share on March 31, 2014, June 30, 2014 and September 30, 2014. 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 Company’s net asset value per share at September 30, 2014 was $9.40 and at December 31, 2013 was $9.85. 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.
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 September 30, 2014 and 2013, the Company recorded approximately $0.3 million and $0.6 million in PIK income, respectively. For the nine months ended September 30, 2014 and 2013, the Company recorded approximately $1.0 million and $1.8 million in PIK income, respectively.
In addition, the Company recorded original issue discount income of approximately $0.6 million and $0.7 million for the three months ended September 30, 2014 and 2013, respectively, representing the amortization of the discount attributed to certain debt securities purchased by the Company, including original
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issue discount (“OID”) and market discount. The Company had discount income of approximately $2.1 million and $2.9 million for the nine months ended September 30, 2014 and 2013, respectively.
Other income generally includes closing fees, origination fees and amendment fees associated with investments in portfolio companies. Such fees may be paid at closing of the Company’s investments or at the time the terms of the underlying loan agreement are revised and are generally fully earned, non-refundable, and non-recurring. Also, the Company may receive fees in connection CLO equity investments which may be paid over the life of the underlying CLO vehicle; such fees are recognized as income when earned.
For the three months ended September 30, 2014, the Company recorded other income of approximately $1.9 million which includes approximately $1.0 million representing a success fee associated with the Company’s investment in a warehouse facility as well approximately $0.5 million from amendment and prepayment fees associated with several of the Company’s debt investments. For the three months ended September 30, 2013, the Company recorded other income of approximately $0.8 million. For the nine months ended September 30, 2014, the Company recorded approximately $4.3 million which includes approximately $2.3 million representing amendment and prepayment fees associated with several of the Company’s debt investments. For the nine months ended September 30, 2013, TICC recorded other income of approximately $3.5 million.
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 and nine months ended September 30, 2014 and 2013, respectively, the Company received no fee income for managerial assistance.
The Company 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 $15.2 million in such distributions during the quarter ended September 30, 2014, compared to approximately $12.3 million during the quarter ended September 30, 2013. The Company earned approximately $45.0 million in such distributions during the nine months ended September 30, 2014, compared with approximately $31.7 million during the nine months ended September 30, 2013.
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Financial highlights for the three and nine months ended September 30, 2014 and 2013, respectively, are as follows:
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At September 30, 2014 and December 31, 2013, 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; as of September 30, 2014 and December 31, 2013, the restricted cash balances were $51,038,473 and $32,428,248, respectively.
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 September 30, 2014, the Company had one commitment of up to approximately $15.0 million to purchase an additional debt investment. Subsequent to September 30, 2014, the Company was allocated approximately $4.0 million on that commitment.
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.
In June 2013, the FASB issued ASU 2013-08, Financial Services — Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements, which amends the criteria that define an investment company and clarifies the measurement guidance and requires new disclosures for investment companies. The Company has adopted this standard for its fiscal year end December 31, 2014 and determined that it is an investment company and follows the accounting and reporting guidance under the Topic 946. The adoption of the standard did not have a material impact on the Company’s consolidated results of operations and financial condition.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The update supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The adoption of the amended guidance in the standard is not expected to have a significant effect on the Company’s consolidated results of operations and financial condition.
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In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The update is intended to define management’s responsibility to evaluate whether there is a substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosure. Amendments in this update become effective in the annual period ending after December 15, 2016, with early application permitted. The Company will evaluate the application of this pronouncement and will adopt the standard for the quarter ending March 31, 2016.
On October 27, 2014, TICC Funding, LLC (“TICC Funding”), a special purpose vehicle and wholly-owned subsidiary of the Company, entered into a revolving credit facility (the “Facility”) with Citibank, N.A. The Company used part of the proceeds from the Facility to redeem all of the $101,250,000 secured notes issued by TICC CLO LLC. Subject to certain exceptions, pricing under the Facility is based on the London interbank offered rate (“LIBOR”) for an interest period equal to three months plus a spread of 1.50% per annum. Interest on the loans is payable quarterly in arrears. In connection with the redemption of the secured notes issued by TICC CLO LLC, the Company will write-off approximately $3.1 million of discount and deferred debt issuance costs.
Pursuant to the terms of the credit agreement governing the Facility, TICC Funding has borrowed, on a revolving basis, the maximum aggregate principal amount of $150,000,000. The Facility is secured by a pool of loans initially consisting of loans sold by TICC CLO to TICC Funding, loans sold and contributed by the Company to TICC Funding, and loans purchased by TICC Funding from unaffiliated third parties. The Company may sell and contribute additional loans to TICC Funding from time to time. The Company will act as the collateral manager of the loans owned by TICC Funding, and has retained a residual interest through its ownership of TICC Funding.
The period during which TICC Funding may request additional borrowings under the Facility will terminate on October 27, 2016. All amounts borrowed under the Facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on October 27, 2017. TICC Funding is required to pay certain fees in connection with the Facility, including a fee on the unused portion of the commitment under the Facility. TICC Funding may prepay any borrowing at any time without a premium or penalty, except that TICC Funding might be liable for certain funding breakage fees if prepayments occur prior to expiration of the relevant interest period. TICC Funding may also permanently reduce all or a portion of the Facility amount from time to time upon payment of a prepayment fee if such reduction occurs prior to October 27, 2016.
On October 30, 2014, the Board of Directors declared a distribution of $0.29 per share for the fourth quarter, payable on December 31, 2014 to shareholders of record as of December 17, 2014.
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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
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December 31, 2013, 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.
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 regulated 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 controlling 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 and on May 28, 2013, we completed the sale of an aggregate of $120.0 million of additional secured notes and an aggregate of $40.0 million of subordinated notes in connection with these transactions. 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 September 30, 2014, our debt investments had stated interest rates of between 4.00% and 11.00% (excluding our investment in Unitek Global Services, Inc.) and maturity dates of between 22 and 127 months. In addition, our total portfolio had a weighted average yield on debt investments of approximately 8.0%.
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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 September 30, 2014, we recognized approximately $0.3 million from PIK interest income associated with our investments in Merrill Communications, LLC, RBS Holding Company and Nextag, Inc. compared to PIK interest of approximately $0.6 million for the quarter ended September 30, 2013. 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, we will generally seek to invest in loans that are 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 September 30, 2014, we closed approximately $97.6 million in portfolio investments, including additional investments of approximately $35.8 million in existing portfolio companies and approximately $61.8 million in new portfolio companies. During the quarter ended September 30, 2014, we recognized a total of $73.7 million from repayments on debt investments, and we recognized approximately $48.3 million from the sale of portfolio investments. We realized net losses on investments during the quarter ended September 30, 2014 in the amount of approximately $3.5 million. For the quarter ended September 30, 2014, we had net unrealized depreciation of approximately $15.3 million.
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.
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.
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In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement which represents amendments to achieve common fair value measurement and disclosure requirements in US GAAP and IFRS.” The amendments are of two types: (i) those that clarify the FASB’s intent about the application of existing fair value measurement and disclosure requirements and (ii) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments that change a particular principle or requirement for measuring fair value or disclosing information about fair value measurements relate to (i) measuring the fair value of the financial instruments that are managed within a portfolio; (ii) application of premium and discount in a fair value measurement; and (iii) additional disclosures about fair value measurements. We adopted this update on January 1, 2012. We have increased our disclosures related to Level 3 fair value measurements in addition to other required disclosures. There were no related impacts on our financial position or results of operations.
ASC 820-10, “Fair Value Measurements and Disclosure,” which establishes a three-level valuation hierarchy for disclosure of fair value measurements, clarified the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. ASC 820-10 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.
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.
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.
In accordance with 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,” 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,
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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.
Our assets measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820-10 at September 30, 2014, were as follows:
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Our assets measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820-10 at December 31, 2013, were as follows:
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The total fair value of our investment portfolio was approximately $942.6 million and $931.6 million as of September 30, 2014 and December 31, 2013, respectively. The increase in investments during the nine months ended September 30, 2014 was due primarily to purchases of investments of approximately $362.9 million, partially offset by debt repayments and sales of securities totaling approximately $327.4 million. Funding for these new investments was provided by an equity capital raise totaling $66.4 million and the deployment of capital available as of December 31, 2013.
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 September 30, 2014, we recognized proceeds of approximately $48.3 million largely from the aggregate proceeds from the sale of several CLO equity investments ($27.3 million), whereas for the year ended December 31, 2013, we recognized proceeds of approximately $118.5 million from the sales of securities. Also, during the quarter ended September 30, 2014, we had repayments and amortization payments of approximately $73.7 million, whereas for the year ended December 31, 2013, we had repayments and amortization payments of approximately $203.9 million.
As of September 30, 2014, we had investments in debt securities of, or loans to, 53 portfolio companies, with a fair value of approximately $655.2 million, and equity investments in 29 portfolio companies, with a fair value of approximately $287.4 million. These debt investments included approximately $1.0 million in accrued PIK interest, which, as described in “Overview” above, is added to the carrying value of our investments, reduced by repayments of principal.
As of December 31, 2013, we had investments in debt securities of, or loans to, 68 portfolio companies, with a fair value of approximately $679.4 million, and equity investments in 33 portfolio companies, with a fair value of approximately $252.2 million. These debt investments included approximately $2.1 million in accrued PIK interest, which, as described in “Overview” above, is added to the carrying value of our investments, reduced by repayments of principal.
A reconciliation of the investment portfolio for the nine months ended September 30, 2014 and the year ended December 31, 2013 follows:
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The following table indicates the quarterly portfolio investment activity for the past seven quarters:
The following table shows the fair value of our portfolio of investments by asset class as of September 30, 2014 and December 31, 2013:
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The following table shows our portfolio of investments by industry at fair value, as of September 30, 2014 and December 31, 2013:
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We have adopted a credit grading system to monitor the quality of our debt investment portfolio. As of September 30, 2014 and December 31, 2013, 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 September 30, 2014 and December 31, 2013, 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.
Further discussion regarding the other investments which experienced significant unrealized depreciation is presented in “Results of Operations.”
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As of September 30, 2014, our debt investments had stated interest rates of between 4.00% and 11.00% (excluding our investment in Unitek Global Services, Inc.) and maturity dates of between 22 and 127 months. In addition, our total portfolio had a weighted average yield on debt investments of approximately 8.0%, compared with 8.7% as of September 30, 2013. 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 September 30, 2014 was approximately $30.2 million compared to approximately $27.4 million for the three months ended September 30, 2013. This increase was due largely 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 September 30, 2014 and September 30, 2013 was approximately $660.3 million and $733.4 million, respectively. For the quarter ended September 30, 2014, investment income consisted of approximately $12.2 million in cash interest from portfolio investments, approximately $0.6 million in amortization of original issue and market discount, approximately $15.2 million in distributions from the equity interest in securitized vehicle investments, as well as approximately $0.3 million in PIK interest income.
For the quarter ended September 30, 2014, other income of approximately $1.9 million was recorded, including approximately $1.4 million representing fees associated with five of our CLO equity investments, including a CLO warehouse facility, compared to other income of approximately $0.8 million for the quarter ended September 30, 2013. Other income generally includes closing fees, origination fees and amendment fees associated with investments in portfolio companies. Such fees may be paid at closing of our investments or at the time the terms of the underlying loan agreement are revised and are generally fully earned, non-refundable, and non-recurring. Also, the Company may receive fees in connection with CLO equity investments which may be paid over the life of the underlying CLO vehicle; such fees are recognized as income when earned.
Total expenses for the quarter ended September 30, 2014 were approximately $12.7 million, which includes the capital gains incentive fee accrual reversal of approximately $0.8 million.
Expenses before incentive fees, for the quarter ended September 30, 2014, were approximately $11.8 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 $0.6 million from the quarter ended September 30, 2013, attributable primarily to increased investment advisory fees (consisting of the base management fee) and professional fees. Expenses before incentive fees for the quarter ended September 30, 2013 were approximately $11.1 million.
The investment advisory base fee for the quarter ended September 30, 2014 was approximately $5.4 million and the investment advisory fee in the comparable period in 2013 was approximately $4.9 million. The increase in the base management fee is due to an increase in average gross assets. At each of September 30, 2014 and December 31, 2013, respectively, approximately $7.1 million and $7.1 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 third quarter of 2014 was approximately $5.0 million, which was directly related to our debt securitization financing transactions as well as our Convertible Note transaction. Interest expense for the third quarter of 2013 was also approximately $5.0 million.
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In August 2011, secured 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%). For the three months ended September 30, 2014, the total interest expense under the securitization was approximately $759,000, comprised of stated interest expense (approximately $643,000), accreted discount (approximately $40,000) and amortized deferred debt issuance costs (approximately $76,000). The accrued interest payable on the Class A Notes during the third quarter of 2014 was approximately $475,000. At December 31, 2013, interest expense of approximately $476,000 remained payable. For further information on this securitization, see “— Liquidity and Capital Resources — Borrowings.”
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 and May 28, 2013, TICC CLO 2012-1 issued additional secured notes totaling an aggregate of $120 million and subordinated notes totaling an aggregate of $40 million, which subordinated notes were purchased by the Company, under the “accordion” feature of the debt securitization which allowed, under certain circumstances and subject to the satisfaction of certain conditions, for an increase in the amount of secured and subordinated 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 September 30, 2014, the secured notes of the 2012 Securitization Issuer have an aggregate face amount of $240 million and were issued in four classes. The class A-1 notes have a current face amount of $176 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 $20 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 $23 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 $21 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 $80 million as of September 30, 2014. For further information on this securitization, see “— Liquidity and Capital Resources — Borrowings.”
For the three months ended September 30, 2014, the aggregate interest expense under the securitization was approximately $1.9 million, comprised of stated interest expense (approximately $1.7 million), accreted discount (approximately $0.1 million) and amortized deferred debt issuance costs (approximately $0.1 million). The aggregate accrued interest payable on the notes of the 2012 Securitization Issuer during the third quarter of 2014 was approximately $683,000. At December 31, 2013, aggregate interest expense of approximately $683,000 million remained payable.
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 was 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, which commenced on May 1, 2013. For the three months ended September 30, 2014, the aggregate interest expense on the Convertible Notes was approximately $2.3 million, comprised of stated interest expense (approximately $2.2 million) and amortized deferred debt issuance costs (approximately $0.1 million). The accrued interest payable on the Convertible Notes during the third quarter of 2014 was approximately $3.6 million. At December 31, 2013, aggregate interest expense on the Convertible Notes of approximately $1.4 million remained payable.
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The table below summarizes the components of interest expense for the three months ended September 30, 2014 and 2013:
Professional fees, consisting of legal, valuation, audit and tax fees, were approximately $604,000 for the quarter ended September 30, 2014, compared to approximately $387,000 for the quarter ended September 30, 2013. This increase was primarily the result of the timing of certain professional services fees, which increased by approximately $217,000.
Compensation expenses were approximately $473,000 for the quarter ended September 30, 2014 compared to approximately $310,000 for the quarter ended September 30, 2013, 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 September 30, 2014 and December 31, 2013, respectively, approximately $407,000 and $24,000 of compensation expenses remained payable.
General and administrative expenses, consisting primarily of directors’ fees, insurance, listing fees, transfer agent and custodian fees, market data services, facilities costs and other expenses, were approximately $385,000 for the three months ended September 30, 2014 compared to approximately $541,000 for the same period in 2013. Office supplies, facilities costs and other expenses are allocated to us under the terms of the Administration Agreement.
The net investment income incentive fee for the third quarter of 2014 was approximately $1.7 million compared to $1.8 million in the third quarter of 2013. 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, 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 capital gains incentive fee expense for the quarter ended September 30, 2014 resulted in an
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accrual reversal of approximately $838,000 as a result of the net impact of net unrealized appreciation and net realized losses on our portfolio for the quarter ended September 30, 2014. For the quarter ended September 30, 2013, an accrual of approximately $2.3 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, 2013, such an accrual was not required under the terms of the Investment Advisory Agreement.
For the quarter ended September 30, 2014, we recorded net realized losses on investments of approximately $3.5 million, which represents the loss on the sale of our equity investment in Stone Tower CLO VII, Ltd. of approximately $4.4 and net realized gains from the sale and repayment of several other of our debt and equity investments which totaled approximately $0.9 million.
Based upon the fair value determinations made in good faith by the Board of Directors, during the quarter ended September 30, 2014, we had net unrealized depreciation of approximately $15.3 million, comprised of $4.0 million in gross unrealized appreciation, $23.6 million in gross unrealized depreciation and approximately $4.3 million relating to the reversal of prior period net unrealized depreciation as investments were realized. The most significant changes in net unrealized appreciation and depreciation during the quarter ended September 30, 2014 were as follows (in millions):
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For the quarter ended September 30, 2013, we recorded net realized losses on investments of approximately $1.3 million, which primarily represented the loss on the write-off of our debt and equity investments in GenuTec Business Solutions of approximately $4.7 million. This loss was partially offset by the net realized gains from the sale of several of our CLO and equity investments which totaled approximately $3.5 million.
Based upon the fair value determinations made in good faith by the Board of Directors, during the quarter ended September 30, 2013, we had net unrealized appreciation of approximately $12.7 million, comprised of $22.3 million in gross unrealized appreciation, $8.2 million in gross unrealized depreciation and approximately $1.4 million relating to the reversal of prior period net unrealized appreciation as investments were realized. The most significant changes in net unrealized appreciation and depreciation during the quarter ended September 30, 2013 were as follows (in millions):
Please see “— Portfolio Grading” for more information.
Net investment income for the quarter ended September 30, 2014 and 2013 was approximately $17.5 million and $12.2 million, respectively. This increase was due to an increase in the amount of distributions from the CLO equity investments in our portfolio as well as greater commitment and amendment fee income. These increases were partially offset by higher management fees.
Excluding the impact of the capital gains incentive fee accrual reversal of approximately $838,000, core net investment income for the quarter ended September 30, 2014 was approximately $16.7 million compared to approximately $14.5 million for the same period in 2013.
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Based on weighted-average shares outstanding of 60,268,078 (basic) and 70,301,230 (diluted), the net increase in net assets resulting from net investment income per common share for the quarter ended September 30, 2014 was approximately $0.29 (basic) and $0.28 (diluted), compared to approximately $0.23 per share (basic) and $0.22 (diluted) for the same period in 2013.
Excluding the impact of the capital gains incentive fee accrual reduction, the net increase in net assets resulting from core net investment income per common share for the quarter ended September 30, 2014 would have been $0.28 (basic) and $0.26 (diluted), compared to $0.28 per share (basic) and $0.26 per share (diluted), for the same period in 2013.
Please see “— Supplemental Information Regarding Core Net Investment Income and Core Net Increase in Net Assets Resulting from Operations” below for more information.
We had a net decrease in net assets resulting from operations of approximately $1.3 million for the quarter ended September 30, 2014, compared to a net increase of approximately $23.6 million for the comparable period in 2013. This decrease was attributable to greater net unrealized depreciation and net realized losses, partially offset by an increase in distributions from the CLO equity investments in our portfolio, greater commitment and amendment fee income as well lower capital gains incentive fees.
Due to the anti-dilutive effect on the computation of diluted earnings per share for the three months ended September 30, 2014, the adjustments for interest on convertible senior notes, base management fees, deferred issuance costs and incentive fees as well as adjustments for dilutive effect of convertible notes were excluded from the respective period’s diluted earnings per share computation. Based on weighted-average shares outstanding of 60,268,078 (basic and diluted), we had, for the quarter ended September 30, 2014, a net decrease in net assets resulting from operations per common share of approximately $0.02 (basic and diluted), compared to a net increase in net assets resulting from operations per share of approximately $0.45 (basic) and $0.41 (diluted) for the same period in 2013.
Excluding the impact of the capital gains incentive fee, we would have had a core net decrease in net assets resulting from operations per common share of $0.03 (basic and diluted), compared to a core net increase in net assets resulting from operations of $0.49 per share (basic) and $0.44 (diluted) for the same period in 2013.
Investment income for the nine months ended September 30, 2014 was approximately $88.8 million compared to approximately $74.6 million for the nine months ended September 30, 2013. This increase was due largely to an increase in the amount of distributions from the equity interests in our CLO vehicle investments. The total principal value of income producing debt investments as of September 30, 2014 and September 30, 2013 was approximately $660.3 million and $733.4 million, respectively. For the nine months ended September 30, 2014, investment income consisted of approximately $36.4 million in cash interest from portfolio investments, approximately $2.1 million in amortization of original issue and market discount, approximately $45.0 million in distributions from the equity interest in securitized vehicle investments, as well as approximately $1.0 million in PIK interest income.
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For the nine months ended September 30, 2014, other income of approximately $4.3 million was recorded, including approximately $1.9 million representing fees associated with five of our CLO equity investments, compared to other income of approximately $3.5 million for the nine months ended September 30, 2013. Other income generally includes closing fees, origination fees and amendment fees associated with investments in portfolio companies. Such fees may be paid at closing of our investments or at the time the terms of the underlying loan agreement are revised and are generally fully earned, non-refundable, and non-recurring. Also, the Company may receive fees in connection with CLO equity investments which may be paid over the life of the underlying CLO vehicle; such fees are recognized as income when earned.
Total expenses for the nine months ended September 30, 2014 were approximately $36.1 million, which includes the capital gains incentive fee accrual reversal of approximately $3.9 million.
Expenses before incentive fees, for the nine months ended September 30, 2014, were approximately $35.1 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 $3.4 million from the nine months ended September 30, 2013, attributable primarily to increased investment advisory fees (consisting of the base management fee) and higher interest expense associated with the secured notes issued under our debt securitization transactions and Convertible Notes. Expenses before incentive fees for the nine months ended September 30, 2013 were approximately $31.7 million.
The investment advisory base fee for the nine months ended September 30, 2014 was approximately $15.8 million and the investment advisory fee in the comparable period in 2013 was approximately $13.9 million. The increase in the base management fee is due to an increase in average gross assets. At each of September 30, 2014 and December 31, 2013, respectively, approximately $7.1 million and $7.1million 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 nine months ended September 30, 2014 was approximately $14.8 million, which was directly related to our debt securitization financing transactions as well as our Convertible Note transaction. Interest expense for the nine months ended September 30, 2013 was approximately $14.0 million.
In August 2011, secured 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%). For the nine months ended September 30, 2014, the total interest expense under the securitization was approximately $2.3 million, comprised of stated interest expense (approximately $1.9 million), accreted discount (approximately $119,000) and amortized deferred debt issuance costs (approximately $226,000). The accrued interest payable on the Class A Notes during the third quarter of 2014 was approximately $475,000. At December 31, 2013, interest expense of approximately $476,000 remained payable. For further information on this securitization, see “— Liquidity and Capital Resources — Borrowings.”
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 and May 28, 2013, TICC CLO 2012-1 issued additional secured notes totaling an aggregate of $120 million and subordinated notes totaling an aggregate of $40 million, which subordinated notes were purchased by the Company, under the “accordion” feature of the debt securitization which allowed, under certain circumstances and subject to the satisfaction of certain conditions, for an increase in the amount of secured and subordinated notes. It is not necessary that the Company own all or any of the notes permitted by this feature, which may
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affect the accounting treatment of the debt securitization financing transaction. As of September 30, 2014, the secured notes of the 2012 Securitization Issuer have an aggregate face amount of $240 million and were issued in four classes. The class A-1 notes have a current face amount of $176 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 $20 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 $23 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 $21 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 $80 million as of September 30, 2014. For further information on this securitization, see “— Liquidity and Capital Resources-Borrowings.”
For the nine months ended September 30, 2014, the aggregate interest expense under the securitization was approximately $5.6 million, comprised of stated interest expense (approximately $5.0 million), accreted discount (approximately $0.3 million) and amortized deferred debt issuance costs (approximately $0.3 million). The aggregate accrued interest payable on the notes of the 2012 Securitization Issuer during the third quarter of 2014 was approximately $683,000. At December 31, 2013, aggregate interest expense of approximately $683,000 million remained payable.
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 was 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, which commenced on May 1, 2013. For the nine months ended September 30, 2014, the aggregate interest expense on the Convertible Notes was approximately $6.9 million, comprised of stated interest expense (approximately $6.4 million) and amortized deferred debt issuance costs (approximately $0.5 million). The accrued interest payable on the Convertible Notes during the third quarter of 2014 was approximately $3.6 million. At December 31, 2013, aggregate interest expense on the Convertible Notes of approximately $1.4 million remained payable.
The table below summarizes the components of interest expense for the nine months ended September 30, 2014 and 2013:
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Professional fees, consisting of legal, valuation, audit and tax fees, were approximately $1.6 million for the nine months ended September 30, 2014, compared to approximately $1.5 million for the nine months ended September 30, 2013. This increase was primarily the result of the timing of certain professional services.
Compensation expenses were approximately $1.4 million for the nine months ended September 30, 2014 compared to approximately $0.9 million for the nine months ended September 30, 2013, 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 September 30, 2014 and December 31, 2013, respectively, approximately $407,000 and $24,000 of compensation expenses remained payable.
General and administrative expenses, consisting primarily of directors’ fees, insurance, listing fees, transfer agent and custodian fees, market data services, facilities costs and other expenses, were approximately $1.6 million for the nine months ended September 30, 2014 compared to approximately $1.5 million for the same period in 2013. Office supplies, facilities costs and other expenses are allocated to us under the terms of the Administration Agreement.
The net investment income incentive fee for the nine months ended September 30, 2014 was approximately $4.8 million compared to $4.4 million for the nine months ended September 30, 2013. 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, 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 capital gains incentive fee expense for the nine months ended September 30, 2014 resulted in an accrual reversal of approximately $3.9 million as a result of the impact of net unrealized depreciation and net realized losses on our portfolio for the nine months ended September 30, 2014. For the nine months ended September 30, 2013, an accrual reversal of approximately $0.4 million was recorded under the hypothetical liquidation calculation.
For the nine months ended September 30, 2014, we recorded net realized losses on investments of approximately $12.2 million, which represents the loss on the restructuring of our debt investment in Nextag Inc. of approximately $5.3 million, the loss on the sale of our equity investment in Stone Tower CLO VII, Ltd. of approximately $4.4 million and net realized losses from the sale and repayment of several of our debt and equity investments which totaled approximately $2.5 million.
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Based upon the fair value determinations made in good faith by the Board of Directors, during the nine months ended September 30, 2014, we had net unrealized depreciation of approximately $15.4 million, comprised of $6.7 million in gross unrealized appreciation, $30.4 million in gross unrealized depreciation and approximately $8.3 million relating to the reversal of prior period net unrealized depreciation as investments were realized. The most significant changes in net unrealized appreciation and depreciation during the nine months ended September 30, 2014 were as follows (in millions):
For the nine months ended September 30, 2013, we recorded net realized gains on investments of approximately $7.1 million, which primarily represents the gain on the sale of several of our CLO debt and equity investments which totaled approximately $10.4 million and was partially offset by the loss associated with the write-off of our investment in Genutec Business Solutions of approximately $4.7 million.
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Based upon the fair value determinations made in good faith by the Board of Directors, during the nine months ended September 30, 2013, we had net unrealized depreciation of approximately $0.1 million, comprised of $34.0 million in gross unrealized appreciation, $24.6 million in gross unrealized depreciation and approximately $9.5 million relating to the reversal of prior period net unrealized appreciation as investments were realized. The most significant changes in net unrealized appreciation and depreciation during the nine months ended September 30, 2013 were as follows (in millions):
Net investment income for the nine months ended September 30, 2014 and 2013 was approximately $52.7 million and $38.8 million, respectively. This increase was due primarily to an increase in the amount of distributions from the CLO equity investments in our portfolio and lower capital gains incentive fees. These were partially offset by increased interest expense and higher management fees.
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Excluding the impact of the capital gains incentive fee accrual reversal of approximately $3.9 million, core net investment income for the nine months ended September 30, 2014 was approximately $48.8 million compared to approximately $38.4 million for the same period in 2013.
Based on weighted-average shares outstanding of 58,307,825 (basic) and 68,340,977 (diluted), the net increase in net assets resulting from net investment income per common share for the nine months ended September 30, 2014 was approximately $0.90 (basic) and $0.85 (diluted), compared to approximately $0.77 per share (basic) and $0.74 (diluted) for the same period in 2013.
Excluding the impact of the capital gains incentive fee accrual reduction, the net increase in net assets resulting from core net investment income per common share for the nine months ended September 30, 2014 would have been $0.84 (basic) and $0.80 (diluted), compared to $0.76 per share (basic) and $0.73 per share (diluted), for the same period in 2013.
We had a net increase in net assets resulting from operations of approximately $25.1 million for the nine months ended September 30, 2014, compared to a net increase of approximately $45.9 million for the comparable period in 2013. This decrease was attributable to greater net unrealized depreciation and net realized losses as well as greater interest expense and higher management fees. This decrease was partially offset by an increase in the amount of distributions from the CLO equity investments in our portfolio as well as lower capital gains incentive fees.
Due to the anti-dilutive effect on the computation of diluted earnings per share for the nine months ended September 30, 2014, the adjustments for interest on convertible senior notes, base management fees, deferred issuance costs and incentive fees as well as adjustments for dilutive effect of convertible notes were excluded from the respective period’s diluted earnings per share computation. Based on weighted-average shares outstanding of 58,307,825 (basic and diluted), we had, for the nine months ended September 30, 2014, a net increase in net assets resulting from operations per common share of approximately $0.43 (basic and diluted), compared to a net increase in net assets resulting from operations per share of approximately $0.91 (basic) and $0.85 (diluted) for the same period in 2013.
Excluding the impact of the capital gains incentive fee accrual, we would have had a core net increase in net assets resulting from operations per common share of $0.36 (basic and diluted), compared to a core net increase in net assets resulting from operations of $0.90 per share (basic) and $0.85 per share (diluted) for the same period in 2013.
The following tables provide a reconciliation of net investment income to core net investment income (for the three and nine months ended September 30, 2014 and 2013, respectively):
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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 and nine months ended September 30, 2014 and 2013, respectively):
In addition, the following ratio is presented to supplement the financial highlights included in Note 12 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 and nine months ended September 30, 2014 and 2013, respectively.
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During the nine months ended September 30, 2014, cash and cash equivalents increased from approximately $14.9 million at the beginning of the period to approximately $27.6 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 $15.4 million, largely reflecting purchases of new investments of approximately $355.0 million partially offset by the proceeds from principal repayments and sales of investments of approximately $323.2 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 $15.9 million, reflecting primarily the net proceeds of approximately $66.4 resulting from an equity offering, partially offset by the distribution of dividends.
On March 19, 2014, we completed a public offering of approximately 6.75 million shares of our common stock at a public offering price of $10.14 per share for total gross proceeds of approximately $68.4 million.
We have certain obligations with respect to the investment advisory and administration services we receive. See “— Overview”. We incurred approximately $15.8 million for investment advisory services, excluding pre-incentive net investment income incentive fees, and approximately $1.6 million for administrative services for the nine months ended September 30, 2014.
A summary of our significant contractual payment obligations is as follows as of September 30, 2014. See “Note 4. Borrowings” to our consolidated financial statements.
We currently have no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices.
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 September 30, 2014 consolidated statements of assets and liabilities. For the three and nine months ended September 30, 2014, the Class A note holders were paid interest on the Class A notes of approximately $0.6 million and $1.9 million, respectively. 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.
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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 and May 28, 2013, TICC CLO 2012-1 issued an additional secured notes totaling an aggregate of $120 million and subordinated notes totaling an aggregate of $40 million, which subordinated notes were purchased by the Company, under the “accordion” feature of the debt securitization which allowed, under certain circumstances and subject to the satisfaction of certain conditions, for an increase in the amount of secured and subordinated 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 September 30, 2014, the secured notes of the 2012 Securitization Issuer have an aggregate face amount of $240 million and were issued in four classes. The class A-1 notes have a current face amount of $176 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 $20 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 $23 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 $21 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 $80 million as of September 30, 2014. For the three and nine months ended September 30, 2014, the class A-1, B-1, C-1 and D-1 were paid in aggregate $1.7 million and $5.0 million, respectively.
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. For the three and nine months ended September 30, 2014, note holders were paid interest of $0 and $4.3 million, respectively.
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.
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The following table reflects the cash distributions, including dividends, dividends reinvested and returns of capital, if any, per share that our Board of Directors has declared on our common stock since the beginning of 2011:
We have a number of business relationships with affiliated or related parties, including the following:
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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).
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On October 27, 2014, TICC Funding, LLC (“TICC Funding”), a special purpose vehicle and wholly-owned subsidiary of TICC Capital Corp., entered into a revolving credit facility (the “Facility”) with Citibank, N.A. We used part of the proceeds from the Facility to redeem all of the $101,250,000 secured notes issued by TICC CLO LLC. Subject to certain exceptions, pricing under the Facility is based on the London interbank offered rate (“LIBOR”) for an interest period equal to three months plus a spread of 1.50% per annum. Interest on the loans is payable quarterly in arrears. In connection with the redemption of the secured notes issued by TICC CLO LLC, we will write-off approximately $3.1 million of discount and deferred debt issuance costs.
Pursuant to the terms of the credit agreement governing the Facility, TICC Funding has borrowed, on a revolving basis, the maximum aggregate principal amount of $150,000,000. The Facility is secured by a pool of loans initially consisting of loans sold by TICC CLO to TICC Funding, loans sold and contributed by us to TICC Funding, and loans purchased by TICC Funding from unaffiliated third parties. We may sell and contribute additional loans to TICC Funding from time to time. We will act as the collateral manager of the loans owned by TICC Funding, and have retained a residual interest through our ownership of TICC Funding.
We are subject to financial market risks, including changes in interest rates. As of September 30, 2014, two debt investments in our portfolio were at a fixed rate, and the remaining sixty-five debt investments were at variable rates, representing approximately $8.5 million and $664.0 million in principal debt, respectively. At September 30, 2014, approximately $651.7 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 syndicated-loan investments are generally reset quarterly, whereas our bilateral investment is generally reset annually. 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 investment income as it pertains to our debt portfolio, we have assumed a 1% increase in the underlying five-year Treasury note, the Prime rate or LIBOR, and no other change in our portfolio as of September 30, 2014. We have also assumed outstanding variable rate borrowings of $341.3 million. Under this analysis, net investment income would decrease by $2.3 million on an annualized basis, reflecting 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 net investment income would be an increase of approximately $9.3 million. To the extent that the rate underlying certain investments, as well as our borrowings, is at a historic low, it is not possible for the underlying rate to decrease by 1% or 5%. If the underlying rate decreased to 0%, it would have a minimal effect on net investment income. 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 (or decrease) 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.
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In addition, to illustrate the impact of a change in the underlying interest rate on our total investment income as it pertains to our CLO equity investments, we have assumed a 1% increase in the underlying three-month LIBOR, and no other change in our CLO portfolio, or to any of the credit, spread, default rate or other factors, as of September 30, 2014. Under this analysis, the effect on total investment income would be a decrease of approximately $21.0 million on an annualized basis, reflecting the portfolio assets held within these CLO vehicles which have implied floors that would be unaffected by a 1% change in the underlying interest rate, compared to the debt carried by those CLO vehicles which are at variable rates and which would be affected by a change in three-month LIBOR. If the increase in three-month LIBOR was more significant, such as 5%, the net effect on total investment income would be a decrease of approximately $10.6 million. Although management believes that this analysis is indicative of our existing interest rate sensitivity, it does not adjust for changes in any of the other assumptions that effect the return on CLO equity investments, both positively and negatively (and which could accompany changes to the three-month LIBOR rate), such as default rates, recovery rates, prepayment rates and reinvestment rates, that could affect the net increase (or decrease) 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.
As of September 30, 2014 (the end of the period covered by this report), 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) of the Securities Exchange Act of 1934, as amended). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of such possible controls and procedures.
There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) that occurred during the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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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.
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, 2013, which could materially affect our business, financial condition and/or operating results. The risks described 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 material changes during the nine months ended September 30, 2014 to the risk factors discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2013.
While we did not engage in unregistered sales of equity securities during the nine months ended September 30, 2014, we issued a total of 207,002 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 $1,847,625.
None.
Not applicable.
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The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:
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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.
By:
/s/ Jonathan H. CohenJonathan H. Cohen Chief Executive Officer (Principal Executive Officer)
/s/ Patrick F. Conroy Patrick F. Conroy Chief Financial Officer (Principal Financial and Accounting Officer)
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