10-Q 1 v444963_10q.htm FORM 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended June 30, 2016

 

OR

 

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

 

COMMISSION FILE NUMBER: 1-36447 

 

 

 

 

ALCENTRA CAPITAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Maryland   46-2961489

(State or other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

200 Park Avenue, 7th Floor

New York, NY  10166

(Address of Principal Executive Offices) (Zip Code)

 

(212) 922-8240

(Registrant’s Telephone Number, Including Area Code) 

 

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

 

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

 

Large accelerated filer   ¨   Accelerated filer   x
           
Non-accelerated filer   ¨  (do not check if a smaller reporting company)   Smaller reporting company   ¨
             

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

 

There were 13,490,636 shares of the Registrant’s common stock outstanding as of August 4, 2016.

 

 

 

ALCENTRA CAPITAL CORPORATION

TABLE OF CONTENTS

 

    Page
     
PART I. FINANCIAL INFORMATION    
     
Item 1. Financial Statements    
     
Consolidated Financial Statements of Alcentra Capital Corporation:    
     
Consolidated Statements of Assets and Liabilities as of June 30, 2016 (unaudited) and December 31, 2015   3
     
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2016 (unaudited) and 2015 (unaudited)   4
     
Consolidated Statements of Changes in Net Assets for the Six Months Ended June 30, 2016 (unaudited) and 2015 (unaudited)   5
     
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 (unaudited) and 2015 (unaudited)   6
     
Consolidated Schedule of Investments as of June 30, 2016 (unaudited) and December 31, 2015   7
     
Notes to Unaudited Consolidated Financial Statements   15
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   31
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk   40
     
Item 4. Controls and Procedures   40
     
PART II. OTHER INFORMATION    
     
Item 1. Legal Proceedings   41
     
Item 1A. Risk Factors   41
     
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds   41
     
Item 3. Defaults Upon Senior Securities   41
     
Item 4. Mine Safety Disclosures   41
     
Item 5. Other Information   41
     
Item 6. Exhibits   42
     
SIGNATURES   43

 

 2 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements 

 

Alcentra Capital Corporation and Subsidiary

 

Consolidated Statements of Assets and Liabilities

 

   As of
June 30, 2016
(Unaudited)
   As of
December 31,
2015
 
Assets          
Portfolio investments, at fair value          
Non-controlled, non-affiliated investments, at fair value (cost of $236,246,942 and $219,715,263, respectively)  $228,320,326   $221,349,073 
Non-controlled, affiliated investments, at fair value (cost of $47,758,791 and $56,426,475, respectively)   50,927,904    59,243,999 
Controlled, affiliated investments, at fair value (cost $14,788,295 and $27,289,995, respectively)   14,390,754    15,748,539 
Total of portfolio investments, at fair value (cost $298,794,028 and $303,431,733, respectively)   293,638,984    296,341,611 
Cash   5,038,752    4,866,972 
Dividends and interest receivable   1,517,925    2,607,205 
Receivable for investments sold   1,364,550     
Deferred financing costs   1,801,484    2,183,881 
Deferred tax asset   927,632    1,382,408 
Prepaid expenses and other assets   249,005    113,730 
Total Assets  $304,538,332   $307,495,807 
           
Liabilities          
Credit facility payable  $51,685,846   $63,504,738 
Notes payable (net of deferred note offering costs of $1,413,937 and $1,156,622, respectively)   50,130,063    38,843,378 
Other accrued expenses and liabilities   278,021    271,801 
Directors’ fees payable   72,500    37,025 
Professional fees payable   235,067    481,333 
Interest and credit facility expense payable   974,292    813,222 
Management fee payable   1,283,763    1,302,213 
Income-based incentive fees payable   2,023,682    1,081,797 
Distributions payable   4,586,816    4,595,700 
Unearned structuring fee revenue   1,354,846    689,577 
Income tax liability   825,900    842,812 
Total Liabilities   113,450,796    112,463,596 
           
Commitments and Contingencies (Note 12)          
           
Net Assets          
Common stock, par value $0.001 per share (100,000,000 shares authorized, 13,490,636 and 13,516,766 shares issued and outstanding, respectively)   13,491    13,517 
Additional paid-in capital   197,181,027    197,652,086 
Accumulated net realized gain (loss)   (4,440,768)   2,791,590 
Undistributed net investment income   3,451,048    1,130,327 
Net unrealized appreciation (depreciation) on investments, net of benefit/(provision) for taxes of $37,782 and $534,813 as of June 30, 2016 and December 31, 2015, respectively   (5,117,262)   (6,555,309)
Total Net Assets   191,087,536    195,032,211 
Total Liabilities and Net Assets  $304,538,332   $307,495,807 
           
Net Asset Value Per Share  $14.16   $14.43 

 

See notes to unaudited consolidated financial statements

 

 3 

 

 

Alcentra Capital Corporation and Subsidiary

 

Consolidated Statements of Operations

 

   For the three
months ended June
30, 2016
(Unaudited)
   For the three
months ended June
30, 2015
 (Unaudited)
   For the six months
ended June 30,
2016
(Unaudited)
   For the six months
ended June 30,
2015
(Unaudited)
 
Investment Income:                    
From non-controlled, non-affiliated investments:                    
Interest income from portfolio investments  $5,169,619   $4,286,969   $10,437,162   $8,444,528 
Paid-in-kind interest income from portfolio investments   1,008,525    1,166,440    2,359,613    1,902,164 
Other income from portfolio investments   652,786    295,386    1,571,450    955,282 
Dividend income from portfolio investments       302,874        302,874 
From non-controlled, affiliated investments:                    
Interest income from portfolio investments   785,044    988,949    1,695,367    2,208,005 
Paid in-kind income from portfolio investments   634,025    631,046    1,485,164    1,242,545 
Other income from portfolio investments   1,845,055    20,527    1,950,937    48,885 
From controlled, affiliated investments:                    
Interest income from portfolio investments   382,888    582,229    764,635    1,158,209 
Paid in-kind income from portfolio investments   162,027    206,077    322,032    404,858 
Other income from portfolio investments       27,043        64,843 
Total investment income   10,639,969    8,507,540    20,586,360    16,732,193 
                     
Expenses:                    
Management fees   1,283,763    1,219,963    2,572,799    2,367,968 
Income-based incentive fees   926,158    397,028    1,716,885    1,203,128 
Capital gains incentive fees       434,217        1,435,684 
Professional fees   372,535    170,549    726,537    359,935 
Valuation services   71,061    100,010    142,047    222,915 
Interest and credit facility expense   1,334,510    1,067,118    2,643,454    1,673,006 
Amortization of deferred financing costs   283,805    195,770    548,435    379,257 
Directors’ fees   84,372    76,191    149,295    114,191 
Insurance expense   65,771    68,006    132,381    137,541 
Other expenses   319,648    129,339    451,289    213,512 
Total expenses   4,741,623    3,858,191    9,083,122    8,107,137 
Waiver of capital gains incentive fees               (1,001,467)
Net expenses   4,741,623    3,858,191    9,083,122    7,105,670 
Net investment income   5,898,346    4,649,349    11,503,238    9,626,523 
                     
Realized Gain (Loss) and Net Change in Unrealized Appreciation (Depreciation) From Portfolio Investments
Net realized gain (loss) on:                    
Non-controlled, non-affiliated investments   23,802    (146,703)   1,900,440    (146,449)
Non-controlled, affiliated investments   1,626,964        2,021,697     
Controlled, affiliated investments           (11,154,495)    
Net realized gain (loss) from portfolio investments   1,650,766    (146,703)   (7,232,358)   (146,449)
Net change in unrealized appreciation (depreciation) on:                    
Non-controlled, non-affiliated investments   (3,575,425)   587,925    (9,560,426)   (535,989)
Non-controlled, affiliated investments   (2,228,352)   2,016,324    351,589    3,412,598 
Controlled, affiliated investments   (62,999)   (286,458)   11,143,915    (382,031)
Net change in unrealized appreciation (depreciation) from portfolio investments   (5,866,776)   2,317,791    1,935,078    2,494,578 
Benefit/(Provision) for taxes on unrealized gain on investments   (287,167)   (406,781)   (497,031)   (569,105)
Net realized gain (loss) and net change in unrealized appreciation (depreciation) from portfolio investments   (4,503,171)   1,764,307    (5,794,311)   1,779,024 
Net Increase in Net Assets Resulting from Operations  $1,395,169   $6,413,656   $5,708,927   $11,405,547 
                     
Basic and diluted:                    
Net investment income per share  $0.44   $0.34   $0.85   $0.71 
Earnings per share  $0.10   $0.47   $0.42   $0.84 
Weighted Average Shares of Common Stock Outstanding   13,500,429    13,516,766    13,507,973    13,516,766 
Dividends declared per common share  $0.340   $0.340   $0.680   $0.680 

 

See notes to unaudited consolidated financial statements

 

 4 

 

 

Alcentra Capital Corporation and Subsidiary

 

Consolidated Statements of Changes in Net Assets

 

   For the six months
ended June 30, 2016
(Unaudited)
   For the six months
ended June 30, 2015
(Unaudited)
 
Increase (decrease) in net assets resulting from operations          
Net investment income  $11,503,238   $9,626,523 
Net realized loss on investments   (7,232,358)   (146,449)
Net change in unrealized appreciation (depreciation) on investments   1,935,078    2,494,578 
Benefits/(Provision) for taxes on unrealized gain on investments   (497,031)   (569,105)
Net increase (decrease) in net assets resulting from operations   5,708,927    11,405,547 
           
Capital transactions          
Offering costs   (165,635)   (72,397)
Repurchase of common stock (26,130 and 0 shares, respectively)   (305,450)    
Net increase (decrease) in net assets resulting from capital transactions   (471,085)   (72,397)
           
Distributions to shareholders from:          
Net investment income   (9,182,517)   (9,191,401)
Realized gains        
Total distributions to shareholders   (9,182,517)   (9,191,401)
           
Total increase (decrease) in net assets   (3,944,675)   2,141,749 
           
Net assets at beginning of period   195,032,211    200,989,308 
Net assets at end of period [including Accumulated net investment income of $3,451,048 and $646,968, respectively]  $191,087,536   $203,131,057 

 

See notes to unaudited consolidated financial statements

 

 5 

 

 

Alcentra Capital Corporation and Subsidiary

 

Consolidated Statements of Cash Flows

 

   For the six months
ended June 30, 2016
(Unaudited)
   For the six months
ended June 30, 2015
(Unaudited)
 
Cash Flows from Operating Activities          
Net increase in net assets resulting from operations  $5,708,927   $11,405,547 
           
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used in) operating activities:          
Net realized loss from portfolio investments   7,232,358    146,449 
Net change in unrealized (appreciation) depreciation of portfolio investments   (1,935,078)   (2,494,578)
Deferred tax asset   454,776     
Deferred tax liability       381,367 
Paid in-kind interest income from portfolio investments   (4,166,809)   (3,549,567)
Accretion of discount on debt securities   (203,639)   (276,958)
Purchases of portfolio investments   (69,555,393)   (52,542,290)
Net proceeds from sales/return of capital of portfolio investments   71,331,188    32,061,599 
Amortization of deferred financing costs   548,435    379,257 
(Increase) decrease in operating assets:          
Dividends and interest receivable   1,089,280    168,275 
Receivable for investments sold   (1,364,550)   4,753 
Prepaid expenses and other assets   (135,275)   91,944 
Increase (decrease) in operating liabilities:          
Payable for investments purchased       (8,717)
Other accrued expenses and liabilities   6,220    (252,373)
Directors’ fees payable   35,475    (10,442)
Professional fees payable   (246,266)   108,633 
Interest and credit facility expense payable   161,070    564,046 
Management fee payable   (18,450)   604,295 
Income-based incentive fees payable   941,885    1,203,128 
Capital gains incentive fees payable       434,217 
Unearned structuring fee revenue   665,269    58,420 
Income tax   (16,912)   142,466 
Net cash provided by (used in) operating activities   10,532,511    (11,380,529)
           
Cash Flows from Financing Activities          
Financing costs paid   (166,038)   (112,501)
Offering costs paid   (422,950)   (1,087,164)
Proceeds from credit facility payable   51,500,000    102,452,027 
Repayments of credit facility payable   (63,318,892)   (126,896,443)
Proceeds from notes payable   11,544,000    40,000,000 
Distributions paid to shareholders   (9,191,401)   (9,191,401)
Repurchase of common stock   (305,450)    
Net cash used in financing activities   (10,360,731)   5,164,518 
Increase/(Decrease) in cash and cash equivalents   171,780    (6,216,011)
Cash at beginning of period   4,866,972    10,022,617 
Cash and Cash Equivalents at End of Period  $5,038,752   $3,806,606 
           
Supplemental and non-cash financing activities:          
Cash paid during the period for interest  $2,482,384   $1,857,795 
Accrued offering costs  $2,485   $2,485 
Accrued distributions payable  $4,586,816   $4,595,700 

 

See notes to unaudited consolidated financial statements

 

 6 

 

  

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments

As of June 30, 2016

(Unaudited)

 

Company***  Industry  Interest
Rate
  Base Rate
Floor
  Maturity
Date
  No. Shares/
Principal
Amount
   Cost(1)   Fair Value   % of Net
Assets
 
                             
Investments in Non-Controlled, Non-Affiliated Portfolio Companies — 119.49%        
 
Senior Secured - First Lien — 33.75%        
 
A2Z Wireless Holdings, Inc. (2)  Telecommunications  LIBOR + 9.0% Cash  1.00%  1/15/2021   14,812,500   $14,664,375   $14,812,500    7.75%
Aphena Pharma Solutions (3)  Packaging  8.50% Cash, 2.0% PIK     3/3/2019   1,828,584    1,828,584    1,828,584    0.96%
Black Diamond Rentals  Oil & Gas Services  12% Cash, 5.0% PIK     7/9/2018   5,785,712    5,785,712    5,785,712    3.03%
IGT (2),(4)  Industrial Services  LIBOR + 8.75% Cash, 1.5% PIK  1.00%  12/10/2019   8,041,749    7,974,266    8,041,749    4.21%
NTI Holdings, LLC (2)  Telecommunications  LIBOR + 8.0% Cash  1.00%  3/30/2021   11,936,269    11,734,391    11,734,391    6.14%
NWN Corporation (2)  Technology & IT  LIBOR + 9.0% Cash  1.00%  10/16/2020   4,906,250    4,808,125    4,906,250    2.57%
Stancor, Inc. (2)  Wholesale/Distribution  LIBOR + 8.0%  0.75%  8/19/2019   5,981,818    5,981,818    5,981,818    3.13%
Superior Controls, Inc. (2),(4)  High Tech Industries  LIBOR + 8.75%  1.00%  3/22/2021   10,200,000    10,200,000    10,200,000    5.33%
Triton Technologies (3)  Call Center Services  8.50% Cash, 2.0% PIK     10/23/2018   1,200,000    1,189,891    1,200,000    0.63%
Total Senior Secured - First Lien           64,167,162    64,491,004    33.75%
Senior Secured - Second Lien — 44.45%                       
                                 
Alpine Waste (2)  Waste Services  LIBOR + 9.0% Cash, 2.0% PIK  1.00%  12/30/2020   11,117,571   $11,117,571   $11,117,571    5.82%
Bioventus (2)  Healthcare Services  LIBOR + 10.0% Cash  1.00%  4/10/2020   12,000,000    11,831,706    12,000,000    6.28%
Conisus LLC (2)  Media: Advertising, Printing & Publishing  LIBOR + 8.75% Cash  1.00%  6/23/2021   11,750,000    11,750,000    11,750,000    6.15%
Duke Finance, LLC (2)  Industrial Manufacturing  LIBOR + 9.75% Cash  1.00%  10/28/2022   7,500,000    6,681,562    6,675,000    3.49%
Graco Supply Company   Aerospace  12% Cash     3/17/2021   4,000,000    4,000,000    4,000,000    2.09%
Healthcare Associates of Texas, LLC(4)  Healthcare Services  12.25% Cash     4/30/2022   8,500,000    8,500,000    8,500,000    4.45%
Medsurant Holdings, LLC   Healthcare Services  12.25% Cash     6/18/2021   6,200,000    6,138,000    6,200,000    3.25%
My Alarm Center, LLC (2)  Security  LIBOR + 11.0% Cash  1.00%  7/9/2019   9,500,000    9,500,000    9,500,000    4.97%
Nation Safe Drivers (NSD) (2)  Automotive Business Services  LIBOR + 8.0% Cash  2.00%  9/29/2020   11,721,154    11,721,154    11,883,000    6.22%
Xpress Global Systems, LLC (2)  Transportation Logistics  LIBOR + 10.5%, 2% PIK  1.00%  4/10/2020   5,440,973    5,033,152    3,304,000    1.73%
Total Senior Secured - Second Lien           86,273,145    84,929,571    44.45%
Senior Subordinated — 26.16%                       
                                 
Black Diamond Rentals  Oil & Gas Services  4.0% Cash     7/9/2018   7,968,642   $7,968,642   $3,758,000    1.97%
GST Autoleather  Automotive Business Services  11% Cash, 2.0% PIK     1/11/2021   8,326,382    8,326,382    8,326,382    4.36%
Media Storm, LLC  Media & Entertainment  10% Cash     8/28/2019   2,454,545    2,454,545    2,454,545    1.28%

 

See notes to unaudited consolidated financial statements

 

 7 

 

 

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments (continued)

As of June 30, 2016

(Unaudited)

 

Company***  Industry  Interest
Rate
  Base Rate
Floor
  Maturity
Date
  No. Shares/
Principal
Amount
   Cost(1)   Fair Value   % of Net
Assets
 
                             
Metal Powder Products LLC (2)  Industrial Manufacturing  LIBOR + 12.25% Cash  0.75%  11/5/2021   8,250,000   $8,250,000   $8,250,000    4.32%
Pharmalogic Holdings Corp.  Healthcare Services  12% Cash     9/1/2021   17,200,000    17,200,000    17,200,000    9.00%
QRC Holdings, LLC   High Tech Industries  12.25% Cash     11/19/2021   10,000,000    10,000,000    10,000,000    5.23%
Total Senior Subordinated           54,199,569    49,988,927    26.16%
Equity/Other — 15.13%                       
                                 
Dentistry For Children, Inc., Class A-1 Units(5)  Healthcare Services            2,000,000   $2,203,001   $4,246,000    2.22%
IGT,
Preferred Shares
  Industrial Services  11% PIK         1,110,922    1,110,922         
Common Shares(5)               44,000    44,000         
Preferred AA Shares(5)               270,734    270,734    270,734    0.14%
                     1,425,656    270,734    0.14%
Media Storm, LLC, Preferred Shares(5)  Media & Entertainment            1,216,204    2,346,964    1,037,000    0.54%
Metal Powder Products, LLC Common Shares(5)  Industrial Manufacturing            500,000    500,000    614,000    0.32%
NTI Holdings, LLC Common Shares(5)  Telecommunications            376,515    403,030    682,000    0.36%
Warrants(5)               417,823    224,689    389,000    0.20%
                     627,719    1,071,000    0.56%
Response Team Holdings LLC,
Preferred Shares
  Restoration Services  12% PIK     3/28/2019   3,108,790    3,108,790    4,722,000    2.47%
Warrants(5)               5             
                     3,108,790    4,722,000    2.47%
Superior Controls, Inc., Preferred Shares(5)  High Tech Industries            400,000    400,000    464,000    0.24%
Tunnel Hill (5)(6)  Waste Services            588,570    15,505,936    12,502,090    6.55%
Wholesome Sweeteners, Inc., Common Shares(5)  Food & Beverage            5,000    5,000,000    3,984,000    2.09%
Xpress Global Systems, LLC, Warrants(5)  Transportation Logistics            489,000    489,000         
Total Equity/Other           31,607,066    28,910,824    15.13%
Total Investments in Non-Controlled, Non-Affiliated Portfolio Companies           236,246,942    228,320,326    119.49%
Investments in Non-Controlled, Affiliated Portfolio Companies — 26.65%*                       
                                 
Senior Secured - First Lien — 1.69%                       
                                 
Show Media, Inc.  Media & Entertainment  5.5% Cash, 5.5% PIK     8/10/2017   4,070,295   $3,915,251   $3,231,000    1.69%
Total Senior Secured - First Lien           3,915,251    3,231,000    1.69%

 

See notes to unaudited consolidated financial statements

 

 8 

 

 

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments (continued)

As of June 30, 2016

(Unaudited)

 

Company***  Industry  Interest
Rate
  Base Rate
Floor
  Maturity
Date
  No. Shares/
Principal
Amount
   Cost(1)   Fair Value   % of Net
Assets
 
                             
Senior Secured - Second Lien — 4.22%        
 
Southern Technical Institute, Inc. (2)  Education  LIBOR + 8.0% Cash, 4% PIK  1.00%  12/2/2020   8,073,730   $8,073,730   $8,074,000    4.22%
Total Senior Secured - Second Lien           8,073,730    8,074,000    4.22%
Senior Subordinated — 10.61%                       
                                 
Battery Solutions, Inc.  Environmental/Recycling Services  6% Cash, 8% PIK     11/6/2021   2,129,303   $2,129,303   $2,129,303    1.11%
DBI Holding, LLC  Infrastructure Maintenance  12% Cash, 1% PIK     9/6/2019   9,194,317    9,194,317    9,470,146    4.96%
      13% PIK     9/6/2019   9,119,984    8,775,430    8,666,800    4.54%
                     17,969,747    18,136,946    9.50%
Total Senior Subordinated           20,099,050    20,266,249    10.61%
Equity/Other — 10.13%                       
                                 
Battery Solutions, Inc.,
Class A Units(5)
  Environmental/Recycling Services            5,000,000   $1,058,000   $365,000    0.19%
Class E Units     8% PIK     11/6/2021   3,664,757    3,664,757    3,664,757    1.92%
                     4,722,757    4,029,757    2.11%
DBI Holding, LLC, Warrants(5)  Infrastructure Maintenance        3/6/2024   519,412    519,412    9,203,000    4.82%
Show Media, Inc., Units(5)  Media & Entertainment            4,092,210    3,747,428         
Southern Technical Institute, Inc.,
Class A Units(5)
  Education            3,164,063    2,167,000    1,594,001    0.83%
Preferred Shares     15.75% PIK         4,403,897    4,292,897    4,403,897    2.30%
Warrants(5)           3/30/2026   221,267    221,266    126,000    0.07%
                     6,681,163    6,123,898    3.20%
Total Equity/Other           15,670,760    19,356,655    10.13%
Total Investments in Non-Controlled, Affiliated Portfolio Companies           47,758,791    50,927,904    26.65%
Investments in Controlled, Affiliated Portfolio Companies — 7.53%**                       
                                 
Senior Secured - First Lien — 6.79%                       
                                 
FST Technical Services, LLC  Technology & Telecom  12% Cash, 5% PIK     11/18/2018   12,981,754   $12,981,754   $12,981,754    6.79%
Total Senior Secured - First Lien           12,981,754    12,981,754    6.79%
Equity/Other — 0.74%                       
                                 
FST Technical Services, LLC, Common Shares  Technology & Telecom  9% PIK         1,750,000   $1,806,541   $1,409,000    0.74%
Total Equity/Other           1,806,541    1,409,000    0.74%
Total Investments in Controlled, Affiliated Portfolio Companies           14,788,295    14,390,754    7.53%
Total Investments           298,794,028    293,638,984    153.67%
Liabilities In Excess Of Other Assets                (102,551,448)   (53.67%)
Net Assets               $191,087,536    100.00%

 

See notes to unaudited consolidated financial statements

 

 9 

 

 

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments (continued)

As of June 30, 2016

(Unaudited)

 

  * Denotes investments in which Alcentra Capital Corporation (the “Company”) is an “Affiliated Person” but not exercising a controlling influence, as defined in the 1940 Act, due to beneficially owning, either directly or through one or more controlled companies, more than 5% but less than 25% of the outstanding voting securities of the investment. Transactions during the six months ended June 30, 2016 in these affiliated investments are as follows:

 

   Fair Value at           Interest/   Fair Value at 
   December 31,   Gross   Gross   Dividend/   June 30, 
Name of Issuers  2015   Addition   Reductions   Other Income   2016 
ACT Lighting  $12,753,733   $-   $12,053,793   $2,097,105   $- 
Battery Solutions, Inc.   6,095,154    -    -    291,247    6,159,060 
DBI Holding, LLC   22,894,780    -    -    1,421,045    27,339,946 
Net Access Corporation   -    -    -    109,642    - 
Show Media, Inc.   3,610,000    -    -    276,094    3,231,000 
Southern Technical Institute, Inc.   13,890,332    -    -    936,336    14,197,898 
   $59,243,999   $-   $12,053,793   $5,131,469   $50,927,904 

 

  ** Denotes investments in which the Company is an “Affiliate Person” and exceeding a controlling influence, as defined in the 1940 Act, due to beneficially owning, either directly or through one or more controlled companies, more than 25% of the outstanding voting securities of the investment. Transactions during the six months ended June 30, 2016 in these affiliated and controlled investments are as follows:

 

   Fair value at           Interest/   Fair Value at 
   December 31,   Gross   Gross   Dividend/   June 30, 
Name of Issuers  2015   Addition   Reductions   Other income   2016 
The DRC Group  $1,804,817   $133,333   $6,333,226   $(4,526)  $- 
FST Technical Services, LLC   13,943,722    -    -    1,091,192    14,390,754 
   $15,748,539   $133,333   $6,333,226   $1,086,666   $14,390,754 

 

  *** Pledged as collateral under the Credit Facility with ING Capital LLC.
     
  (1) The cost of debt securities is adjusted for accretion of discount/amortization of premium and interest paid-in-kind on such securities.
  (2) The principal balance outstanding for all floating rate loans is indexed to LIBOR or an alternate base rate (e.g., prime rate), which typically resets semi-annually, quarterly, or monthly at the borrower’s option. The borrower may also elect to have multiple interest reset periods for each loan. For each of these loans, the Company has provided the applicable margin over LIBOR based on each respective credit agreement.
  (3) The investments are portfolio companies of Enhanced Equity Fund, L.P. (“EEF”). EEF has guaranteed the portfolio company’s obligations to the company pursuant to this investment.
  (4) The investment has an unfunded commitment as of June 30, 2016 which is excluded from the presentation (see Note 12).
  (5) Non-income producing security.
  (6) This investment was formerly known as City Carting Holding Company, Inc. On June 3, 2016, City Carting combined with Tunnel Hill Partners, L.P.

 

Abbreviation Legend

PIK - Payment-In-Kind

 

See notes to unaudited consolidated financial statements 

 

 10 

 

Alcentra Capital Corporation and Subsidiary
Consolidated Schedule of Investments
As of December 31, 2015

 

Company***   Industry   Interest Rate   Base
Rate
Floor
  Maturity
Date
  No. Shares/
Principal
Amount
  Cost(1)   Fair Value   % of Net
Assets
Investments in Non-Controlled, Non-Affiliated Portfolio Companies — 113.49%                                                
Senior Secured – First Lien — 36.58%                                                        
A2Z Wireless Holdings, Inc.(2),(3)     Telecommunications       LIBOR + 11.75             3/31/2018       9,885,542     $ 9,722,622     $ 10,379,594       5.32
Aphena Pharma Solutions(4)     Packaging       8.50% Cash, 2.0% PIK               3/3/2019       3,792,657       3,792,657       3,792,657       1.94
Black Diamond Rentals     Oil & Gas Services       12% Cash, 5.0% PIK               7/8/2018       13,127,489       13,127,489       13,127,489       6.73
HealthFusion, Inc.     High Tech Industries       13% Cash               10/7/2018       4,750,000       4,750,000       4,892,913       2.51
IGT(3)     Industrial Services       LIBOR + 9.25% Cash       1.00     12/10/2019       9,168,757       9,080,156       9,168,757       4.70
NTI Holding, LLC(3)     Telecommunications       LIBOR + 8.0% Cash       1.00     3/30/2021       7,835,625       7,757,269       7,835,625       4.02
NWN Corporation(3)     Technology & IT       LIBOR + 9.0% Cash       1.00     10/16/2020       4,968,750       4,869,375       4,968,750       2.55
Response Team Holdings LLC(3)     Restoration Services       LIBOR + 8.50% Cash,
1.00% PIK
      2.00     3/28/2019       9,902,334       9,902,334       10,001,000       5.13
Stancor, Inc.(3)     Wholesale/Distribution       LIBOR + 8.0     0.75     8/19/2019       5,981,818       5,981,818       5,981,818       3.07
Triton Technologies(4)     Call Center Services       8.50% Cash, 2.0% PIK               10/23/2018       1,200,000       1,188,731       1,200,000       0.61
Total Senior Secured – First Lien                                             70,172,451       71,348,603       36.58 % 
Senior Secured – Second Lien — 36.51%                                                        
Alpine Waste(3)     Waste Services       LIBOR + 9.0% Cash,
0.5% PIK
      1.00     12/30/2020       11,047,685     $ 11,047,685     $ 11,047,685       5.66
Bioventus(3)     Healthcare: Orthopedic
Products
      LIBOR + 10.0% Cash       1.00     4/10/2020       12,000,000       11,810,851       12,000,000       6.15
Conisus LLC(3)     Media: Advertising,
Printing & Publishing
      LIBOR + 10.25% Cash       1.00     6/23/2021       11,750,000       11,750,000       11,750,000       6.03
Graco Supply Company     Aerospace       12% Cash               3/17/2021       4,000,000       4,000,000       4,000,000       2.05
Medsurant Holdings, LLC     Healthcare Services       12.25% Cash               6/18/2021       6,200,000       6,138,000       6,200,000       3.18
My Alarm Center, LLC(3)     Security       LIBOR + 11.0% Cash       1.00     7/9/2019       9,500,000       9,500,000       9,500,000       4.87
Nation Safe Drivers (NSD)(3)     Automotive Business
Services
      LIBOR + 8.0     2.00     9/29/2020       11,721,154       11,721,154       11,721,154       6.01
Xpress Global Systems, LLC(3)     Transportation Logistics       LIBOR + 10.5%,
2% PIK
      1.00     4/10/2020       5,454,778       4,986,386       4,986,386       2.56
Total Senior Secured – Second Lien                                     70,954,076       71,205,225       36.51 % 
Senior Subordinated — 26.17%                                                                
Dentistry For Children, Inc.     Healthcare Services       11% Cash, 2.25% PIK               9/1/2017       14,836,488     $ 14,836,488     $ 14,836,488       7.61
GST Autoleather     Automotive Business
Services
      11% Cash, 2.0% PIK               1/11/2021       8,242,827       8,242,827       8,242,827       4.22
Media Storm, LLC     Media & Entertainment       10% Cash               8/28/2019       2,454,545       2,454,545       2,454,545       1.26
Pharmalogic Holdings Corp.     Healthcare Services       12% Cash               9/1/2021       15,500,000       15,500,000       15,500,000       7.95
Radiant Logistics(3)     Transportation Logistics       LIBOR + 11% Cash       1.00     4/2/2021       10,000,000     $ 10,000,000     $ 10,000,000       5.13
Total Senior Subordinated                                             51,033,860       51,033,860       26.17 % 
Equity/Other — 14.23%                                                                
City Carting Holding Company, Inc., Series A Preferred Shares(5)     Waste Services       22% PIK               4/30/2016       8,542,950     $ 8,542,950     $ 8,542,950       4.38
Series B Preferred Shares(5)             18% PIK               4/30/2016       4,152,842       4,152,841       3,152,999       1.62
                                              12,695,791       11,695,949       6.00
Dentistry For Children, Inc.,
Class A-1 Units(6)
    Healthcare Services                               2,000,000       2,203,000       4,136,000       2.12
HealthFusion, Inc., Warrants(6)     High Tech Industries                               418,000       418,000       2,115,000       1.08
IGT, Preferred Shares(6)     Industrial Services                               1,079,684       1,079,684       900,000       0.46
Common Shares(6)                                     44,000       44,000              
                                              1,123,684       900,000       0.46

 
 
See notes to consolidated financial statements

 

 11 

 

Alcentra Capital Corporation and Subsidiary
Consolidated Schedule of Investments – (continued)
As of December 31, 2015

 

Company***   Industry   Interest Rate   Base
Rate
Floor
  Maturity
Date
  No. Shares/
Principal
Amount
  Cost(1)   Fair Value   % of Net
Assets
Media Storm, LLC, Preferred Shares(6)     Media & Entertainment                               1,216,204       2,346,964       795,999       0.41
NTI Holding, LLC Common Shares(6)     Telecommunications                               350,000       350,000       610,000       0.31
Response Team Holdings LLC, Preferred Shares     Restoration Services       12% PIK               3/28/2019       2,928,437       2,928,437       2,928,437       1.50
Warrants(6)                                     5             303,000       0.16
                                              2,928,437       3,231,437       1.66
Wholesome Sweeteners, Inc., Common Shares(6)     Food & Beverage                               5,000       5,000,000       3,788,000       1.94
Xpress Global Systems, LLC, Warrants(6)     Transportation Logistics                               489,000       489,000       489,000       0.25
Total Equity/Other                                             27,554,876       27,761,385       14.23 % 
Total Investments in Non-Controlled, Non-Affiliated Portfolio Companies     219,715,263       221,349,073       113.49 % 
Investments in Non-Controlled, Affiliated Portfolio Companies — 30.38%*                                                
Senior Secured – First Lien — 1.85%                                                        
Show Media, Inc.     Media & Entertainment       5.5% Cash, 5.5% PIK               8/10/2017       3,984,269     $ 3,775,048     $ 3,610,000       1.85
Total Senior Secured – First Lien                                             3,775,048       3,610,000       1.85 % 
Senior Secured – Second Lien — 6.19%                                                        
Southern Technical Institute, Inc.(3)     Education       LIBOR + 9.75%       1.00     12/2/2020       12,061,333     $ 12,061,333     $ 12,061,333       6.19
Total Senior Secured – Second Lien     Cash, 2% PIK                               12,061,333       12,061,333       6.19 % 
Senior Subordinated — 15.09%                                                                
ACT Lighting     Wholesale       12% Cash, 2% PIK               7/24/2019       8,506,733     $ 8,372,671     $ 8,506,733       4.36
              8% PIK               7/24/2020       1,964,331       1,815,097       1,860,000       0.96
                                              10,187,768       10,366,733       5.32
Battery Solutions, Inc.     Environmental/
Recycling Services
      6% Cash, 8% PIK               12/20/2018       2,045,181     $ 2,045,181     $ 2,045,181       1.05
DBI Holding, LLC     Infrastructure
Maintenance
      12% Cash, 4% PIK               9/6/2019       9,032,780       9,032,780       9,032,780       4.63
              16% PIK               9/6/2019       8,444,350       8,059,285       7,980,000       4.09
                                              17,092,065       17,012,780       8.72
Total Senior Subordinated                                             29,325,014       29,424,694       15.09
Equity/Other — 7.25%                                                                
ACT Lighting, Warrants(6)     Wholesale                       7/24/2019       143,000     $ 143,000     $ 2,387,000       1.22
Battery Solutions, Inc., Class A
Units(6)
    Environmental/
Recycling Services
                              5,000,000       1,058,000       530,000       0.27
Class E Units             8% PIK               12/20/2018       3,519,973       3,519,973       3,519,973       1.80
                                              4,577,973       4,049,973       2.07
DBI Holding, LLC, Warrants(6)     Infrastructure
Maintenance
                      3/6/2024       519,412       519,412       5,882,000       3.02
Show Media, Inc., Units(6)     Media & Entertainment                               4,092,210       3,747,428              
Warrants(6)                                                        
                                              3,747,428              
Southern Technical Institute, Inc., Class A Units(6)     Education                               3,164,063       2,167,000       1,828,999       0.94
Warrants(6)                                     110,267       110,267              
                                              2,277,267       1,828,999       0.94
Total Equity/Other                                             11,265,080       14,147,972       7.25 % 
Total Investments in Non-Controlled, Affiliated Portfolio Companies     56,426,475       59,243,999       30.38%  

 
 
See notes to consolidated financial statements

 

 12 

 

Alcentra Capital Corporation and Subsidiary 
Consolidated Schedule of Investments – (continued)
As of December 31, 2015

 

Company***   Industry   Interest Rate   Base
Rate
Floor
  Maturity
Date
  No. Shares/
Principal
Amount
  Cost(1)   Fair Value   % of Net
Assets
Investments in Controlled, Affiliated Portfolio Companies — 8.07%**                                                
Senior Secured – First Lien — 6.92%                                                        
DRC Emergency Services     Disaster Recovery
Services
      10% Cash               1/11/2020       5,000,000     $ 5,000,000     $        
              8% Cash               6/30/2016       1,199,893       1,199,893       835,000       0.43
                                              6,199,893       835,000       0.43
FST Technical Services, LLC     Technology & Telecom       12% Cash, 5.0% PIK               11/18/2018       12,659,722       12,659,722       12,659,722       6.49
Total Senior Secured – First Lien                                             18,859,615       13,494,722       6.92 % 
Equity/Other — 1.15%                                                                
DRC Emergency Services, Preferred Shares     Disaster Recovery
Services
      10% PIK                       7,885,459     $ 6,623,838     $ 969,817       0.49
FST Technical Services, LLC, Common Shares     Technology & Telecom       9% PIK                       1,750,000       1,806,542       1,284,000       0.66
Total Equity/Other                                             8,430,380       2,253,817       1.15 % 
Total Investments in Controlled, Affiliated Portfolio Companies     27,289,995       15,748,539       8.07 % 
Total Investments                                             303,431,733       296,341,611       151.94 % 
Liabilities In Excess Of Other Assets                                             (101,309,400 )      (51.94 )% 
Net Assets                                                   $ 195,032,211       100.00 % 

 

  * Denotes investments in which the Company is an “Affiliated Person” but not exercising a controlling influence, as defined in the 1940 Act, due to beneficially owning, either directly or through one or more controlled companies, more than 5% but less than 25% of the outstanding voting securities of the investment. Transactions during the year ended December 31, 2015 in these affiliated investments are as follows:

  

Name of Issuers   Fair Value at December 31, 2014   Gross
Addition
  Gross Reductions   Interest/ Dividend/ Other income   Fair Value at December 31, 2015
ACT Lighting   $ 10,849,399     $ 321,902     $     $ 1,393,060     $ 12,753,733  
Battery Solutions, Inc.     4,576,000       3,688,255       3,333,333       617,795       6,095,154  
DBI Holding, LLC     16,102,785       1,677,744             2,866,050       22,894,780  
Net Access Corporation     9,412,000             10,729,267       34,748        
Show Media, Inc.     4,596,000       3,639,487       3,423,107       651,883       3,610,000  
Southern Technical Institute, Inc.     15,717,008       61,333             1,372,069       13,890,332  
    $ 61,253,192     $ 9,388,721     $ 17,485,707     $ 6,935,605     $ 59,243,999  

 

  ** Denotes investments in which the Company is an “Affiliate Person” and exceeding a controlling influence, as defined in the 1940 Act, due to beneficially owning, either directly or through one or more controlled companies, more than 25% of the outstanding voting securities of the investment. Transactions during the year ended December 31, 2015 in these affiliated and controlled investments are as follows:

 

Name of Issuers   Fair value at December 31, 2014   Gross
Addition
  Gross Reductions   Interest/ Dividend/ Other income   Fair Value at December 31, 2015
The DRC Group   $ 12,596,562     $ 533,333     $     $ 564,704     $ 1,804,817  
FST Technical Services, LLC     17,459,000       159,722             1,939,967       13,943,722  
    $ 30,055,562     $ 693,055     $     $ 2,504,671     $ 15,748,539  

 

 

  *** Pledged as collateral under the Credit Facility with ING Capital LLC.

 
 
See notes to consolidated financial statements

 

 13 

 

Alcentra Capital Corporation and Subsidiary
Consolidated Schedule of Investments – (continued)
As of December 31, 2015

 

(1)The cost of debt securities is adjusted for accretion of discount/amortization of premium and interest paid-in-kind on such securities.

  

(2)The investment has an unfunded commitment as of December 31, 2015 which is excluded from the presentation (see Note 13).

  

(3)The principal balance outstanding for all floating rate loans is indexed to LIBOR or an alternate base rate (e.g., prime rate), which typically resets semi-annually, quarterly, or monthly at the borrower's option. The borrower may also elect to have multiple interest reset periods for each loan. For each of these loans, the Company has provided the applicable margin over LIBOR based on each respective credit agreement.

  

(4)The investments are portfolio companies of Enhanced Equity Fund, L.P. (“EEF”). EEF has guaranteed the portfolio company's obligations to the company pursuant to this investment.

  

(5)City Carting Holding Company, Inc. is in the process of exploring strategic alternatives. As a result, maturity dates of Preferred Shares have been extended to 4/30/16.

  

(6)Non-income producing security.

  

Abbreviation Legend
PIK — Payment-In-Kind

 
 
See notes to consolidated financial statements

 

 14 

 

 

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

 

1.Organization and Purpose

 

Alcentra Capital Corporation (the “Company”, “Alcentra”, “we”, “us” or “our”) was formed as a Maryland corporation on June 6, 2013 as an externally managed, non-diversified closed-end management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”) and is applying the guidance of Accounting Standards Codification (“ASC”) Topic 946, Financial Services Investment Companies. Alcentra is managed by Alcentra NY, LLC (the “Adviser” or “Alcentra NY”), a registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). In addition, for U.S. federal income tax purposes, Alcentra has elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its tax year ending December 31, 2014.

 

The Company was formed for the purpose of acquiring certain assets held by BNY Mellon-Alcentra Mezzanine III, L.P. (the “Partnership”). The Partnership is a Delaware limited partnership, which commenced operations on May 14, 2010 (the “Commencement Date”). BNY Mellon-Alcentra Mezzanine III (GP), L.P. (the “General Partner”), a Delaware limited liability company, is the General Partner of the Partnership. BNY Mellon-Alcentra Mezzanine Partners (the “Manager”), a division of Alcentra NY and an affiliate of the General Partner, manages the investment activities of the Partnership. Alcentra NY is wholly-owned by BNY Alcentra Group Holdings, Inc. (“Alcentra Group”), which is wholly-owned by The Bank of New York Mellon Corporation.

 

On May 8, 2014 (commencement of operations), the Company acquired all of the assets of the Partnership other than its investment in the shares of common stock and warrants to purchase common stock of GTT Communications (the “Fund III Acquired Assets”) for $64.4 million in cash and $91.5 million in shares of Alcentra’s common stock. Concurrent with Alcentra’s acquisition of the Fund III Acquired Assets from the Partnership, Alcentra also purchased for $29 million in cash certain debt investments (the “Warehouse Portfolio”) from Alcentra Group. The Warehouse Portfolio debt investments were originated by the investment professionals of the Adviser and purchased by Alcentra Group using funds under a warehouse credit facility provided by The Bank of New York Mellon Corporation in anticipation of the initial public offering of Alcentra’s shares of common stock. Except for the $1,500 seed capital, the Company had no assets or operations prior to the acquisition of the investment portfolios of the Partnership and as a result, the Partnership is considered a predecessor entity of the Company.

 

On May 14, 2014, Alcentra completed its initial public offering (the “Offering”), at a price of $15.00 per share. Through its initial public offering the Company sold 6,666,666 shares for gross proceeds of approximately $100 million. Alcentra used $94.2 million of the proceeds from the Offering to fund the purchase of the warehouse portfolio, and the cash portion of the consideration paid to Fund III. On June 6, 2014, Alcentra sold 750,000 shares through the underwriters’ exercise of the overallotment option for gross proceeds of $11,250,000.

 

On April 8, 2014, the Company formed Alcentra BDC Equity Holdings, LLC, a wholly-owned subsidiary for tax purposes. This subsidiary allows us to hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements of a RIC under the Code. The financial statements of this entity are consolidated into the financial statements of Alcentra. All intercompany balances and transactions have been eliminated.

 

The Company’s investment objective is to maximize the total return to its stockholders in the form of current income and capital appreciation through debt and related equity investments in middle-market companies. The Company seeks to achieve its investment objective by originating and investing primarily in private U.S. middle-market companies (typically those with $5.0 million to $15.0 million of EBITDA (earnings before interest, taxes, depreciation and amortization) through first lien, second lien, unitranche and mezzanine debt financing, with corresponding equity co-investments. It sources investments primarily through the network of relationships that the principals of its investment adviser have developed with financial sponsor firms, financial institutions, middle-market companies, management teams and other professional intermediaries.

 

Upon commencement of operations, the Company also entered into an administration and custodian agreement (the “Agreement”) with State Street Bank and Trust Company (the “Administrator”).

 

 15 

 

 

2.Summary of Significant Accounting Policies

 

Basis of Presentation – The accompanying financial statements of the Company have been prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain financial information that is normally included in annual financial statements, including certain financial statement notes, prepared in accordance with GAAP, is not required for interim reporting purposes and have been omitted. In the opinion of management, the unaudited financial results included herein contain all adjustments considered necessary for the fair presentation of financial statements for the interim periods included herein. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending December 31, 2016.

 

The accounting records of the Company are maintained in United States dollars.

 

Alcentra NY purchased the initial 100 shares for $1,500 on March 12, 2014.

 

Use of Estimates The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates and such differences could be material. The most significant estimates relate to the valuation of the Company’s portfolio investments.

 

Consolidation In accordance with Regulation S-X Article 6.03 and ASC Topic 810 - Consolidation, the Company generally will not consolidate its interest in any operating company other than in investment company subsidiaries, certain financing subsidiaries, and controlled operating companies substantially all of whose business consists of providing services to the Company.

 

Portfolio Investment Classification The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “Control Investments” are defined as investments in which the Company owns more than 25% of the voting securities or has rights to maintain greater than 50% of the board representation. Under the 1940 Act, “Affiliate Investments” are defined as investments in which the Company owns between 5% and 25% of the voting securities and does not have rights to maintain greater than 50% of the board representation. “Non-controlled, non-affiliate investments” are defined as investments that are neither Control Investments or Affiliate Investments.

 

Cash At June 30, 2016, cash balances totaling $5.0 million exceeded FDIC insurance protection levels, subjecting the Company to risk related to the uninsured balance. All of the Company’s cash deposits are held by the Administrator and management believes that the risk of loss associated with any uninsured balance is remote.

 

Deferred Financing Costs Deferred financing costs consist of fees and expenses paid in connection with the credit facility (as defined in Note 10) and are capitalized at the time of payment. These costs are amortized using the straight line method, which approximate the effective interest method over the term of the Credit Facility.

 

Deferred Note Offering Costs Deferred Note Offering costs consist of fees and expenses paid in connection with the series of Senior Securities issued (as defined in Note 9) and are capitalized at this time as these fees and expenses were incurred before the issuance commenced. These costs are amortized using the straight line method, which approximate the effective interest method over the term of the Notes.

 

Valuation of Portfolio Investments – Portfolio investments are carried at fair value as determined by the Board of Directors (the “Board’’) of Alcentra.

 

The methodologies used in determining these valuations include:

 

(1) Preferred shares/membership units and common shares/membership units

 

In determining estimated fair value for common shares/membership units and preferred shares, the Company makes assessments of the methodologies and value measurements which market participants would use in pricing comparable investments, based on market data obtained from independent sources as well as from the Company’s own assumptions and taking into account all material events and circumstance which would affect the estimated fair value of such investments. Several types of factors, circumstances and events could affect the estimated fair value of the investments. These include but are not limited to the following:

 

(i) Any material changes in the (a) competitive position of the portfolio investment, (b) legal and regulatory environment within which the portfolio investment operates, (c) management or key managers of the portfolio investment, (d) terms and/or cost of financing available to the portfolio investment, and (e) financial position or operating results of the investment; (ii) pending disposition by the Company of all or a major portfolio investments; and (iii) sales prices of recent public or private transactions in identical or comparable investments.

 

 16 

 

 

One or a combination of the following valuation techniques are used to fair value these investments: Market Approach and Income Approach. The Market Approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Income Approach uses valuation techniques to convert future amounts to a present amount (i.e., discounting estimated future cash flows to a net present value amount).

 

(2) Debt

 

The yield to maturity analysis is used to estimate the fair value of debt, including the unitranche facilities, which are a combination of senior and subordinated debt in one debt instrument. The calculation of yield to maturity takes into account the current market price, par value, coupon interest rate and time to maturity.

 

(3) Warrants

 

Where warrants are considered to be in the money, their incremental value is included within the valuation of the investments.

 

Valuation techniques are applied consistently from period to period, except when circumstances warrant a change to a different valuation technique that will provide a better estimate of fair value. The valuation process begins with each investment being initially valued by the investment professionals of the Company or its Adviser. Preliminary valuation conclusions are then documented and discussed with senior investment professional of the Company, its Adviser. The Investment Committee reviews the valuation of the investment professionals and then determines the fair value of each investment in good faith based on the input of the investment professionals.

 

With respect to the Company’s valuation process, the Board undertakes a similar multi-step valuation process each quarter, as described below:

 

Alcentra’s quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of the Adviser responsible for the portfolio investment;

 

preliminary valuation conclusions will then be documented and discussed with Alcentra’s senior management and the Adviser;

 

the audit committee of the Board then reviews these preliminary valuations;

 

at least once quarterly, independent valuation firms engaged by the Board prepare preliminary valuations on a selected basis and submit the reports to the Board; and

 

the Board then discusses valuations and determine the fair value of each investment in Alcentra’s portfolio in good faith, based on the input of the Adviser, the independent valuation firms and the audit committee.

 

The Board has authorized the engagement of independent valuation firms to provide Alcentra with valuation assistance. Alcentra intends to have independent valuation firms provide it with valuation assistance on a portion of its portfolio on a quarterly basis and its entire portfolio will be reviewed at least annually by independent valuation firms; however, the Board is ultimately and solely responsible for the valuation of its portfolio investments at fair value as determined in good faith pursuant to its valuation policy and a consistently applied valuation process.

 

Because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a readily available market for the securities existed or from those which will ultimately be realized.

 

Organizational and Offering Costs Organization expenses, including reimbursement payments to the Adviser, are expensed on the Company’s Consolidated Statements of Operations. These expenses consist principally of legal and accounting fees incurred in connection with the organization of the Company and have been expensed as incurred. Offering expenses consist principally of underwriter’s fee, legal, accounting, printing fees and other related expenses associated with the filing of a registration statement. Offering costs are offset against proceeds of the offering in paid-in capital in excess of par in the Consolidated Statements of Changes in Net Assets.

 

 17 

 

 

Paid-In-Capital The Company records the proceeds from the sale of its common stock on a net basis to (i) capital stock and (ii) paid in capital in excess of par value, excluding all commissions.

 

Earnings and Net Asset Value Per Share – Earnings per share is calculated based upon the weighted average number of shares of common stock outstanding during the reported period. Net Asset Value per share is calculated using the number of shares outstanding as of the end of the period.

 

Investments – Investment security transactions are accounted for on a trade date basis. Cost of portfolio investments represents the actual purchase price of the securities acquired including capitalized legal, brokerage and other fees as well as the value of interest and dividends received in-kind and the accretion of original issue discounts. Fees may be charged to the issuer by the Company in connection with the origination of a debt security financing. Such fees are reflected as a discount to the cost of the portfolio security and the discount is accreted into income over the life of the related debt security.

 

Original Issue Discount – When the Company receives warrants with a nominal or discounted exercise price upon origination of a debt or preferred stock investment, a portion of the cost basis is allocated to the warrants. When the investment is made concurrently with the sale of a substantial amount of equity, the value of the warrants is based on the sales price. The value of the warrants is recorded as original issue discount (“OID”) to the value of the debt or preferred stock investment and the OID is amortized over the life of the investment.

 

Interest and Dividend Income – Interest is recorded on the accrual basis to the extent that the Company expects to collect such amounts. The Company accrues paid in-kind interest (“PIK”) by recording income and an increase to the cost basis of the related investments. Dividend income is recorded on ex-dividend date. Dividends in-kind are recorded as an increase in cost basis of investments and as income.

 

Investments that are expected to pay regularly scheduled interest in cash are generally placed on non-accrual status when principal or interest cash payments are past due 30 days or more and/or when it is no longer probable that principal or interest cash payments will be collected. Such non-accrual investments are restored to accrual status if past due principal and interest are paid in cash, and in management’s judgment, are likely to continue timely payment of their remaining principal and interest obligations. Cash interest payments received on non-accrual designated investments may be recognized as income or applied to principal depending on management’s judgment. There were no non-accrual investments as of June 30, 2016 and December 31, 2015.

 

Other Income – The Company may also receive structuring or closing fees in connection with its investments. Such upfront fees are accreted into income over the life of the investment.

 

Prepayment penalties received by the Company for debt instruments paid back to the Company prior to the maturity date are recorded as income upon receipt.

 

Income Taxes – The Company has elected to be treated for U.S. federal income tax purposes as a RIC under Subchapter M of the Code, and to operate in a manner so as to qualify for the tax treatment applicable to RIC’s. To obtain and maintain our qualification for taxation as a RIC, the Company must, among other things, meet certain source-of-income and asset diversification requirements. In addition, the Company must distribute to our stockholders, for each taxable year, at least 90% of “investment company taxable income,’’ which is generally net ordinary taxable income plus the excess of realized net short-term capital gains over realized net long-term capital losses, or the Annual Distribution Requirement. As a RIC, the Company generally will not pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that are timely distributed to stockholders as dividends.

 

Alcentra BDC Equity Holdings LLC has elected to be a taxable entity (the “Taxable Subsidiary”). The Taxable Subsidiary permits the Company to hold equity investments in portfolio companies which are “pass through” entities for tax purposes and continue to comply with the “source income” requirements contained in RIC tax provisions of the Code. The Taxable Subsidiary is not consolidated with the Company for income tax purposes and may generate income tax expense, benefit, and the related tax assets and liabilities, as a result of its ownership of certain portfolio investments. The income tax expense, or benefit, if any, and related tax assets and liabilities are reflected in the Company’s consolidated financial statements. For the three and six months ended June 30, 2016, we recognized a provision for income tax on unrealized gain on investments of ($0.3) million and ($0.5) million for the Taxable Subsidiaries, respectively. For the three and six months ended June 30, 2015, we recognized a provision for income tax on unrealized gain on investments of $0.4 million and $0.6 million for the Taxable Subsidiaries, respectively. As of June 30, 2016 and December 31, 2015, $0.9 million and $1.4 million was included in the deferred tax asset on the Consolidated Statements of Assets and Liabilities, respectively.

 

Indemnification – In the normal course of business, the Company enters into contractual agreements that provide general indemnifications against losses, costs, claims and liabilities arising from the performance of individual obligations under such agreements. The Company has had no prior claims or payments pursuant to such agreements. The Company’s individual maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, based on management’s experience, the Company expects the risk of loss to be remote.

 

 18 

 

 

Recently Issued Accounting Standards - In April 2015, FASB issued ASU 2015-03, Interest – Imputation of interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. This guidance is effective for annual and interim periods beginning after December 15, 2015. The Company adopted this guidance as of January 1, 2016. The new guidance will be applied retrospectively to each prior period presented.

   

In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). The update eliminates the requirement to categorize investments in the fair value hierarchy if their fair value is measured at net asset value (NAV) per share (or its equivalent) using the practical expedient in the FASB’s fair value measurement guidance. Public companies are required to apply ASU 2015-07 retrospectively for interim and annual reporting periods beginning after December 15, 2015. Accordingly, the Company has evaluated the impact of ASU 2015-07 on its consolidated financial statements and determined that the adoption of ASU 2015-07 has not had a material impact on our consolidated financial statements.

 

3.Fair Value of Portfolio Investments

 

The Company accounts for its investments in accordance with FASB Accounting Standards Codification Topic 820 (“ASC Topic 820”), Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value. ASC Topic 820 established a fair value hierarchy which prioritizes and ranks the level of market price observability used in measuring investments at fair value.

 

Market price observability is impacted by a number of factors, including the type of investment, the characteristics specific to the investment, and the state of the marketplace (including the existence and transparency of transactions between market participants). Investments with readily-available actively quoted prices or for which fair value can be measured from actively-quoted prices in an orderly market will generally have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

 

Investments measured and reported at fair value are classified and disclosed in one of the following categories (from highest to lowest) based on inputs:

 

Level 1 – Quoted prices (unadjusted) are available in active markets for identical investments that the Company has the ability to access as of the reporting date. The type of investments which would generally be included in Level 1 includes listed equity securities and listed derivatives. As required by ASC Topic 820, the Company, to the extent that it holds such investments, does not adjust the quoted price for these investments, even in situations where the Company holds a large position and a sale could reasonably impact the quoted price.

 

Level 2 – Pricing inputs are observable for the investments, either directly or indirectly, as of the reporting date, but are not the same as those used in Level 1. Fair value is determined through the use of models or other valuation methodologies.

 

Level 3 – Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant judgment or estimation by the Company. The types of investments which would generally be included in this category include debt and equity securities issued by private entities.

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given investment is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.

 

The following tables summarize the levels in the fair value hierarchy into which the Company’s financial instruments are categorized as of June 30, 2016 and December 31, 2015:

 

 19 

 

 

The fair values of our investments disaggregated into the three levels of the fair value hierarchy based upon the lowest level of significant input used in the valuation as of June 30, 2016 are as follows:

 

   Level 1   Level 2   Level 3   Total 
Senior Secured - First Lien  $   $   $80,703,758   $80,703,758 
Senior Secured - Second Lien           93,003,571    93,003,571 
Subordinated Debt           70,255,176    70,255,176 
Equity/Other           49,676,479    49,676,479 
Total Investments  $   $   $293,638,984   $293,638,984 

 

The fair values of our investments disaggregated into the three levels of the fair value hierarchy based upon the lowest level of significant input used in the valuation as of December 31, 2015 are as follows:

 

   Level 1   Level 2   Level 3   Total 
Senior Secured - First Lien  $   $   $88,453,325   $88,453,325 
Senior Secured - Second Lien           83,266,558    83,266,558 
Subordinated Debt           80,458,554    80,458,554 
Equity/Other           44,163,174    44,163,174 
Total Investments  $   $   $296,341,611   $296,341,611 

 

The changes in investments classified as Level 3 are as follows for the six months ended June 30, 2016 and June 30, 2015.

 

As of June 30, 2016:

 

   Senior   Senior             
   Secured -   Secured -   Senior   Equity/     
   First Lien   Second Lien   Subordinated   Other   Total 
Balance as of January 1, 2016  $88,453,325   $83,266,558   $80,458,554   $44,163,174   $296,341,611 
Amortized discounts/premiums   73,466    76,331    53,842    -    203,639 
Paid in-kind interest   1,165,969    207,009    1,130,887    1,662,944    4,166,809 
Net realized gain (loss)   (5,309,022)   11,658    269,964    (2,204,958)   (7,232,358)
Net change in unrealized appreciation (depreciation)   3,993,380    (1,594,453)   (4,143,123)   3,679,274    1,935,078 
Purchases   30,984,253    15,340,499    27,918,637    7,355,926    81,599,315 
Sales/Return of capital   (38,657,613)   (4,304,031)   (35,433,585)   (4,979,881)   (83,375,110)
Balance as of June 30, 2016  $80,703,758   $93,003,571   $70,225,176   $49,676,479   $293,638,984 
                          
Net change in unrealized appreciation (depreciation) from investments still held as of June 30, 2016  $(462,764)  $(1,594,452)  $(3,964,158)  $973,410   $(5,049,964)

 

As of June 30, 2015:

 

   Senior   Senior             
   Secured -   Secured -   Senior   Equity/     
   First Lien   Second Lien   Subordinated   Other   Total 
Balance as of January 1, 2015  $97,395,708   $46,748,798   $54,986,207   $51,343,141   $250,473,854 
Amortized discounts/premiums   180,877    37,952    58,129    -    276,958 
Paid in-kind interest   356,063    22,890    1,388,337    1,782,277    3,549,567 
Net realized gain (loss)   2,876    94,675    -    (244,000)   (146,449)
Net change in unrealized appreciation (depreciation)   3,346,883    (207,627)   676,804    (1,161,482)   2,654,578 
Purchases   8,988,494    17,297,356    19,500,000    6,756,440    52,542,290 
Sales/Return of capital   (13,228,266)   (7,500,000)   (3,333,333)   -    (24,061,599)
Balance as of June 30, 2015  $97,042,635   $56,494,044   $73,276,144   $58,476,376   $285,289,199 
                          
Net change in unrealized appreciation (depreciation) from investments still held as of June 30, 2015  $3,346,883   $(207,627)  $676,804   $(1,161,482)  $2,654,578 

 

 20 

 

 

The following is a summary of the quantitative inputs and assumptions used for items categorized in Level 3 of the fair value hierarchy as of June 30, 2016 and December 31, 2015, respectively.

 

As of June 30, 2016:

 

   Fair Value at         Range     
Assets at Fair Value  June 30,
2016
   Valuation
Technique
  Unobservable
Input
  of
Inputs
   Weighted
Average
 
                      
Senior Secured - First Lien  $80,703,758   Yield to Maturity  Comparable Market Rate   8.75% - 17.0%   11.32%
                      
Senior Secured - Second Lien  $93,003,571   Yield to Maturity  Comparable Market Rate   9.6% - 19.7%   12.57%
                      
Senior Subordinated  $70,255,176   Yield to Maturity  Comparable Market Rate   4.0% - 16.0%   12.84%
                      
Preferred Ownership  $14,562,388   Market Approach  Enterprise Value/LTM EBITDA Multiple   4.00x - 13.00x   7.88x
                      
Common Ownership/Common Warrants  $35,114,091   Market Approach  Enterprise Value/LTM EBITDA Multiple   4.00x - 15.00x   13.40x
                      
Total  $293,638,984                 

 

As of December 31, 2015:

 

   Fair Value at         Range     
Assets at Fair Value  December 31,
2015
   Valuation
Technique
  Unobservable
Input
  of
Inputs
   Weighted
Average
 
                      
Senior Secured - First Lien  $88,453,325   Yield to Maturity  Comparable Market Rate   8.75% - 17.0%   12.29%
                      
Senior Secured - Second Lien  $83,266,558   Yield to Maturity  Comparable Market Rate   10.0% - 13.5%   11.28%
                      
Senior Subordinated  $80,458,554   Yield to Maturity  Comparable Market Rate   8.0% - 26.2%   13.80%
                      
Preferred Ownership  $20,810,175   Market Approach  Enterprise Value/LTM EBITDA Multiple   

6.84x - 8.06

x   7.45x
                      
Common Ownership/Common Warrants  $23,352,999   Market Approach  Enterprise Value/LTM EBITDA Multiple   

8.97x - 9.14

x   9.05x
                      
Total  $296,341,611                 

 

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4.Share Transactions

 

On January 18, 2016, the Board of Directors approved a $5.0 million open market stock repurchase program. Pursuant to the program, we are authorized to repurchase up to $5.0 million in the aggregate of our outstanding common stock in the open market. The timing, manner, price and amount of any share repurchases will be determined by our management, in its discretion, based upon the evaluation of economic conditions, stock price, applicable legal and regulatory requirements and other factors. The open market stock repurchase program will be in effect until the earlier of (i) January 18, 2017 or (ii) the repurchase of $5.0 million of the Company’s common stock. The program does not require us to repurchase any specific number of shares and we cannot assure that any shares will be repurchased under the program. The program may be suspended, extended, modified or discontinued at any time.

 

The following table sets forth the number of shares of common stock repurchased by the Company under its share repurchase program for the six months ended June 30, 2016:

 

Month Ended   Shares Repurchased   Repurchase Price Per Share   Aggregate Consideration for Repurchased Shares 
 March 31, 2016    10,509    $10.7700 - $11.2444   $115,828 
 May 31, 2016    9,547    $11.5596 - $12.3333    114,762 
 June 30, 2016    6,074    $12.2335 - $12.3586    74,860 
      26,130        $305,450 

 

For the six months ended June 30, 2015 there was no common stock repurchased.

 

5. Distributions

 

The Company intends to make quarterly distributions of available net investment income determined on a tax basis to its stockholders. Distributions to stockholders are recorded on the record date. The amount, if any, to be distributed to stockholders is determined by the Board each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, will be distributed at least annually. If we do not distribute (or are not deemed to have distributed) at least 98% of our annual ordinary income in the calendar year earned, we will generally be required to pay an excise tax equal to 4% of the amount by which 98% of our annual ordinary income exceed the distributions from such taxable income for the year. To the extent that we determine that our estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, we accrue excise taxes, if any, on estimated excess taxable income. As of June 30, 2016 and June 30, 2015, we accrued $75,000 and $0, respectively, for any unpaid potential excise tax liability and have included these amounts within income tax liability on the accompanying Consolidated Statements of Assets and Liabilities.

 

 22 

 

 

The following table reflects the Company’s dividends declared and paid on its common stock for the six months ended June 30, 2016:

 

Date Declared  Record Date  Payment Date  Amount Per Share 
March 7, 2016  March 31, 2016  April 7, 2016  $0.340 
May 5, 2016  June 30, 2016  July 7, 2016  $0.340 

 

The following table reflects the Company’s dividends declared and paid on its common stock for the six months ended June 30, 2015:

 

Date Declared  Record Date  Payment Date  Amount Per Share 
March 10, 2015  March 31, 2015  April 6, 2015  $0.340 
May 11, 2015  June 30, 2015  July 6, 2015  $0.340 

 

The Company has adopted a dividend reinvestment plan (“DRIP”) that provides for the reinvestment of dividends on behalf of its stockholders, unless a stockholder has elected to receive dividends in cash. As a result, if the Company declares a cash dividend, the stockholders who have not “opted out” of the DRIP no later than the record date will have their cash dividend automatically reinvested into additional shares of the Company’s common stock. The Company has the option to satisfy the share requirements of the DRIP through the issuance of new shares of common stock or through open market purchases of common stock by the DRIP plan administrator. Newly issued shares are valued based upon the final closing price of the common stock on the NASDAQ Global Select Market on the dividend payment date. Shares purchased in the open market to satisfy the DRIP requirements will be valued upon the average price of the applicable shares purchased by the Plan Administrator, before any associated brokerage or other costs.

 

6.Related Party Transactions

 

Management Fee

 

Under the Investment Advisory Agreement, the Company has agreed to pay Alcentra NY an annual base management fee based on its gross assets as well as an incentive fee based on its performance. The base management fee is calculated at an annual rate as follows: 1.75% of its gross assets (i.e., total assets held before deduction of any liabilities), including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents (such as investments in U.S. Treasury Bills), if its gross assets are below $625 million; 1.625% if its gross assets are between $625 million and $750 million; and 1.5% if its gross assets are greater than $750 million. The various management fee percentages (i.e. 1.75%, 1.625% and 1.5%) would apply to the Company’s entire gross assets in the event its gross assets exceed the various gross asset thresholds. The base management fee will be payable quarterly in arrears and shall be calculated based on the average value of the Company’s gross assets, excluding cash and cash equivalents, at the end of the two most recently completed calendar quarters.

 

The incentive fee consists of two parts. The first part, which is calculated and payable quarterly in arrears, equals 20% of the Company’s “pre-incentive fee net investment income’’ for the immediately preceding quarter, subject to a hurdle rate of 2% per quarter (8% annualized), and is subject to a “catch-up’’ feature. The second part is calculated 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 aggregate cumulative realized capital gains from inception through the end of each calendar year, computed net of aggregate cumulative realized capital losses and aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid capital gain incentive fees. 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, managerial assistance and consulting fees or other fees that the Company receives from portfolio companies) accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable for administrative services under the Investment Advisory Agreement, and any interest expense and any distributions paid on any issued and outstanding preferred stock, but excluding the incentive fee and any offering expenses and other expenses not charged to operations but excluding certain reversals to the extent such reversals have the effect of reducing previously accrued incentive fees based on the deferral of non-cash interest). Pre-incentive fee net investment income excludes, 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 until the Company has received such income in cash.

 

For the three and six months ended June 30, 2016, the Company recorded expenses for base management fees of $1,283,763 and $2,572,799, respectively, of which $0 and $0, respectively, was waived by the Adviser and $1,283,763 was payable at June 30, 2016. For the three and six months ended June 30, 2015, the Company recorded expenses for base management fees of $1,219,963 and $2,367,968, respectively, of which $0 and $0, respectively, was waived by the Adviser and $1,219,963 was payable at June 30, 2015.

 

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The Adviser agreed to waive its fees (base management and incentive fee), without recourse against or reimbursement by the Company, through the quarter ended June 30, 2015 and to the extent required in order for us to earn a quarterly net investment income to maintain a targeted dividend payment on shares of common stock outstanding on the relevant dividend payment dates of 9.0% (to be paid on a quarterly basis). For the three and six months ended June 30, 2016, the Company incurred income-based incentive fees of $926,158 and $1,716,885, respectively, of which none was waived by the Adviser. For the three and six months ended June 30, 2015, the Company incurred income-based incentive fees of $397,028 and $1,203,128, respectively, of which none was waived by the Adviser. For the three and six months ended June 30, 2016, the Company incurred capital gains incentive fees of $0 and $0, respectively, of which $0 and $0, respectively, was waived by the Adviser. For the three and six months ended June 30, 2015, the Company incurred capital gains incentive fees of $434,217 and $1,435,684, respectively, of which $0 and $1,001,467, respectively, was waived by the Adviser.

 

7.Directors’ Fees

 

The independent directors of the Company each receive an annual fee of $40,000. They also receive $2,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending in person each board of directors meeting and $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each board meeting telephonically. They also receive $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with each committee meeting attended in person and each telephonic committee meeting. The chairman of the audit committee, the nominating and corporate governance committee and the compensation committee will receive an annual fee of $10,000, $5,000 and $5,000, respectively. The Company has obtained directors’ and officers’ liability insurance on behalf of its directors and officers.

 

For the three and six months ended June 30, 2016 the Company recorded directors’ fee expense of $84,372 and $149,295, respectively, of which $72,500 was payable at June 30, 2016. For the three and six months ended June 30, 2015 the Company recorded directors’ fee expense of $76,191 and $114,191, respectively, of which $75,250 was payable at June 30, 2015.

 

8.Purchases and Sales (Investment Transactions)

 

Investment purchases, sales and principal payments/paydowns are summarized below for the six months ended June 30, 2016 and June 30, 2015.

 

   For the six months ended June 30, 
   2016   2015 
Investment purchases, at cost (including PIK interest and dividends)  $73,722,202   $44,542,290 
Investment sales, proceeds (including Principal payments/paydown proceeds)   71,331,188    24,061,599 

 

9.Alcentra Capital InterNotes®

 

On January 30, 2015, the Company entered into a Selling Agent Agreement with Incapital LLC, as purchasing agent for our issuance of $40.0 million of Alcentra Capital InterNotes®. On January 25, 2016, the Company entered into an additional Selling Agent Agreement with Incapital LLC, as purchasing agent for the Company’s issuance of up to $15 million of Alcentra Capital InterNotes®.

 

These notes are direct unsecured obligations and each series of notes will be issued by a separate trust (administered by U.S. Bank). These notes bear interest at fixed interest rates and offer a variety of maturities no less than twelve months from the original date of issuance.

 

During the six months ended June 30, 2016, the Company issued $11.5 million in aggregate principal amount of the Alcentra Capital InterNotes® for net proceeds of $11.3 million. These notes were issued with a stated interest rate ranging from 6.375% to 6.50%. These notes mature between February 15, 2021 and June 15, 2021. For the three and six months ended June 30, 2016, the Company borrowed an average of $46.1 and $44.6 million with a weighted average interest rate of 6.43% and 6.43%, respectively.

 

 24 

 

 

The following table summarizes the Alcentra Capital InterNotes® issued and outstanding during the six months ended June 30, 2016.

 

Tenor at  Principal   Interest        
Origination  Amount   Rate   Weighted Average    
(in years)  (000’s omitted)   Range   Interest Rate   Maturity Date Range
5  $50,126    6.25% - 6.50%    6.39%  February 15, 2020 - June 15, 2021
7   1,418    6.50% - 6.75%    6.63%  January 15, 2022 - April 15, 2022
   $51,544              

 

During the six months ended June 30, 2016, we redeemed $0 aggregate principal amount of our Alcentra Capital InterNotes®. The net proceeds of this offering were used to repay outstanding indebtedness under the Credit Facility.

 

In connection with the issuance of the Alcentra Capital InterNotes®, we incurred $1.01 million of fees which are being amortized over the term of the notes and are included within deferred financing costs on the Consolidated Statements of Assets and Liabilities as of June 30, 2016. During the six months ended June 30, 2016 the Company recorded $1.59 million of interest costs and amortization of offering costs on the Alcentra Capital InterNotes® as interest expense.

 

10.Credit Facility/Line of Credit

 

On May 8, 2014, the Company entered into a senior secured revolving credit agreement (the “Credit Facility”) with ING Capital LLC (“ING”), as administrative agent, collateral agent and lender to provide liquidity in support of its investment and operational activities. The Credit Facility has an initial commitment of $80 million with an accordion feature that allows for an increase in the total commitments up to $160 million, subject to certain conditions and the satisfaction of specified financial covenants. The Credit Facility was amended on August 11, 2015 to increase the accordion feature to allow for a future increase of the total commitments up to $250 million, subject to satisfaction of certain conditions at the time of any such future increase. As amended, the Credit Facility has a maturity date of August 11, 2020 and bears interest, at our election, at a rate per annum equal to (i) 2.25% plus the highest of a prime rate, the Federal Funds rate plus 0.5%, three month LIBOR plus 1%, and zero or (ii) 3.25% plus the one, three or six month LIBOR rate, as applicable.

 

On March 2, 2016, we amended certain provisions of the Credit Facility relating to the treatment of approximately $38.6 million in aggregate principal amount of outstanding InterNotes that mature prior to the Credit Facility. Among other things, the amendments to the Credit Facility provide that, in the nine-month period prior to the maturity of these particular InterNotes, which mature between February 15 and April 15, 2020, our ability to borrow under the Credit Facility will be reduced by and in the amount of such InterNotes still outstanding during such time. The Credit Facility is secured primarily by the Company’s assets. Costs of $3.5 were incurred in connection with obtaining and amending the Credit Facility, which have been recorded as deferred financing costs on the Consolidated Statements of Assets and Liabilities and are being amortized over the life of the Credit Facility.

 

Amounts available to borrow under the Credit Facility are subject to a minimum borrowing /collateral base that applies an advance rate to certain investments held by the Company. The Company is subject to limitations with respect to the investments securing the Credit Facility, including, but not limited to, restrictions on sector concentrations, loan size, portfolio company leverage which may affect the borrowing base and therefore amounts available to borrow.

 

The Company pays a commitment fee between 0.5% and 1.0% per annum based on the size of the unused portion of the Credit Facility. This fee is included in interest expense on the Company’s Consolidated Statements of Operations.

 

The Company has made customary representations and warranties and is required to comply with various covenants and reporting requirements. These covenants are subject to important limitations and exceptions that are described in the documents governing the Credit Facility. As of June 30, 2016, the Company was in compliance in all material respects with the terms of the Credit Facility.

 

As of June 30, 2016 and December 31, 2015 the Company had United States dollar borrowings of $51.7 million and $63.5 million outstanding under the Credit Facility, respectively. For the three and six months ended June 30, 2016, the Company borrowed an average of $43.4 million and $49.3 million with a weighted average interest rate of 3.83% and 3.79%, respectively. For the three and six months ended June 30, 2015, the Company borrowed an average of $43.4 million and $49.6 million with a weighted average interest rate of 3.53% and 3.51%, respectively.

 

11.Market and Other Risk Factors

 

At June 30, 2016, the Company’s portfolio investments are comprised of non-publicly-traded securities. The non-publicly-traded securities trade in an illiquid marketplace. The portfolio is concentrated in the twenty-three industries listed in Note 13. Risks affecting these industries include, but are not limited to, increasing competition, rapid changes in technology, government actions and changes in economic conditions. These risk factors could have a material effect on the ultimate realizable value of the Company’s investments.

 

 25 

 

 

Economic conditions in 2016 continued to impact revenues and operating cash flows for most businesses and continued to impact the lending markets, leaving many businesses unable to borrow or refinance debt obligations. These restrictions on obtaining available financing, coupled with the continuing economic slowdown, have resulted in a low volume of purchase and sale transactions across all industries, which have limited the amount of observable inputs available to the Company in estimating the fair value of the Company’s investments. The Company estimates the fair value of investments for which observable market prices in active markets do not exist based on the best information available, which may differ significantly from values that would have otherwise been used had a ready market for the investments existed and the differences could be material.

 

Market conditions may deteriorate, which may negatively impact the estimated fair value of the Company’s investments or the amounts which are ultimately realized for such investments.

 

The above events are beyond the control of the Company and cannot be predicted. Furthermore, the ability to liquidate investments and realize value is subject to significant limitations and uncertainties. There may also be risk associated with the concentration of investments in one geographic region or in certain industries.

 

12.Commitments and Contingencies

 

In the normal course of business, the Company enters into contracts that contain a variety of representations and warranties and which provide general indemnifications. In addition, the Company has agreed to indemnify its officers, directors, employees, agents or any person who serves on behalf of the Company from any loss, claim, damage, or liability which such person incurs by reason of his performance of activities of the Company, provided they acted in good faith. The Company expects the risk of loss related to its indemnifications to be remote.

 

The Company’s investment portfolio may contain debt investments that are in the form of lines of credit and unfunded delayed draw commitments, which require the Company to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of June 30, 2016 and December 31, 2015, the Company had $4.1 million and $1.0 million in unfunded commitments under loan and financing agreements, respectively. As of June 30, 2016 and December 31, 2015, the Company’s unfunded commitment under loan and financing agreements are presented below.

 

   As of 
   June 30, 2016   December 31, 2015 
         
A2Z Wireless Holdings, Inc.  $-   $1,004,270 
Superior Controls, Inc.   2,300,000    - 
Healthcare Associates of Texas, LLC   1,300,000    - 
IGT   500,000    - 
Total  $4,100,000   $1,004,270 

 

 26 

 

 

13.Classification of Portfolio Investments

 

As of June 30, 2016, the Company’s portfolio investments were categorized as follows:

 

Industry  Cost   Fair Value   % of
Net
Assets*
 
Healthcare Services  $45,872,707   $48,146,000    25.20%
Telecommunications   27,026,485    27,617,891    14.46%
Infrastructure Maintenance   18,489,159    27,339,946    14.31%
Waste Services   26,623,507    23,619,661    12.36%
High Tech Industries   20,600,000    20,664,000    10.81%
Automotive Business Services   20,047,536    20,209,382    10.58%
Industrial Manufacturing   15,431,562    15,539,000    8.13%
Technology & Telecom   14,788,295    14,390,754    7.53%
Education  14,754,893   14,197,898    7.43%
Media: Advertising, Printing & Publishing   11,750,000    11,750,000    6.15%
Oil & Gas Services   13,754,354    9,543,712    4.99%
Security   9,500,000    9,500,000    4.97%
Industrial Services   9,399,922    8,312,483    4.35%
Media & Entertainment   12,464,188    6,722,545    3.52%
Environmental/Recycling Services   6,852,060    6,159,060    3.22%
Wholesale/Distribution   5,981,818    5,981,818    3.13%
Technology & IT   4,808,125    4,906,250    2.57%
Restoration Services   3,108,790    4,722,000    2.47%
Aerospace   4,000,000    4,000,000    2.09%
Food & Beverage   5,000,000    3,984,000    2.08%
Transportation Logistics   5,522,152    3,304,000    1.73%
Packaging   1,828,584    1,828,584    0.96%
Call Center Services   1,189,891    1,200,000    0.63%
Total  $298,794,028   $293,638,984    153.67%
                
Geographic Region               
South  $84,330,323   $77,621,093    40.62%
Eastern   69,166,422    73,879,399    38.66%
Mid West   48,886,489    48,778,333    25.53%
South East   46,244,233    47,850,584    25.04%
North East   16,598,016    16,770,250    8.78%
South West   14,788,295    14,390,754    7.53%
West   18,780,250    14,348,571    7.51%
Total  $298,794,028   $293,638,984    153.67%
                
Investment Type               
Senior Secured - Second Lien  $94,346,875   $93,003,571    48.67%
Senior Secured - First Lien   81,064,167    80,703,758    42.23%
Senior Subordinated   74,298,619    70,255,176    36.77%
Equity/Other   49,084,367    49,676,479    26.00%
Total  $298,794,028   $293,638,984    153.67%

 

*Fair value as a percentage of Net Assets

 

 27 

 

 

As of December 31, 2015, the Company’s portfolio investments were categorized as follows:

 

Industry  Cost   Fair Value   % of
Net
Assets*
 
Healthcare Services  $38,677,488   $40,672,488    20.85%
Infrastructure Maintenance   17,611,477    22,894,780    11.74%
Waste Services   23,743,476    22,743,634    11.66%
Automotive Business Services   19,963,981    19,963,981    10.24%
Telecommunications   17,829,891    18,825,219    9.65%
Transportation Logistics   15,475,386    15,475,386    7.93%
Technology & Telecom   14,466,264    13,943,722    7.15%
Education   14,338,600    13,890,332    7.12%
Restoration Services   12,830,771    13,232,437    6.78%
Oil & Gas Services   13,127,489    13,127,489    6.73%
Wholesale   10,330,768    12,753,733    6.54%
Healthcare: Orthopedic Products   11,810,851    12,000,000    6.15%
Media: Advertising, Printing & Publishing   11,750,000    11,750,000    6.02%
Industrial Services   10,203,840    10,068,757    5.16%
Security   9,500,000    9,500,000    4.87%
High Tech Industries   5,168,000    7,007,913    3.59%
Media & Entertainment   12,323,985    6,860,544    3.53%
Environmental/Recycling Services   6,623,154    6,095,154    3.13%
Wholesale/Distribution   5,981,818    5,981,818    3.07%
Technology & IT   4,869,375    4,968,750    2.55%
Aerospace   4,000,000    4,000,000    2.05%
Packaging   3,792,657    3,792,657    1.94%
Food & Beverage   5,000,000    3,788,000    1.94%
Disaster Recovery Services   12,823,731    1,804,817    0.93%
Call Center Services   1,188,731    1,200,000    0.62%
Total  $303,431,733   $296,341,611    151.94%
                
Geographic Region               
South East  $78,199,153   $80,722,968    41.39%
Eastern   51,779,326    54,523,091    27.95%
South   67,214,814    54,400,549    27.89%
West   34,068,929    34,419,331    17.65%
Mid West   32,695,872    33,163,200    17.00%
South West   18,466,264    17,943,722    9.20%
North East   11,007,375    11,168,750    5.73%
North West   10,000,000    10,000,000    5.13%
Total  $303,431,733   $296,341,611    151.94%
                
Investment Type               
Senior Secured - First Lien  $92,807,114   $88,453,325    45.35%
Senior Secured - Second Lien   83,015,409    83,266,558    42.69%
Senior Subordinated   80,358,874    80,458,554    41.26%
Equity/Other   47,250,336    44,163,174    22.64%
Total  $303,431,733   $296,341,611    151.94%

 

*Fair value as a percentage of Net Assets

 

 28 

 

 

14.Financial Highlights

 

The following per share data and financial ratios have been derived from information provided in the consolidated financial statements of the Company. The following is a schedule of financial highlights for one share of common stock for the six months ended June 30, 2016 and June 30, 2015.

 

   For the six months ended   For the six months ended 
   June 30, 2016   June 30, 2015 
   (Unaudited)   (Unaudited) 
Per share data(1)          
Net asset value, beginning of period  $14.43   $14.87 
           
Net investment income (loss)   0.85    0.71 
Net realized and unrealized gains (losses)   (0.40)   0.17 
Provision for taxes on unrealized appreciation on investments   (0.04)   (0.04)
Net increase (decrease) in net assets resulting from operations   0.41    0.84 
           
Distributions to shareholders:(2)          
From net investment income   (0.68)   (0.68)
           
Net asset value, end of period  $14.16   $15.03 
Market value per share, end of period  $12.15   $12.70 
           
Total return based on net asset value(3)(4)   2.8%   5.6%
Total return based on market value(3)(4)   10.6%   7.0%
           
Shares outstanding at end of period   13,490,636    13,516,766 
           
Ratio/Supplemental Data:          
Net assets, at end of period  $191,087,536   $203,131,057 
Ratio of total expenses before waiver to average net assets(5)   9.44%   8.10%
Ratio of interest expenses to average net assets(5)   3.32%   2.05%
Ratio of incentive fees to average net assets(5)   1.78%   2.64%
Ratio of waiver of management and incentive fees to average net assets(5)   —%    1.00%
Ratio of net expenses to average net assets(5)   9.44%   7.10%
Ratio of net investment income (loss) before waiver to average net assets(5)   11.95%   8.62%
Ratio of net investment income (loss) after waiver to average net assets(5)   11.95%   9.62%
           
Total Credit Facility payable outstanding  $51,685,846   $38,054,738 
Total Notes payable outstanding  $51,544,000   $40,000,000 
           
Asset coverage ratio(6)   2.9    3.6 
Portfolio turnover rate(4)   25%   12%

 

 
(1) The per share data was derived by using the average shares outstanding during the period.
(2) The per share data for distributions is the actual amount of distributions paid or payable per share of common stock outstanding during the entire period.
(3) Returns are historical and are calculated by determining the percentage change in net asset value or market value with all distributions reinvested. Distributions are assumed to be reinvested at prices obtained under the Company’s dividend reinvestment plan.
(4) Not Annualized.
(5) Annualized.
(6) Asset coverage ratio is equal to (i) the sum of (A) net assets at the end of the period and (B) debt outstanding at the end of the period, divided by (ii) total debt outstanding at the end of the period.

 

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15.Unconsolidated Significant Subsidiaries

 

In accordance with the SEC’s Regulation S-X and GAAP, we have subsidiaries that are not required to be consolidated. We have certain unconsolidated significant subsidiaries that pursuant to Rule 4-08(g) of Regulation S-X, summarized financial information is presented below in aggregate as of and for the six months ended June 30, 2016 and as of and for the year ended December 31, 2015.

 

   As of      For the six months ended 
Balance Sheet  June 30, 2016   Income Statement  June 30, 2016 
            
Current Assets   4,511,901   Net Sales   6,973,906 
Noncurrent Assets   18,483,000   Gross Profit   2,372,543 
Current Liabilities   939,688   Net Income/EBITDA   1,674,723 
Noncurrent Liabilities   12,981,754         
              
    As of       For the year ended 
Balance Sheet   

December 31, 2015

   Income Statement   

December 31, 2015

 
              
Current Assets   9,799,192   Net Sales   26,808,399 
Noncurrent Assets   25,016,525   Gross Profit   4,817,956 
Current Liabilities   3,982,975   Net Income (Loss)   (8,829,955)
Noncurrent Liabilities   20,000,000         

 

In addition to the risks associated with our investments in general, there are unique risks associated with our investments in each of these entities.

 

For example, the business and growth of FST Technical Services, LLC (“FST”) depends in large part on the continued trend toward outsourcing of certain services in the semiconductor and biopharmaceutical industries. There can be no assurance that this trend in outsourcing will continue, as companies may elect to perform such services internally. A significant change in the direction of this trend generally, or a trend in the semiconductor and biopharmaceutical industry not to use, or to reduce the use of, outsourced services such as those provided by it, could significantly decrease its revenues and such decreased revenues could have a material adverse effect on it or its results of operations or financial condition.

 

DRC Emergency Services, LLC (“DRC”) was sold to a third party on January 19, 2016. As such, summary financial information for DRC is included for the year ended December 31, 2015 and is not included for the six months ended June 30, 2016.

 

16.Subsequent Events

 

The Company has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date the financial statements were issued.

 

Subsequent to June 30, 2016, the following activity occurred:

 

On July 7, 2016, a $0.34 per share dividend was paid to shareholders of record as of June 30, 2016.

 

Through July 14, 2016, Alcentra sold an additional $3.5 million in aggregate principal amount of Alcentra Capital InterNotes 6.25% notes due 2021.

 

On July 20, 2016, Alcentra invested $13.0 million in Limbach Facilities Services (13% Cash/3% PIK Subordinated Note).

 

On August 1, 2016, DBI Holding LLC repaid our senior subordinated notes ($9.6 million), senior PIK notes ($9.2 million) and warrants ($9.7 million) for total proceeds of $28.5 million.

 

On August 4, 2016, a $0.34 dividend was declared for shareholders of record September 30, 2016 to be paid on October 6, 2016.

 

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements as to:

 

our future operating results;

 

our business prospects and the prospects of our portfolio companies;

 

the effect of investments that we expect to make;

 

our contractual arrangements and relationships with third parties;

 

actual and potential conflicts of interest with Alcentra NY, LLC;

 

the dependence of our future success on the general economy and its effect on the industries in which we invest;

 

the ability of our portfolio companies to achieve their objectives;

 

the use of borrowed money to finance a portion of our investments;

 

the adequacy of our financing sources and working capital;

 

the timing of cash flows, if any, from the operations of our portfolio companies;

 

our ability to maintain our qualification as a business development company; and

 

the effect of future changes in laws or regulations (including the interpretation of these laws and regulations by regulatory authorities) and conditions in our operating areas, particularly with respect to business development companies.

 

Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “anticipate,” “predict,” “potential,” “plan” or similar words.

 

We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q. Actual results could differ materially from those anticipated in our forward-looking statements, and future results could differ materially from historical performance. We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law or SEC rule or regulation. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

 

The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto contained in this quarterly report on Form 10-Q.

 

Overview

 

Alcentra Capital Corporation (the “Company”, “Alcentra”, “ACC”, “we”, “us” or “our”) was formed as a Maryland corporation on June 4, 2013 as an externally managed, non-diversified closed-end management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”). Alcentra is managed by Alcentra NY, LLC (the “Adviser”, or “Alcentra NY”), registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). State Street Bank and Trust Company (“State Street”) provides us with financial reporting, post-trade compliance, and treasury services. In addition, for U.S. federal income tax purposes, Alcentra has elected to be treated as a regulated investment company (“RIC”), commencing with tax year ended December 31, 2014, under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).  

 

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BNY Mellon-Alcentra Mezzanine III, L.P. (the “Partnership” or “Fund III”) is a Delaware limited partnership, which commenced operations on May 14, 2010. The Partnership was formed for the purpose of seeking current income and long-term capital appreciation by making investments in senior debt securities, subordinated debt securities, and common and preferred equity securities with equity rights or participations in U.S.-based middle market companies. BNY Mellon-Alcentra Mezzanine III (GP), L.P. (the “General Partner”), a Delaware limited liability company, is the General Partner of the Partnership. BNY Mellon-Alcentra Mezzanine Partners (the “Manager”), a division of Alcentra NY, LLC (“Alcentra Group”) and an affiliate of the General Partner, manages the investment activities of the Partnership. Alcentra NY, LLC is wholly owned by BNY Alcentra Group Holdings, Inc. which is wholly owned by The Bank of New York Mellon Corporation.

 

On May 14, 2014, Alcentra completed its initial public offering (the “Offering”), at a price of $15.00 per share. Through its initial public offering the Company sold 6,666,666 shares for gross proceeds of approximately $100,000,000. On June 6, 2014, Alcentra sold 750,000 shares through the underwriters' exercise of the overallotment option for gross proceeds of $11,250,000.

 

Immediately prior to the Offering, Fund III sold all of its assets other than its investment in the shares of common stock and warrants to purchase common stock of GTT Communications (the “Fund III Acquired Assets”) to the Company for $64.4 million in cash and $91.5 million in shares of the Company's common stock. Concurrent with the acquisition of the Fund III Acquired Assets from Fund III, the Company also purchased for $29 million in cash certain additional investments (the “Warehouse Portfolio”) from Alcentra Group. The Warehouse Portfolio consisted of approximately $29 million in debt investments originated by the investment professionals of the Manager and purchased by Alcentra Group using funds under a warehouse credit facility provided by The Bank of New York Mellon Corporation in anticipation of the Offering.

 

The Company entered into a senior secured term loan agreement (the “Bridge Facility”) with ING Capital LLC as lender that it used to fund the purchase of the Warehouse Portfolio and to fund the cash portion of the consideration paid to Fund III. In May 2014, the Company used $94.2 million of the proceeds from the Offering to repay the Bridge Facility in full.

 

The Company's investment objective is to generate both current income and capital appreciation through debt and equity investments by targeting investment opportunities with favorable risk-adjusted returns. The Company invests primarily in middle-market companies in the form of mezzanine and senior secured loans, each of which may include an equity component, and, to a lesser extent, by making direct equity investments in such companies.

 

The Company is required to comply with certain regulatory requirements such as not acquiring any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets. Qualifying assets include investments in “eligible portfolio companies.” Under the relevant SEC rules, the term “eligible portfolio company” includes all private operating companies, operating companies whose securities are not listed on a national securities exchange, and certain public operating companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million, in each case organized and with their principal of business in the United States.

 

Portfolio Composition and Investment Activity

 

Portfolio Composition

 

We originate and invest primarily in middle-market companies (typically those with $5.0 million to $15.0 million of EBITDA) through first lien, second lien, unitranche and mezzanine debt financing, often times with a corresponding equity investment.

 

During the three months ended June 30, 2016, we invested $39.3 million in debt and equity investments in four new portfolio companies and one add on investment. These investments consisted of senior secured loans ($4.55 million, or 11.6%), second lien notes ($16.0 million, or 40.7%), subordinated notes ($18.25 million, or 46.4%), and equity securities ($0.5 million, or 1.27%). During the three months ended June 30, 2016 we received proceeds from sales or repayments, including principal, return of capital dividends and net realized gains (losses), of $26.46 million. During the three months ended June 30, 2015, we invested $31.25 million in debt, including three new portfolio companies. These investments consisted of second lien notes ($11.75 million, or 37.6%) and subordinated notes($19.5 million, or 62.4%). During the three months ended June 30, 2015, we received proceeds from repayments of principal, including return of capital dividends and realized gains, of $16.5 million.

 

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As of June 30, 2016, the fair value of our investment portfolio totaled $293.6 million and consisted of 33 portfolio companies. As of June 30, 2016, 57% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR, and 43% bore interest at fixed rates. Our average portfolio company investment at amortized cost and fair value was approximately $9.0 million and $8.9 million, respectively, and our largest portfolio company investment by amortized cost and fair value was approximately $18.5 million and $27.3 million, respectively.

 

As of December 31, 2015, the fair value of our investment portfolio totaled $296.3 million and consisted of 32 portfolio companies. As of December 31, 2015, 52% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR, and 47% bore interest at fixed rates. Our average portfolio company investment at amortized cost and fair value was approximately $9.6 million and $9.3 million, respectively, and our largest portfolio company investment by amortized cost and fair value was approximately $17.1 million and $22.8 million, respectively.

 

The weighted average yield on debt investments as of June 30, 2016 and December 31, 2015 was 11.7% and 12.4%, respectively. The weighted average yields were computed using the effective interest rates for debt investments as of June 30, 2016 and December 31, 2015, including the accretion of original issue discount.

 

The following table shows the portfolio composition by investment type at fair value and cost with the corresponding percentage of total investments:

 

    Fair Value     Cost  
    June 30, 2016     December 31, 2015     June 30, 2016     December 31, 2015  
    (dollars in thousands)  
Senior Secured - First Lien   $ 80,704       27.5 %   $ 88,453       29.9 %   $ 81,064       27.1 %   $ 92,807       30.6 %
Senior Secured - Second Lien     93,004       31.7 %     83,267       28.1 %     94,347       31.6 %     83,015       27.4 %
Senior Subordinated     70,255       23.9 %     80,459       27.1 %     74,299       24.9 %     80,360       26.5 %
Equity/Other     49,676       16.9 %     44,163       14.9 %     49,084       16.4 %     47,250       15.6 %
Total   $ 293,639       100.0 %   $ 296,342       100.0 %   $ 298,794       100.0 %   $ 303,432       100.0 %

 

The following table shows portfolio composition by geographic region at fair value and cost with the corresponding percentage of total investments. The geographic composition is determined by the location of the corporate headquarters of the portfolio company, which may not be indicative of the primary source of the portfolio company’s business.

 

    Fair Value     Cost  
    June 30, 2016     December 31, 2015     June 30, 2016     December 31, 2015  
    (dollars in thousands)  
South   $ 77,621       26.4 %   $ 54,401       18.4 %   $ 84,330       28.2 %   $ 67,215       22.2 %
South Eastern     47,851       16.3 %     80,723       27.2 %   $ 46,244       15.5 %     78,199       25.8 %
Eastern     90,650       30.9 %     65,692       22.2 %   $ 85,766       28.7 %     62,787       20.7 %
West     14,349       4.9 %     44,419       15.0 %   $ 18,780       6.3 %     44,069       14.5 %
South West     14,391       4.9 %     17,944       6.1 %   $ 14,788       4.9 %     18,466       6.1 %
Mid West     48,778       16.6 %     33,163       11.2 %   $ 48,886       16.4 %     32,696       10.8 %
Total   $ 293,639       100.0 %   $ 296,342       100.0 %   $ 298,794       100.0 %   $ 303,432       100.0 %

 

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The following table shows the detailed industry composition of our portfolio at fair value and cost as a percentage of total investments:

 

   Fair Value  Cost
   June 30, 2016  December 31, 2015  June 30, 2016  December 31, 2015
             
Healthcare Services   16.40%   17.77%   16.64%   15.35%
Telecommunications   9.41%   6.35%   5.88%   9.05%
Infrastructure Maintenance   9.31%   7.73%   5.80%   6.19%
Waste Services   8.04%   7.67%   7.82%   8.91%
High Tech Industries   7.04%   2.36%   1.70%   6.89%
Automotive Business Services   6.88%   6.74%   6.58%   6.71%
Industrial Manufacturing   5.29%   0.00%   0.00%   5.16%
Technology & Telecom   4.90%   4.71%   4.77%   4.95%
Education   4.84%   4.69%   4.73%   4.94%
Media: Advertising, Printing & Publishing   4.00%   3.97%   3.87%   3.93%
Oil & Gas Services   3.25%   4.43%   4.33%   4.60%
Security   3.24%   3.21%   3.13%   3.18%
Industrial Services   2.83%   3.40%   3.36%   3.15%
Media & Entertainment   2.29%   2.32%   4.06%   4.17%
Environmental/Recycling Services   2.10%   2.06%   2.18%   2.29%
Wholesale/Distribution   2.04%   6.32%   5.38%   2.00%
Technology & IT   1.67%   1.67%   1.60%   1.61%
Restoration Services   1.61%   4.47%   4.23%   1.04%
Aerospace   1.36%   1.35%   1.32%   1.34%
Food & Beverage   1.35%   1.28%   1.65%   1.67%
Transportation Logistics   1.13%   5.22%   5.10%   1.85%
Packaging   0.61%   1.27%   1.25%   0.61%
Call Center Services   0.41%   0.40%   0.39%   0.41%
Disaster Recovery Services   0.00%   0.61%   4.23%   0.00%
Grand Total   100.00%   100.00%   100.00%   100.00%

 

$91.8 million of the portfolio (32%) had a first credit exposure at 0.0x – 1.0x EBITDA; $128.0 million of the portfolio (44%) had a first credit exposure at 1.0x – 3.0x EBITDA; $52.4 million of the portfolio (18%) had a first credit exposure at 3.0x – 4.0x EBITDA; $3.8 million of (1%) had a first credit exposure at 4.0x – 4.5x EBITDA; and $14.6 million of the portfolio (5%) had a first credit exposure at >4.5x EBITDA.

 

Portfolio Asset Quality

 

We currently do not use a rating system to monitor portfolio performance. As the portfolio grows in size, we would expect to implement a portfolio rating system.

 

Non-Accrual

 

We will generally not accrue interest on loans and debt securities if principal or interest cash payments are past due 30 days or we have reason to doubt our ability to collect such interest.

 

As of June 30, 2016 and December 31, 2015, we had no loans on non-accrual status.

 

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Discussion and Analysis of Results of Operations

 

Comparison of three months ended June 30, 2016 and June 30, 2015

 

Investment Income

 

For the three months ended June 30, 2016, total investment income was $10.6 million, an increase of $2.1 million, or 24.7% over the $8.5 million of total investment income for the three months ended June 30, 2015. This increase was primarily attributable to an increase in interest income with the addition of 2 portfolio companies, and $1.7 million in prepayment penalties .

 

We generate revenue in the form of interest income on debt investments and capital gains and distributions, if any, on investment securities that we may acquire in portfolio companies. Our debt investments typically have a term of five to seven years and bear interest at a fixed or floating rate. Interest on our debt securities is payable both quarterly and monthly. Payments of principal on our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt investments may pay interest in-kind, or PIK. Any outstanding principal amount of our debt securities and any accrued but unpaid interest will generally become due at the maturity date. The level of interest income we receive is directly related to the balance of interest-bearing investments multiplied by the weighted average yield of our investments. We expect the total dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases.

 

We may also generate revenue in the form of prepayment fees, commitment, loan origination, structuring or due diligence fees, fees for providing significant managerial assistance, consulting fees and the secondary sale of certain of our investments. We are exploring the secondary sale of select equity interests in certain portfolio companies.  We believe that the sale of these equity interests would allow us to rotate a portion of our non-incoming producing equity investment portfolio into income generating debt investments. There can be no assurances that these negotiations will result in a sale of any or all of the equity interests or if a sale transaction is undertaken as to its terms or timing.

 

Expenses

 

For the three months ended June 30, 2016, total expenses were $4.7 million, which was an increase of $0.883 million, or 22.9%, over the $3.8 million for the three months ended June 30, 2015. Interest and financing expenses for the three months ended June 30, 2016 were $1.62 million, an increase of $0.355 million from $1.26 million for the three months ended June 30, 2015. This is largely due to the additional issuance of $11.5 million in Alcentra Capital Internotes® . The base management fee increased $0.060 million, or 5.2%, to $1.283 million for the three months ended June 30, 2016 due to higher average total assets less cash and cash equivalents than the comparable period in 2015. The income-based incentive fee for the three months ended June 30, 2016 was $0.926, a 133.3% increase from the comparable period in 2015. The capital gains incentive fee was $0 for the period ending June 30, 2016, a decrease of $0.434 million from comparable period in 2015. The administrative service fee, professional fees and other general and administrative expenses totaled $0.913 million for the three months ended June 30, 2016 compared to a total of $0.544 million for the three months ended June 30, 2015.

 

Net Investment Income

 

Net investment income for the three months ended June 30, 2016 was $5.9 million, an increase of $1.329 million, or 28.6%, compared to net investment income of $4.6 million during the three months ended June 30, 2015 as a result of the $2.1 million increase in total investment income and the $0.8 million increase in total expenses.

 

Net Increase in Net Assets Resulting From Operations

 

For the three months ended June 30, 2016, the net realized gain from portfolio investments was $1.7 million.

 

During the three months ended June 30, 2016, we recorded a net change in unrealized depreciation from portfolio investments of $5.8 million attributable to depreciation on debt and equity investments. During the three months ended June 30, 2015, the net change in unrealized appreciation was $2.3 million.

 

As a result of these events, our net increase in net assets resulting from operations during the three months ended June 30, 2016 was $1.4 million, a decrease of $5.0 million, or 78.2%, compared to a net increase in net assets resulting from operations of $6.4 million during the three months ended June 30, 2015.

 

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Provision for Taxes on Unrealized Appreciation on Investments

 

We have direct wholly owned subsidiaries that have elected to be taxable entities (the "Taxable Subsidiaries"). The Taxable Subsidiaries permit us to hold equity investments in portfolio companies which are "pass through" entities for tax purposes and continue to comply with the "source income" requirements contained in RIC tax provisions of the Code. The Taxable Subsidiaries are not consolidated with us for income tax purposes and may generate income tax expense, benefit, and the related tax assets and liabilities, as a result of their ownership of certain portfolio investments. The income tax expense, or benefit, if any, and related tax assets and liabilities are reflected in our consolidated financial statements. For the three months ended June 30, 2016, we recognized a provision for income tax on unrealized gains on investments of $0.3 million.

 

Comparison of six months ended June 30, 2016 and June 30, 2015

 

Investment Income

 

For the six months ended June 30, 2016, total investment income was $20.6 million, an increase of $3.85million, or 23.0%, over the $16.7 million of total investment income for the six months ended June 30, 2015. The increase was primarily attributable to a $1.7 million increase in income resulting largely from an increase in the size of the portfolio, as well as fee income of $2.2 million.

 

Expenses

 

For the six months ended June 30, 2016, total expenses, including income tax provision, were $9.1 million, an increase of $1.9 million or 27.8%, over the $7.1 million of total expenses after the waiver of capital gains incentive fees for the six months ended June 30, 2015. Interest and financing expenses for the six months ended June 30, 2016 were $3.2 million, an increase of $1.3 million or 55.5%, compared to $2.1 million for the six months ended June 30, 2015 as a result of interest and commitment fees related to the Credit Facility as well as the additional cost from the issuance of $15 million of InterNotes. The base management fee increased $0.2 million, or 8.6%, to $2.6 million for the six months ended June 30, 2016 due to higher average total assets less cash and cash equivalents than the comparable period in 2015. The incentive fee for the six months ended June 30, 2016 was $1.7 million, a $0.07 million, or 4.5%, increase from the $1.6 million incentive fee for the six months ended June 30, 2015 which was the result of an increase of $0.5 million in the income incentive fee to $1.7 million and a decrease in the capital gains incentive fee accrual of $0.4 million during the 2016 period. The administrative service fee, professional fees and other general and administrative expenses totaled $1.6 million for the six months ended June 30, 2016 compared to $1.0 million for the six months ended June 30, 2015.

 

Net Investment Income

 

Net investment income for the six months ended June 30, 2016 was $11.5 million, which was an increase of $1.9 million, or 19.5%, compared to net investment income of $9.6 million during the six months ended June 30, 2015 as a result of the $3.8 million increase in total investment income and the $1.9 million increase in total expenses, including income tax provision.

 

Net Increase in Net Assets Resulting From Operations

 

For the six months ended June 30, 2016, the total net realized losses on investments were $7.2 million and were comprised of $11.1 million in gross realized losses and and $3.9 million in realized gains. Significant realized gains (losses) for the six months ended June 30, 2016 are summarized as follows:

 

Portfolio Company  Realization Event  Net Realized Gain/(Loss)
(in millions)
         
DRC Emergency Services  Sale of Portfolio Company  $(11.1)
Health Fusion  Exit of Portfolio Company   1.7 
ACT Lighting  Exit of Portfolio Company   1.7 
Net Access Systems  Exit of Portfolio Company   0.3 
Response Team  Exit of Portfolio Company   0.2 
      $(7.2)

 

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For the six months ended June 30, 2015, the total realized loss on investments was $0.1 million.

 

During the six months ended June 30, 2016, we recorded a net change in unrealized appreciation on investments of $1.9 million attributable to (i) the reversal of net unrealized depreciation on investments of $11.1 million related to the exit or sale of investments (ii) net unrealized depreciation of $9.2 million on debt investments. During the six months ended June 30, 2015, we recorded a net change in unrealized appreciation on investments of $2.5 million attributable to (i) net unrealized depreciation of $0.9 million on debt investments and (ii) net unrealized appreciation of $3.4 million on debt and equity investments. As a result of these events, our net increase in net assets resulting from operations during the six months ended June 30, 2016, after provision for taxes, was $5.7 million, or a decrease of $5.7 million, compared to a net increase in net assets resulting from operations of $11.4 million during the prior year period.

 

Liquidity and Capital Resources

 

As of June 30, 2016, we had $5.0 million in cash and cash equivalents and our net assets totaled $191.5 million. We believe that our current cash and cash equivalents on hand, our credit facility and our anticipated cash flows from operations will provide adequate capital resources with which to operate and finance our investment business and make distributions to our stockholders for at least the next 12 months. We intend to generate additional cash primarily from future debt offerings and future borrowings, as well as cash flows from operations, including income earned from investments in our portfolio companies. On both a short-term and long-term basis, our primary use of funds will be investments in portfolio companies and cash distributions to our stockholders.

 

Cash Flows

 

For the three months ended June 30, 2016, we experienced a net increase in cash and cash equivalents in the amount of $0.171 million. During that period, we received $10.5 million in cash from operating activities, primarily from the return of capital from portfolio investments of approximately $71.3 million and $4.1 of paid in kind income. This was partially offset by the investment in new portfolio companies of approximately $69.5 million. During the same period, financing activities reduced cash by $10.4 million primarily due to the repayment of the credit facility.

 

For the three months ended June 30, 2015, we experienced a decrease in cash and cash equivalents in the amount of $6.2 million. During that period, our operating activities used $11.3 million in cash, primarily in connection with the purchase/repayments of investments.. In addition, financing activities increased cash by $5.2 million primarily from the issuance of the InterNotes. As of June 30, 2015, we had $3.8 million of cash on hand.

 

Capital Resources

 

Our liquidity and capital resources are derived from the capital contributions and cash flows from operations, including investment sales and repayments, and income earned. Our primary use of funds from operations includes investments in portfolio companies and other operating expenses we incur, as well as distributions to our stockholders. We expect to use these capital resources as well as proceeds from turnover within our portfolio, borrowings under the Credit Facility and from public and private offerings of securities to finance our investment activities.

 

In May 2014, Alcentra entered into a senior secured revolving credit agreement (“Credit Facility”) with ING Capital LLC, as administrative agent and lender. The Credit Facility had an initial commitment of $80 million with an accordion feature that allows for an increase in total commitments to $160 million. The Credit Facility was amended on August 11, 2015 to increase the accordion feature to allow for a future increase of the total commitments up to $250.0 million, subject to satisfaction of certain conditions at the time of any such future increase. As amended, the Credit Facility has a maturity date of August 11, 2020 and bears interest, at our election, at a rate per annum equal to (i) 2.25% plus the highest of a prime rate, the Federal Funds rate plus 0.5%, three month LIBOR plus 1.0% and zero or (ii) 3.00% plus the one, three or six month LIBOR rate, as applicable.

  

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On March 2, 2016, we amended certain provisions of the Credit Facility relating to the treatment of approximately $38.6 million in aggregate principal amount of outstanding InterNotes that mature prior to the Credit Facility. Among other things, the amendments to the Credit Facility provide that, in the nine-month period prior to the maturity of these particular InterNotes, which mature between February 15 and April 15, 2020, our ability to borrow under the Credit Facility will be reduced by and in the amount of such InterNotes still outstanding during such time. The Credit Facility is secured by a first priority security interest in all of our portfolio investments, the equity interests in certain of its direct and indirect subsidiaries and substantially all of its other assets. We are also subject to customary covenants and events of default typical of a facility of this type.

 

As of June 30, 2016, we are in compliance with all covenants of the Credit Facility and there was $51.7 million outstanding.

 

Also, as a business development company, we generally are required to meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities, to total senior securities, which include all of our borrowings and any outstanding preferred stock, of at least 200%. We were in compliance with the asset coverage ratios at all times. As of June 30, 2016 our asset coverage ratio was 285%.

 

Recently Issued Accounting Standards

 

In April 2015, FASB issued ASU 2015-03, Interest – Imputation of interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs , which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. This guidance is effective for annual and interim periods beginning after December 15, 2015. We have adopted this guidance as of March 31, 2016. The new guidance will be applied retrospectively to each prior period presented.

 

In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). The update eliminates the requirement to categorize investments in the fair value hierarchy if their fair value is measured at net asset value (NAV) per share (or its equivalent) using the practical expedient in the FASB’s fair value measurement guidance. Public companies are required to apply ASU 2015-07 retrospectively for interim and annual reporting periods beginning after December 15, 2015. Accordingly, the Company has evaluated the impact of ASU 2015-07 on its consolidated financial statements and determined that the adoption of ASU 2015-07 has not had a material impact on our consolidated financial statements.

 

Regulated Investment Company Status and Distributions

 

We have elected to be treated as a RIC under Subchapter M of the Code beginning the fiscal year ending December 31, 2014. If we qualify as a RIC, we will not be taxed on our investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are distributed, or deemed to be distributed, to stockholders on a timely basis.

 

Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation until realized. Dividends declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income or the distribution of prior year taxable income carried forward into and distributed in the current year. Distributions also may include returns of capital.

 

To qualify for RIC tax treatment, we must, among other things, distribute, with respect to each taxable year, at least 90% of our investment company net taxable income (i.e., our net ordinary income and our realized net short-term capital gains in excess of realized net long-term capital losses, if any). If we qualify as a RIC, we will also be subject to a federal excise tax, based on distributive requirements of our taxable income on a calendar year basis.

 

We intend to distribute to our stockholders between 90% and 100% of our annual taxable income (which includes our taxable interest and fee income).

 

Investment Advisory Agreement

 

Under the Advisory Agreement, Alcentra pays Alcentra NY, LLC (the "Adviser") a base management fee calculated at an annual rate as follows: 1.75% of its gross assets (i.e., total assets held before deduction of any liabilities), including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents (such as investments in U.S. Treasury Bills), if its gross assets are below $625 million; 1.625% of its total gross assets if our gross assets are between $625 million and $750 million; and 1.5% of its gross assets if its assets are greater than $750 million. These various management fee percentages (i.e. 1.75%, 1.625% and 1.5%) would apply to ACC's entire gross assets in the event its gross assets exceed the various gross asset thresholds.

   

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In addition, Alcentra pays the Adviser an incentive fee under the Advisory Agreement which consists of two parts. The first part, which is calculated and payable quarterly in arrears, equals 20% of our "pre-incentive fee net investment income" for the immediately preceding quarter, subject to a hurdle rate of 2% per quarter (8% annualized), and is subject to a "catch-up" feature. The second part is calculated and payable in arrears as of the end of each calendar year (or, upon termination of the Advisory Agreement, as of the termination date) and equals 20% of ACC's aggregate cumulative realized capital gains from inception through the end of each calendar year, computed net of aggregate cumulative realized capital losses and aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid capital gain incentive fees. See Note 6.

 

The Adviser agreed to waive its fees (base management and incentive fee), without recourse against or reimbursement by us, through the quarter ended June 30, 2015 and to the extent required in order for us to earn a quarterly net investment income to maintain a targeted dividend payment on shares of common stock outstanding on the relevant dividend payment dates of 9.0% (to be paid on a quarterly basis).

 

Critical Accounting Policies

 

The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ.

 

Valuation of Portfolio Investments

 

We generally invest in illiquid loans and securities including debt and equity securities of middle-market companies. Debt and equity securities that are not publicly traded or whose market prices are not readily available are valued at fair value as determined in good faith by ACC's board of directors. Such determination of fair values may involve subjective judgments and estimates, although we engage independent valuation providers to review the valuation of each portfolio investment that does not have a readily available market quotation at least once annually. With respect to unquoted securities, we value each investment considering, among other measures, discounted cash flow models, comparisons of financial ratios of peer companies and other factors.

 

Because there is not a readily available market for substantially all of the investments in our portfolio, we value most of our portfolio investments at fair value as determined in good faith by ACC's board of directors using a documented valuation policy and a consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.

 

With respect to investments for which market quotations are not readily available, ACC's board of directors undertakes a multi-step valuation process each quarter, as described below:

 

  Our quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of the Adviser responsible for the portfolio investment;

 

  Preliminary valuation conclusions are then documented and discussed with our senior management and the Adviser committee;

 

  The audit committee of ACC's board of directors then reviews these preliminary valuations;

 

  At least once quarterly, independent valuation firms engaged by ACC's board of directors will prepare valuations on a selected basis and submit reports to the board of directors; and

 

  The board of directors then discusses valuations and determines the fair value of each investment in our portfolio in good faith, based the input of Adviser, the independent valuation firm and the audit committee.

 

Revenue Recognition

 

We record interest income on an accrual basis to the extent that we expect to collect such amounts. For loans and debt securities with contractual PIK interest, which represents contractual interest accrued and added to the loan balance that generally becomes due at maturity, we do not accrue PIK interest if the portfolio company valuation indicates that such PIK interest is not collectible. We will not accrue interest on loans and debt securities if principal or interest cash payments are past due 30 days or more and/or we have reason to doubt our ability to collect such interest.

 

Loan origination fees, original issue discount and market discount or premium are capitalized, and we then accrete or amortize such amounts using the effective interest method as interest income. Upon the prepayment of a loan or debt security, any unamortized loan origination is recorded as interest income. We record prepayment premiums on loans and debt securities as interest income.

 

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Off-Balance Sheet Arrangements

 

We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. As of June 30, 2016, we had off-balance sheet arrangements consisting of three unfunded commitments totaling $4.1 million. As of December 31, 2015, we had one unfunded commitment totaling $1.0 million.

 

Recent Developments

 

Subsequent to June 30, 2016, the following activity occurred:

 

On July 7, 2016, a $0.34 per share dividend was paid to shareholders of record as of June 30, 2016.

 

Through July 14, 2016, Alcentra sold an additional $3.5 million in aggregate principal amount of Alcentra Capital InterNotes 6.25% notes due 2021.

 

On July 20, 2016, Alcentra invested $13.0 million in Limbach Facilities Services (13% Cash/3% PIK Subordinated Note).

 

On August 1, 2016, DBI Holding LLC repaid our senior subordinated notes ($9.6 million), senior PIK notes ($9.2 million) and warrants ($9.7 million) for total proceeds of $28.5 million.

 

On August 4, 2016, the Board of Directors approved the 2016 third quarter dividend of $0.34 per share for shareholders of record date September 30, 2016 and payable October 6, 2016.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

We are subject to financial market risks, including changes in interest rates. All of the floating rate loans in the portfolio have interest rate floors, which have effectively converted the loans to fixed rate loans in the current interest rate environment. For the three months ended June 30, 2016, 15 loans in the portfolio bore interest at floating rates, or 57% of the fair value of our portfolio. For the year ended December 31, 2015, 14 of the loans in the portfolio bore interest at floating rates, or 52% of the fair value of our portfolio. In the future, we expect other loans in our portfolio will have floating rates. Assuming that the Statement of Assets and Liabilities as of June 30, 2016, were to remain constant and no actions were taken to alter the existing interest rate sensitivity, a hypothetical one or two percent increase in LIBOR would have less than a 2.5% effect on our portfolio’s income. Although we believe that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size and composition of the assets on the balance sheet and other business developments that could affect net increase in net assets resulting from operations, or net income. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by this estimate. We may hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contacts subject to the requirements of the 1940 Act. 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 our portfolio of investments. As of June 30, 2016 and June 30, 2015, we did not engage in hedging activities.

 

Changes in interest rates will affect our cost of funding. Our interest expense will be affected by changes in certain published indices such as the LIBOR rate in connection with the Credit Facility. 

 

Item 4. Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures

 

The Company’s management, under the supervision and with the participation of various members of management, including its Chief Executive Officer (“CEO”) and its Chief Accounting Officer (“CAO”), has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CAO have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report.

 

(b) Changes in Internal Control Over Financial Reporting

 

Management did not identify any change in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2016 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II — OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

The Company is not currently subject to any material legal proceedings, nor, to its knowledge, is any material legal proceeding threatened against it. From time to time, the Company may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of its 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 effect upon its financial condition or results of operations.

 

Item 1A. Risk Factors

 

There has been no material change in the information provided under the heading “Risk Factors” in the Company’s annual report on Form 10-K filed with the SEC on March 9, 2016. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial may materially affect its business, financial condition and/or operating results.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Stock Repurchase Program

 

On January 18, 2016, our board of directors authorized a $5.0 million stock repurchase program that was put into effect in March 2016. The timing and amount of any stock repurchases will depend on the terms and conditions of the repurchase program and no assurances can be given that any common stock, or any particular amount, will be purchased. Unless extended by our board of directors, the stock repurchase program will terminate on the earlier of (i) one year from the date of its approval or (ii) the repurchase of $5.0 million of the Company’s common stock and may be modified or terminated at any time for any reason without prior notice. We have provided our stockholders with notice of our intention to repurchase shares of our common stock in accordance with 1940 Act requirements. We will retire immediately all such shares of common stock that we purchase in connection with the stock repurchase program.

 

The following table summarizes our share repurchases under our stock repurchase program for the six months ended June 30, 2016:

 

   Jan   Feb   March   April   May   June 
   2016   2016   2016   2016   2016   2016 
Dollar amount repurchased          $115,408   $-   $114,762   $102,966 
Shares repurchased           10,509    -    9,547    8,364 
Average price per share (including commission)   N/A    N/A   $11.26   $N/A   $11.98   $12.27 
Weighted average discount to net asset value   N/A    N/A    21.84%   N/A    15.10%   13.37%

 

Item 3.  Defaults Upon Senior Securities

 

None.

 

Item 4.  Mine Safety Disclosures

 

Not applicable.

 

Item 5.  Other Information

 

Not applicable.

 

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Item 6.  Exhibits

 

The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:

 

Exhibit Number   Description
     
11.1   Computation of Per Share Earnings(1)
     
31.1   Chief Executive Officer Certification Pursuant to Exchange Act Rule 13a-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
     
31.2   Chief Accounting Officer Certification Pursuant to Exchange Act Rule 13a-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
     
32.1   Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
     
32.2   Chief Accounting Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

 

  * Filed herewith.

 

  (1) Included in the notes to the consolidated financial statements contained in this report

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: August 4, 2016

 

  By: /s/ Paul J. Echausse
    Name: Paul J. Echausse
    Title:  Chief Executive Officer and President
     
  By: /s/ Ellida McMillan
    Name:  Ellida McMillan
    Title:  Chief Accounting Officer, Secretary, and Treasurer

 

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