10-Q 1 v409646_10q.htm 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 March 31, 2015

 

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

(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   ¨
           
Non-accelerated filer   x  (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 13,516,766 shares of the Registrant’s common stock outstanding as of May 11, 2015.

 

 
 

 

ALCENTRA CAPITAL CORPORATION

TABLE OF CONTENTS

 

    Page
     
PART I. FINANCIAL INFORMATION   1
     
Item 1. Financial Statements   1
     

Consolidated Financial Statements of Alcentra Capital Corporation:

     
     
Consolidated Statement of Assets and Liabilities as of March 31, 2015 (unaudited)   1
     
Consolidated Statement of Operations for the Three Months Ended March 31, 2015 (unaudited)   2
     
Consolidated Statement of Changes in Net Assets for the Three Months Ended March 31, 2015 (unaudited)   3
     
Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2015 (unaudited)   4
     
Consolidated Schedule of Investments as of March 31, 2015 (unaudited)   5
     
Financial Statements of BNY Mellon-Alcentra Mezzanine III, L.P.:    
     
Statement of Assets and Liabilities as of March 31, 2014 (unaudited)    
     
Statement of Operations for the Three Months Ended March 31, 2014 (unaudited)   2
     
Statement of Changes in Net Assets for the Three Months Ended March 31, 2014 (unaudited)   3
     
Statement of Cash Flows for the Three Months Ended March 31, 2014 (unaudited)   4
     
Schedule of Investments as of March 31, 2014 (unaudited)  
     
Notes to Unaudited Financial Statements   13
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   29
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk   38
     
Item 4. Controls and Procedures   39
     
PART II. OTHER INFORMATION   40
     
Item 1. Legal Proceedings   40
     
Item 1A. Risk Factors   40
     
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds   40
     
Item 3. Defaults Upon Senior Securities   40
     
Item 4. Mine Safety Disclosures   40
     
Item 5. Other Information   40
     
Item 6. Exhibits   40
     
SIGNATURES   41

 

 
 

 

PART I — FINANCIAL INFORMATION

 

On May 8, 2014, Alcentra Capital Corporation (the “Company”) acquired substantially all of the investment portfolio of BNY Mellon-Alcentra Mezzanine III, L.P. (the “Partnership”). Except for the $1,500 seed capital, the Company had no assets or operations prior to the acquisition of the investment portfolio of the Partnership and as a result, the Partnership is considered a predecessor entity of the Company for purposes of this Quarterly Report. 

 

Item 1. Financial Statements

 

Alcentra Capital Corporation and Subsidiary

Consolidated Statements of Assets and Liabilities

 

Assets  As of
March 31, 2015
(unaudited)
   As of
December 31, 2014
 
Portfolio investments, at fair value          
Non-controlled, non-affiliated investments, at fair value (cost of $173,154,341 and $165,921,535, respectively)  $173,433,992   $167,325,100 
Non-controlled, affiliated investments, at fair value (cost $62,350,239 and $61,564,299, respectively)   63,435,406    61,253,192 
Controlled, affiliated investments, at fair value (cost $26,795,722 and $26,596,938, respectively)   30,158,773    30,055,562 
Total of portfolio investments, at fair value (cost $262,300,302 and $254,082,772, respectively)   267,028,171    258,633,854 
Cash   3,962,318    10,022,617 
Dividends and interest receivable   762,380    1,417,500 
Receivable for investments sold   -    4,753 
Deferred financing costs   1,803,033    1,986,520 
Deferred note offering costs   227,642    25,743 
Prepaid expenses and other assets   73,205    128,388 
Total Assets  $273,856,749   $272,219,375 
           
Liabilities          
Credit facility payable  $56,954,490   $62,499,154 
Notes payable   5,936,000    - 
Payable for investments purchased   -    8,717 
Other accrued expenses and liabilities   153,821    539,417 
Directors' fees payable   38,000    85,692 
Professional fees payable   362,551    409,628 
Interest and credit facility expense payable   154,693    216,476 
Management fee payable   1,148,005    615,668 
Incentive fee payable   806,100    - 
Distributions payable   4,595,700    4,595,700 
Unearned structuring fee revenue   494,381    517,339 
Income tax liability   1,690    45,272 
Deferred tax liability   1,856,987    1,697,004 
Total Liabilities   72,502,418    71,230,067 
           
Commitments and Contingencies (Note 12)          
           
Net Assets          
Common stock, par value $0.001 per share (100,000,000 shares authorized, 13,516,766 and 13,516,766 shares issued and outstanding, respectively)   13,517    13,517 
Additional paid-in capital   197,806,987    197,838,155 
Accumulated net realized gain (loss)   71,966    71,712 
Undistributed investment income   593,320    211,846 
Net unrealized appreciation (depreciation) on investments, net of provision for taxes of $1,856,987 and $1,697,004 as of March 31, 2015 and December 31, 2014, respectively   2,868,541    2,854,078 
Total Net Assets   201,354,331    200,989,308 
Total Liabilities and Net Assets  $273,856,749   $272,219,375 
           
Net Asset Value Per Share  $14.90   $14.87 

 

1
 

 

Alcentra Capital Corporation and Subsidiary

Consolidated Statements of Operations

 

   Alcentra Capital
Corporation and Subsidiary
   BNY Mellon-Alcentra
Mezzanine III, L.P.
 
Investment Income:  For the three months
ended

March 31, 2015
(unaudited)
   For the three months
ended

March 31, 2014
(unaudited)
 
From non-controlled, non-affiliated investments:          
Interest income from portfolio investments  $4,157,559   $1,392,791 
Paid in-kind income from portfolio investments   735,724    373,338 
Other income from portfolio investments   659,896    105,089 
Dividend income from portfolio investments   -    251,752 
From non-controlled, affiliated investments:          
Interest income from portfolio investments   1,219,056    725,012 
Paid in-kind income from portfolio investments   611,499    195,383 
Other income from portfolio investments   28,358    21,176 
From controlled, affiliated investments:          
Interest income from portfolio investments   575,980    514,320 
Paid in-kind income from portfolio investments   198,781    406,120 
Other income from portfolio investments   37,800    10,482 
Total investment income   8,224,653    3,995,463 
           
Expenses:          
Management fees   1,148,005    699,473 
Incentive fees   1,807,567    - 
Professional fees   189,386    79,327 
Valuation services   122,905    - 
Interest and credit facility expense   605,888    40,947 
Amortization of deferred financing costs   183,487    - 
Directors' fees   38,000    - 
Insurance expense   69,535    - 
Other expenses   84,173    - 
Total expenses   4,248,946    819,747 
Waiver of management and incentive fees by the Investment Advisor   (1,001,467)   - 
Net expenses   3,247,479    819,747 
Net investment income   4,977,174    3,175,716 
           
Realized Gain (Loss) and Net Change in Unrealized Appreciation (Depreciation) From Portfolio Investments          
Net realized gain (loss) on:          
Non-controlled, non-affiliated investments   254    94,409 
Non-controlled, affiliated investments   -    - 
Controlled, affiliated investments   -    - 
Net realized gain (loss) from portfolio investments   254    94,409 
Net change in unrealized appreciation (depreciation) on:          
Non-controlled, non-affiliated investments   (1,123,914)   2,734,627 
Non-controlled, affiliated investments   1,396,274    182,597 
Controlled, affiliated investments   (95,573)   279,333 
Net change in unrealized appreciation (depreciation) from portfolio investments   176,787    3,196,557 
Benefit/(Provision) for taxes on unrealized gain on investments   (162,324)   - 
Net realized gain (loss) and net change in unrealized appreciation (depreciation) from portfolio investments   14,717    3,290,966 
           
Net Increase in Net Assets from Operations  $4,991,891   $6,466,682 
           
Basic and diluted:          
Net investment income per share  $0.37    N.A. 
Earnings per share  $0.37    N.A. 
Weighted Average Shares of Common Stock Outstanding   13,516,766    N.A. 
Dividends declared per common share  $0.340    N.A. 

 

2
 

 

Alcentra Capital Corporation and Subsidiary

Consolidated Statements of Changes in Net Assets

 

   Alcentra Capital Corporation
and Subsidiary
   BNY Mellon-Alcentra
Mezzanine III, L.P.
 
   For the three months
ended

March 31, 2015
(unaudited)
   For the three months
ended

March 31, 2014
(unaudited)
 
Beginning Balances          
General Partner   N.A.    4,967,879 
Limited Partners   N.A.    105,671,548 
Total Beginning Balances   N.A.    110,639,427 
Capital contributions          
General Partner   N.A.    - 
Limited Partners   N.A.    34,915,014 
Total   N.A.    34,915,014 
Distributions          
General Partner   N.A.    - 
Limited Partners   N.A.    (3,941,341)
Total   N.A.    (3,941,341)
Net increase in net assets resulting from operations          
General Partner   N.A.    - 
Limited Partners   N.A.    6,466,682 
Total   N.A.    6,466,682 
Carried interest allocation          
General Partner   N.A.    924,599 
Limited Partners   N.A.    (924,599)
Total   N.A.    - 
Total - General Partner   N.A.    5,892,478 
Total - Limited Partners   N.A.    142,187,304 
Ending Balance   N.A.   $148,079,782 
           
Increase (decrease) in net assets resulting from operations          
Net investment income   4,977,174    N.A. 
Net realized gain (loss) on investments   254    N.A. 
Net change in unrealized appreciation (depreciation) on investments   176,787    N.A. 
Benefits/(Provision) for taxes on unrealized gain on investments   (162,324)   N.A. 
Net increase (decrease) in net assets resulting from operations   4,991,891    N.A. 
           
Capital transactions          
Offering costs   (31,168)   N.A. 
Net increase (decrease) in net assets resulting from capital transactions   (31,168)   N.A. 
           
           
Distributions to shareholders from:          
Net investment income   (4,595,700)   N.A. 
Realized gains   -    N.A. 
Total distributions to shareholders   (4,595,700)   N.A. 
           
Total increase (decrease) in net assets   365,023    N.A. 
           
Net assets at beginning of period   200,989,308    N.A. 
Net assets at end of period [including Undistributed investment income of $593,320]   201,354,331    N.A. 

 

3
 

 

Alcentra Capital Corporation and Subsidiary

Consolidated Statements of Cash Flows

 

   Alcentra Capital Corporation
and Subsidiary
   BNY Mellon-Alcentra
Mezzanine III, L.P.
 
   For the three months
ended

March 31, 2015
(unaudited)
   For the three months
ended

March 31, 2014
(unaudited)
 
Cash Flows from Operating Activities          
Net increase in net assets resulting from operations  $4,991,891   $6,466,682 
           
Adjustments to reconcile net increase in net assets from operations to net cash provided by (used in) operating activities:          
Net realized (gain) loss from portfolio investments   (254)   (94,409)
Net change in unrealized (appreciation) depreciation of portfolio investments   (176,787)   (3,196,557)
Deferred tax liability   159,983    - 
Paid in-kind interest income from portfolio investments   (1,546,004)   (974,841)
Accretion of discount on debt securities   (208,115)   (146,419)
Purchases of portfolio investments   (21,982,468)   (37,928,872)
Net proceeds from sales/return of capital of portfolio investments   15,519,311    8,813,417 
Amortization of deferred financing costs   183,487    - 
(Increase) decrease in operating assets:          
Dividends and interest receivable   655,120    560,123 
Receivable for investments sold   4,753    - 
Due from Limited Partners   -    (64,766)
Deferred note offering costs   (201,899)   - 
Prepaid expenses and other assets   55,183    348,518 
Increase (decrease) in operating liabilities:          
Payable for investments purchased   (8,717)   - 
Other accrued expenses and liabilities   (359,853)   (22,109)
Due to affiliate   -    (1,286)
Directors' fees payable   (47,692)   - 
Professional fees payable   (47,077)   - 
Interest and credit facility expense payable   (61,783)   (8,877)
Management fee payable   532,337    (714,014)
Incentive fees payable   806,100    - 
Unearned structuring fee revenue   (22,958)   - 
Income tax   (43,582)   - 
Net cash provided by (used in) operating activities   (1,799,024)   (26,963,410)
           
Cash Flows from Financing Activities          
Offering costs paid   (56,911)   - 
Proceeds from credit facility payable   52,531,684    15,000,000 
Repayments of credit facility payable   (58,076,348)   (15,000,000)
Proceeds from notes payable   5,936,000    - 
Distributions paid to shareholders   (4,595,700)   - 
Capital contributions received from Partners   -    34,834,796 
Cash distributions paid to Partners   -    (3,941,341)
Net cash provided by (used in) financing activities   (4,261,275)   30,893,455 
Increase (decrease) in cash and cash equivalents   (6,060,299)   3,930,045 
Cash at beginning of period   10,022,617    729,431 
Cash and Cash Equivalents at End of Period  $3,962,318   $4,659,476 
           
Supplemental and non-cash financing activities:          
Cash paid during the period for interest  $544,105   $49,824 
Accrued offering costs  $5,944   $- 
Accrued distributions payable  $4,595,700   $- 

 

4
 

 

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments

As of March 31, 2015

(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 — 86.13%                
                                   
Senior Secured - First Lien — 41.08%                         
                                   
A2Z Wireless Holdings, Inc. (2)  Telecommunications  LIBOR + 11.75%       3/31/2018   8,506,183   $8,336,058   $8,506,183    4.22%
Aphena Pharma Solutions (3)  Packaging  8.50% Cash, 2.0% PIK       3/3/2019   3,735,300    3,735,300    3,735,300    1.85%
Black Diamond Rentals  Oil & Gas Services  12% Cash, 2.0% PIK       7/8/2018   12,831,084    12,831,084    13,110,086    6.51%
Datascan Holdings, Inc. (4)  Business Services  LIBOR + 9.50%   1.00%   12/17/2018   3,000,000    3,000,000    3,000,000    1.49%
HealthFusion, Inc. (2)  Healthcare Services  13% Cash       10/7/2018   5,750,000    5,750,000    5,980,000    2.97%
IGT (2),(4)  Industrial Services  LIBOR + 8.50% Cash   1.00%   12/10/2019   9,227,500    9,121,696    9,227,500    4.58%
North Atlantic Petroleum (5)  Retail Distribution  10.75% Cash       11/13/2017   14,250,000    14,250,000    14,250,000    7.08%
Response Team Holdings LLC (4)  Restoration Services  LIBOR + 8.50% Cash, 1.00% PIK   2.00%   3/28/2019   9,206,258    9,206,258    9,208,000    4.57%
Stancor, Inc. (4)  Wholesale/Distribution  LIBOR + 8.0%   0.75%   8/19/2019   7,000,000    7,000,000    7,000,000    3.48%
Triton Technologies (3)  Call Center Services  8.50% Cash, 2.0% PIK       10/23/2018   1,200,000    1,186,431    1,200,000    0.60%
Well Biz Brands (3)  Consumer Services  8.50% Cash, 2.0% PIK       10/23/2018   7,510,046    7,510,046    7,510,046    3.73%
Total Senior Secured - First Lien                        81,926,873    82,727,115    41.08%
                                   
Senior Secured - Second Lien — 20.02%                           
                                   
Alpine Waste (2),(4)  Waste Services  LIBOR + 9.0% Cash, 0.5% PIK   1.00%   12/30/2020   9,011,375   $9,011,375   $9,011,375    4.48%
Bioventus (4)  Healthcare: Orthopedic Products  LIBOR + 10.0% Cash   1.00%   4/10/2020   12,000,000    11,782,698    12,000,000    5.96%
Nation Safe Drivers (NSD) (4)  Automotive  LIBOR + 8.0%   2.00%   9/29/2020   11,721,154    11,721,154    11,721,154    5.82%
Puerto Rico Cable Acquisition Company d/b/a Choice Cable TV (4)  Media: Broadcasting & Subscription  LIBOR + 8.50%   1.00%   5/30/2019   7,500,000    7,402,023    7,575,000    3.76%
Total Senior Secured - Second Lien                      39,917,250    40,307,529    20.02%
                                   
Senior Subordinated — 12.50%                            
                                   
Dentistry For Children, Inc. (2)  Healthcare Services  11% Cash, 2.25% PIK       9/1/2017   14,588,453   $14,588,453   $14,588,453    7.25%
GST Autoleather  Automotive  11% Cash, 2.0% PIK       1/11/2021   8,118,167    8,118,167    8,118,167    4.03%
Media Storm, LLC  Media & Entertainment  10% Cash       8/28/2019   2,454,545    2,454,545    2,454,545    1.22%
Total Senior Subordinated                        25,161,165    25,161,165    12.50%
                                   
Equity/Other — 12.53%                            
                                   
City Carting Holding Company, Inc.,  Series A Preferred Shares  Waste Management  7% Cash, 15% PIK       4/30/2015   8,316,783   $8,316,783   $8,256,878    4.10%

 

See notes to unaudited consolidated financial statements

 

5
 

 

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments (continued)

As of March 31, 2015

(Unaudited)

 

Company***  Industry  Interest
Rate
  Base Rate
Floor
   Maturity
Date
  No. Shares/
Principal
Amount
   Cost(1)   Fair Value   % of Net
Assets
 
                              
 Series B Preferred Shares     10% Cash, 8% PIK           4,152,842   $4,152,842   $4,152,842    2.06%
                                12,469,625    12,409,720    6.16%
Dentistry For Children, Inc., Class A-1 Units(6)  Healthcare Services              1,500,000    2,203,000    2,379,000    1.18%
HealthFusion, Inc., Warrants(6)  Healthcare Services              418,000    418,000    876,000    0.44%
IGT,  Preferred Shares(6)  Industrial Services              990,324    990,324    990,324    0.49%
 Common Shares(6)                 44,000    44,000    44,000    0.02%
                                1,034,324    1,034,324    0.51%
Media Storm, LLC, Preferred Shares(6)  Media & Entertainment              1,216,204    2,346,965    1,634,000    0.81%
Response Team Holdings LLC,  Preferred Shares  Restoration Services  12% PIK       3/28/2019   2,677,139    2,677,139    2,677,139    1.33%
Response Team Holdings LLC, Warrants (6)                 5             
Wholesome Sweeteners, Inc., Common Shares(6)  Food & Beverage              5,000    5,000,000    4,228,000    2.10%
Total Equity/Other                26,149,053    25,238,183    12.53%
Total Investments in Non-Controlled, Non-Affiliated Portfolio Companies     173,154,341    173,433,992    86.13%
                                   
Investments in Non-Controlled, Affiliated Portfolio Companies — 31.51%*               
                                   
Senior Secured - First Lien — 1.90%              
                                   
Show Media, Inc.  Media & Entertainment  5.5% Cash, 5.5% PIK       8/10/2017   3,821,456   $3,537,468   $3,821,456    1.90%
Total Senior Secured - First Lien                        3,537,468    3,821,456    1.90%
                                   
Senior Secured - Second Lien — 5.96%                            
                                   
Southern Technical Institute, Inc. (4)  Education  LIBOR + 9.75%   1.00%  12/2/2020   12,000,000   $12,000,000   $12,000,000    5.96%
Total Senior Secured - Second Lien                    12,000,000    12,000,000    5.96%
                                   
Senior Subordinated — 15.22%                            
                                   
ACT Lighting  Wholesale  12% Cash, 2% PIK       7/24/2019   8,378,081   $8,224,790   $8,378,081    4.16%
     8% PIK         7/24/2020   1,849,018    1,682,063    1,722,000    0.86%
                                9,906,853    10,100,081    5.02%
Battery Solutions, Inc.  Environmental/Recycling Services  12% Cash, 2% PIK       12/20/2018   5,236,326    5,236,326    4,713,294    2.34%
DBI Holding, LLC  Infrastructure Maintenance  12% Cash, 4% PIK       9/6/2019   8,762,307    8,762,307    8,762,307    4.35%
      16% PIK        9/6/2019   7,490,979    7,050,179    7,069,000    3.51%
                                15,812,486    15,831,307    7.86%
Total Senior Subordinated                        30,955,665    30,644,682    15.22%
                                   
Equity/Other — 8.43%                            
                                   
ACT Lighting, Warrants (6)  Wholesale          7/24/2019   143,000   $143,000   $835,000    0.42%

 

See notes to unaudited consolidated financial statements

 

6
 

 

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments (continued)

As of March 31, 2015

(Unaudited)

 

Company***  Industry  Interest
Rate
  Base Rate
Floor
   Maturity
Date
  No. Shares/
Principal
Amount
   Cost(1)   Fair Value   % of Net
Assets
 
                                   
Battery Solutions, Inc., Class A Units(6)  Environmental/Recycling Services           5,000,000   $1,058,000   $     
DBI Holding, LLC, Warrants(6)  Infrastructure Maintenance          3/6/2024   519,412    519,412    1,176,000    0.58%
Net Access Corporation, Class A Units(6)  Technology              3,000,000    8,112,000    10,458,999    5.19%
Show Media, Inc., Units(6)  Media & Entertainment              4,092,210    3,747,427    645,002    0.32%
Southern Technical Institute, Inc.,  Class A Units(6) Education              3,164,063    2,167,000    3,744,000    1.86%
 Warrants(6)                 110,267    110,267    110,267    0.06%
                                2,277,267    3,854,267    1.92%
Total Equity/Other                        15,857,106    16,969,268    8.43%
Total Investments in Non-Controlled, Affiliated Portfolio Companies      62,350,239    63,435,406    31.51%
Investments in Controlled, Affiliated Portfolio Companies — 14.98%**              
                                   
Senior Secured - First Lien — 9.16%              
                                   
DRC Emergency Services  Disaster Recovery Services  10% Cash       1/11/2020   5,000,000   $5,000,000   $5,000,000    2.49%
      8% Cash        6/30/2016   666,560    666,560    666,560    0.33%
                                5,666,560    5,666,560    2.82%
FST Technical Services, LLC  Technology & Telecom  12% Cash, 2% PIK       11/18/2018   12,500,000    12,500,000    12,771,000    6.34%
Total Senior Secured - First Lien                    18,166,560    18,437,560    9.16%
                                   
Equity/Other — 5.82%                            
                                   
DRC Emergency Services, Preferred Shares  Disaster Recovery Services  10% PIK           8,084,241   $6,822,620   $7,141,213    3.55%
FST Technical Services, LLC, Common Shares  Technology & Telecom  9% PIK           1,750,000    1,806,542    4,580,000    2.27%
Total Equity/Other                        8,629,162    11,721,213    5.82%
Total Investments in Controlled, Affiliated Portfolio Companies            26,795,722    30,158,773    14.98%
Total Investments                        262,300,302    267,028,171    132.62%
Liabilities In Excess Of Other Assets                   (65,673,840)   (32.62)%
Net Assets                                   $201,354,331    100.00%

 

*Denotes investments in which the Partnership 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 three months ended March 31, 2015 in these affiliated investments are as follows:

 

   Fair Value at           Interest/   Fair Value at 
   December 31,   Gross   Gross   Dividend/   March 31, 
Name of Issuers  2014   Addition   Reductions   Other income   2015 
ACT Lighting  $10,849,399   $77,937   $-   $337,530   $10,935,081 
Battery Solutions, Inc.   4,576,000    26,095    -    188,770    4,713,294 
DBI Holding, LLC   16,102,785    453,900    -    754,320    17,007,307 
Net Access Corporation   9,412,000    -    -    -    10,458,999 
Show Media, Inc.   4,596,000    6,839,513    6,785,946    252,263    4,466,458 
Southern Technical Institute, Inc.   15,717,008    -    -    326,030    15,854,267 
   $61,253,192   $7,397,445   $6,785,946   $1,858,913   $63,435,406 

 

**Denotes investments in which the Partnership 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 three months ended March 31, 2015 in these affiliated and controlled investments are as follows:

 

   Fair Value at           Interest/   Fair Value at 
   December 31,   Gross   Gross   Dividend/   March 31, 
Name of Issuers  2014   Addition   Reductions   Other income   2015 
The DRC Group  $12,596,562   $198,781   $-   $337,261   $12,807,773 
FST Technical Services, LLC   17,459,000    -    -    475,300    17,351,000 
   $30,055,562   $198,781   $-   $812,561   $30,158,773 

 

***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 investment has an unfunded commitment as of March 31, 2015 which is excluded from the presentation (see Note 12).
(3)The investments are guaranteed by Enhanced Equity Fund, L.P. ("EEF")

 

See notes to unaudited consolidated financial statements

 

7
 

 

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments (continued)

As of March 31, 2015

(Unaudited)

 

(4)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.
(5)Investment is not a qualifying investment as defined under section 55 (a) of the investment Company act of 1940. Qualifying assets must represent at least 70% of total assets at the time of acquisition.
(6)Non-income producing security.

 

Abbreviation Legend

PIK -  Payment-In-Kind

 

See notes to unaudited consolidated financial statements

 

8
 

 

Alcentra Capital Corporation

Consolidated Schedule of Investments

As of December 31, 2014

 

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 — 83.25%                
                                   
Senior Secured - First Lien — 36.94%                    
                                   
Aphena Pharma Solutions  Packaging  8.50% Cash, 2.0% PIK       3/3/2019   3,716,716   $3,716,716   $3,716,716    1.85%
Black Diamond Rentals  Oil & Gas Services  12% Cash, 2.0% PIK       7/8/2018   12,767,248    12,767,248    13,044,000    6.49%
Datascan Holdings, Inc.  Business Services  LIBOR + 9.75%   1.00%  12/17/2018   3,000,000    3,000,000    3,000,000    1.49%
HealthFusion, Inc. (2)  Healthcare Services  13% Cash       10/7/2018   5,750,000    5,750,000    5,980,000    2.97%
IGT (2)  Industrial Services  LIBOR + 8.50% Cash   1.00%  12/10/2019   9,000,000    8,893,250    9,000,000    4.48%
North Atlantic Petroleum (3)  Retail Distribution  10.75% Cash       11/13/2017   14,625,000    14,625,000    14,625,000    7.28%
Response Team Holdings LLC  Restoration Services  LIBOR + 8.50% Cash, 1.00% PIK   2.00%  3/28/2019   9,518,307    9,518,307    9,520,288    4.74%
Stancor, Inc.  Wholesale/Distribution  LIBOR + 8.0%   0.75%  8/19/2019   7,000,000    7,000,000    7,000,000    3.48%
Triton Technologies  Call Center Services  8.50% Cash, 2.0% PIK       10/23/2018   1,200,000    1,185,145    1,201,000    0.60%
Well Biz Brands  Consumer Services  8.50% Cash, 2.0% PIK       10/23/2018   7,167,144    7,167,144    7,167,144    3.56%
Total Senior Secured - First Lien            73,622,810    74,254,148    36.94%
                                   
Senior Secured - Second Lien — 17.29%                    
                                   
Alpine Waste (2)  Waste Services  LIBOR + 9.0% Cash, 0.5% PIK   1.00%  12/30/2020   9,000,000   $9,000,000   $9,000,000    4.48%
Bioventus  Healthcare: Orthopedic Products  LIBOR + 10.0% Cash   1.00%  4/10/2020   12,000,000    11,760,000    12,000,000    5.97%
Nation Safe Drivers (NSD) (2)  Automotive  LIBOR + 8.0%   2.00%  9/29/2020   6,173,798    6,173,798    6,173,798    3.07%
Puerto Rico Cable Acquisition Company d/b/a Choice Cable TV  Media: Broadcasting & Subscription  LIBOR + 8.50%   1.00%  5/30/2019   7,500,000    7,397,404    7,575,000    3.77%
Total Senior Secured - Second Lien              34,331,202    34,748,798    17.29%
                                   
Senior Subordinated — 12.46%                    
                                   
Dentistry For Children, Inc. (2)  Healthcare Services  11% Cash, 2.25% PIK       9/1/2017   14,506,700   $14,506,700   $14,506,700    7.22%
GST Autoleather  Automotive  11% Cash, 2.0% PIK       1/11/2021   8,077,778    8,077,778    8,077,778    4.02%
Media Storm, LLC  Media & Entertainment  10% Cash       8/28/2019   2,454,545    2,454,545    2,454,545    1.22%
Total Senior Subordinated            25,039,023    25,039,023    12.46%
                                   
Equity/Other — 16.56%                           
                                   
American Addiction Centers, Series A Redeemable Preferred Equity(4)  Healthcare & Pharmaceuticals  12% Cash       4/15/2017   8,000,000   $8,000,000   $8,160,000    4.06%

 

See notes to consolidated financial statements

 

9
 

 

Alcentra Capital Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2014

 

 

Company***  Industry  Interest Rate  Base Rate Floor   Maturity Date  No. Shares/
Principal Amount
   Cost(1)   Fair Value   % of Net Assets 
                              
City Carting Holding Company, Inc.,
 Series A Preferred Shares
  Waste Management  7% Cash, 15% PIK      4/30/2015   7,478,639   $7,478,639   $7,478,639    3.72%
 Series B Preferred Shares     10% Cash, 8% PIK           3,876,840    3,876,840    3,876,840    1.93%
                                11,355,479    11,355,479    5.65%
Dentistry For Children, Inc., Class A-1 Units(5)  Healthcare Services              1,500,000    2,203,000    2,262,000    1.13%
HealthFusion, Inc., Warrants(5)  Healthcare Services              418,000    418,000    754,000    0.38%
IGT,
 Preferred Shares(5)
  Industrial Services              962,651    962,651    962,651    0.48%
 Common Shares(5)                 44,000    44,000    44,000    0.02%
                                1,006,651    1,006,651    0.50%
Media Storm, LLC, Preferred Shares(5)  Media & Entertainment              1,216,204    2,346,964    2,555,000    1.27%
Response Team Holdings LLC,
 Preferred Shares
  Restoration Services  12% PIK       3/28/2019   2,598,406    2,598,406    2,599,001    1.29%
Response Team Holdings LLC, Warrants (5)                 5             
Wholesome Sweeteners, Inc., Common Shares(5)  Food & Beverage              5,000    5,000,000    4,591,000    2.28%
Total Equity/Other                      32,928,500    33,283,131    16.56%
Total Investments in Non-Controlled, Non-Affiliated Portfolio Companies      165,921,535    167,325,100    83.25%
                                   
Investments in Non-Controlled, Affiliated Portfolio Companies — 30.48%*                
                                   
Senior Secured - First Lien — 2.29%                    
                                   
Show Media, Inc.  Media & Entertainment  11.0% PIK       8/10/2017   7,535,778   $6,761,028   $4,596,000    2.29%
Total Senior Secured - First Lien                      6,761,028    4,596,000    2.29%
                                   
Senior Secured - Second Lien — 5.97%                    
                                   
Southern Technical Institute, Inc.  Education  LIBOR + 9.75%   1.00%  12/2/2020   12,000,000   $12,000,000   $12,000,000    5.97%
Total Senior Secured - Second Lien            12,000,000    12,000,000    5.97%
                                   
Senior Subordinated — 14.90%                    
                                   
ACT Lighting  Wholesale  12% Cash, 2% PIK       7/24/2019   8,336,399   $8,177,158   $8,336,399    4.15%
   8% PIK           7/24/2020   1,812,763    1,640,216    1,680,000    0.84%
                          9,817,374    10,016,399    4.99%
Battery Solutions, Inc.  Environmental/Energy Services  12% Cash, 2% PIK       12/20/2018   5,210,232    5,210,232    4,576,000    2.28%
DBI Holding, LLC  Infrastructure Maintenance  12% Cash, 1% PIK       9/6/2019   8,631,785    8,631,785    8,631,785    4.29%
   13% PIK           9/6/2019   7,167,600    6,709,880    6,723,000    3.34%
                          15,341,665    15,354,785    7.63%
Total Senior Subordinated            30,369,271    29,947,184    14.90%

 

See notes to consolidated financial statements

 

10
 

 

Alcentra Capital Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2014

 

Company***  Industry  Interest Rate  Base Rate Floor   Maturity Date  No. Shares/
Principal Amount
   Cost(1)   Fair Value   % of Net Assets 
                              
Equity/Other — 7.32%                    
                                   
ACT Lighting, Warrants (5)  Wholesale        7/24/2019   143,000   $143,000   $833,000    0.41%
Battery Solutions, Inc., Class A Units(5)  Environmental/Energy Services              5,000,000    1,058,000         
DBI Holding, LLC, Warrants(5)  Infrastructure Maintenance          3/6/2024   519,412    519,412    748,000    0.37%
Net Access Corporation, Class A Units(5)  Technology              3,000,000    8,112,000    9,412,000    4.68%
Show Media, Inc., Units(5),(6)  Media & Entertainment              324,321    324,321         
Southern Technical Institute, Inc.,
 Class A Units(5)
  Education              3,164,063    2,167,000    3,606,741    1.80%
 Warrants(5)                 110,267    110,267    110,267    0.06%
                                2,277,267    3,717,008    1.86%
Total Equity/Other            12,434,000    14,710,008    7.32%
Total Investments in Non-Controlled, Affiliated Portfolio Companies      61,564,299    61,253,192    30.48%
                                   
Investments in Controlled, Affiliated Portfolio Companies — 14.95%**                
                                   
Senior Secured - First Lien — 9.23%                
                                   
DRC Emergency Services  Disaster Recovery Services  10% Cash       1/11/2020   5,000,000   $5,000,000   $5,000,000    2.49%
   8% Cash           6/30/2016   666,560    666,560    666,560    0.33%
                                5,666,560    5,666,560    2.82%
FST Technical Services, LLC  Technology & Telecom  12% Cash, 2% PIK       11/18/2018   12,500,000    12,500,000    12,879,000    6.41%
Total Senior Secured - First Lien      18,166,560    18,545,560    9.23%
                                   
Equity/Other — 5.72%                
                                   
DRC Emergency Services, Preferred Shares  Disaster Recovery Services  10% PIK           7,885,459   $6,623,838   $6,930,002    3.44%
FST Technical Services, LLC, Common Shares  Technology & Telecom  9% PIK           1,750,000    1,806,540    4,580,000    2.28%
Total Equity/Other      8,430,378    11,510,002    5.72%
Total Investments in Controlled, Affiliated Portfolio Companies      26,596,938    30,055,562    14.95%
Total Investments                               254,082,772    258,633,854    128.68%
Liabilities In Excess Of Other Assets             (57,644,546)   (28.68%)
Net Assets                                   $200,989,308    100.00%

 

*Denotes investments in which the Partnership 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, 2014 in these affiliated investments are as follows:

 

   Fair Value at           Interest/   Fair Value at 
   December 31,   Gross   Gross   Dividend/   December 31, 
Name of Issuers  2013   Addition   Reductions   Other income   2014 
ACT Lighting  $-   $11,419,162   $1,500,000   $685,229   $10,849,399 
Battery Solutions, Inc.   6,075,969    68,663    -    819,578    4,576,000 
DBI Holding, LLC   -    15,637,081    -    2,240,640    16,102,785 
Net Access Corporation   11,964,457    -    3,920,230    359,709    9,855,000 
Show Media, Inc.   6,294,000    643,862    -    818,199    4,596,000 
Southern Technical Institute, Inc.   10,702,958    787,500    9,520,833    1,177,952    15,717,008 
   $35,037,384   $28,556,269   $14,941,063   $6,101,307   $61,696,192 

 

**Denotes investments in which the Partnership 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, 2014 in these affiliated and controlled investments are as follows:

 

   Fair value at           Interest/   Fair Value at 
   December 31,   Gross   Gross   Dividend/   December 31, 
Name of Issuers  2013   Addition   Reductions   Other income   2014 
The DRC Group  $11,906,520   $8,690,664   $8,774,638   $1,928,028   $12,596,562 
FST Technical Services, LLC   14,034,723    37,779    156,873    2,306,535    17,459,000 
   $25,941,243   $8,728,443   $8,931,511   $4,234,563   $30,055,562 

 

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

 

See notes to consolidated financial statements

 

11
 

 

Alcentra Capital Corporation

Consolidated Schedule of Investments (continued)

As of December 31, 2014

 

(2)The investment has an unfunded commitment as of December 31, 2014 which is excluded from the presentation (see Note 12).
(3)Investment is not a qualifying investment as defined under section 55 (a) of the investment Company act of 1940. Qualifying assets must represent at least 70% of total assets at the time of acquisition.
(4)The Company provided financing to Behavioral Healthcare Realty, a wholly owned subsidiary of American Addiction Centers.
(5)Non-income producing security.
(6)As part of the December 2013 amendment, the senior secured notes of Show Media, Inc., contain a provision that, under certain circumstances, allow the holder to convert a portion of the notes into equity, subject to a maximum ownership of 49% of the Common Stock of the business. On December 31, 2014, we entered into an amendment whereby we elected to convert 50% of our Notes into Redeemable Convertible Preferred Stock (the "Preferred"). The Preferred has an 11% accrued dividend. The remaining note has an 11% coupon that is payable at 5.5% cash and 5.5% PIK commencing June 30, 2015.

 

Abbreviation Legend

PIK -   Payment-In-Kind

 

See notes to consolidated financial statements

 

12
 

 

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2015

 

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 intends to elect 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, LLC 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 extensive 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”).

 

Capitalized terms used but not defined here in, shall have the meaning assigned to them in the amended and restated Limited Partnership Agreement dated as of April 5, 2012, as amended.

  

2.Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying financial statements of the Partnership and 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-K and Article 10 of Regulation S-X.

 

13
 

 

In the opinion of management, the consolidated financial results included herein contain all adjustments considered necessary for the fair presentation of financial statements for the interim periods included herein.

 

The accounting records of the Company and the Partnership 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 March 31, 2015, cash balances totaling $3,962,318 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 18) and are capitalized at this time as these fees and expenses were incurred before the issuance commenced.

 

Valuation of Portfolio Investments

 

Portfolio investments are carried at fair value as determined by the General Partner of the Partnership and, in case of the fair value as of March 31, 2015, 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 or the Partnership 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 Partnership’s or 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:

  

14
 

 

 

(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 or Partnership of all or a major portfolio investments; and (iii) sales prices of recent public or private transactions in identical or comparable investments.

 

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 General Partner or for the Company, its Adviser. Preliminary valuation conclusions are then documented and discussed with senior investment professionals of the General Partner of the Partnership or for 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 statement 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 statement of changes in net assets. $1.56 million of offering costs were incurred with the initial public offering.

 

The Partnership is obligated to reimburse the General Partner for 100% of the placement fee and for organizational costs of the Partnership in an amount not to exceed $1,250,000 on a cumulative basis. Organizational costs paid by the Partnership in excess of $1,250,000 (“Excess Organizational Expenses”) and all placement fees paid by the Partnership will reduce the management fee as described in Note 7. No costs were charged for the Partnership for the three months ended March 31, 2015 or March 31, 2014.

 

15
 

 

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 and Partnership 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 and Partnership receive 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 and Partnership expect to collect such amounts. The Company and Partnership accrue 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 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 March 31, 2015 and December 31, 2014.

 

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 – Beginning with its first taxable year, the Company intends to elect for U.S. federal income tax purposes to be treated 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 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.

 

The Partnership is structured as a partnership for U.S. Federal income tax purposes, and as such, is not subject to income taxes; each Partner (depending on its structure for tax purposes) may be individually liable for income taxes, if any, on its share of the Partnership’s taxable income.

 

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 months ended March 31, 2015 and for the year ended December 31, 2014, we recognized a provision for income tax on unrealized gain on investments of $0.2 million and $1.6 million for the Taxable Subsidiaries, respectively. As of March 31, 2015 and December 31, 2014, $1.8 million and $1.6 million were included in the deferred tax liability on the Consolidated Statement of Assets and Liabilities, respectively.

 

The following is the major tax jurisdiction for the Partnership and the earliest tax year subject to examination: United States – 2010.

 

16
 

 

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.

 

3.Fair Value of Portfolio Investments

 

The Company and Partnership account 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 and Partnership 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 and Partnership, to the extent that it holds such investments, does not adjust the quoted price for these investments, even in situations where the Company and Partnership 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 and Partnership. 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 and Partnership’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 table summarizes the levels in the fair value hierarchy into which the Company and Partnership’s financial instruments are categorized as of March 31, 2015 and December 31, 2014:

 

As of March 31, 2015

 

   Level 1   Level 2   Level 3   Total 
                     
Senior Secured – First Lien  $-   $-   $104,986,131   $104,986,131 
Senior Secured – Second Lien   -    -    52,307,529    52,307,529 
Subordinated Debt   -    -    55,805,847    55,805,847 
Equity/Other   -    -    53,928,664    53,928,664 
Total investments  $-   $-   $267,028,171   $267,028,171 

  

As of December 31, 2014

 

   Level 1   Level 2   Level 3   Total 
                     
Senior Secured – First Lien  $-   $-   $97,395,708   $97,395,708 
Senior Secured – Second Lien   -    -    46,748,798    46,748,798 
Subordinated Debt   -    -    54,986,207    54,986,207 
Equity/Other   -    8,160,000    51,343,141    59,503,141 
Total investments  $-   $8,160,000   $250,473,854   $258,633,854 

 

17
 

 

During the period from May 8, 2014 to December 31, 2014, our ability to observe valuation inputs has resulted in a reclassification of $8,160,000 investment from Level 3 to Level 2 with no other reclassifications of assets between levels. This transfer was reported at the end of the reporting period in which it occurred. There were no transfers between levels for the three months ended March 31, 2015.

 

Transfers between levels of the fair value hierarchy are reported at the end of the reporting period in which they occur.    

 

The changes in investments classified as Level 3 are as follows for the three months ended March 31, 2015 and March 31, 2014. 

 

    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   152,334    27,317    28,464    -    208,115 
Paid in-kind interest   195,638    11,375    680,074    658,917    1,546,004 
Net realized gain (loss)   254    -    -    -    254 
Net change in unrealized appreciation (depreciation)   2,509,918    (27,317)   111,102    (2,256,916)   336,787 
Purchases   12,251,590    5,547,356    -    4,183,522    21,982,468 
Sales/Return of capital   (7,519,311)   -    -    -    (7,519,311)
Transfers in   -    -    -    -    - 
Transfers out   -    -    -    -    - 
Balance as of March 31, 2015  $104,986,131   $52,307,529   $55,805,847   $53,928,664   $267,028,171 
                          
Net change in unrealized appreciation(depreciation) from investments still held as of March 31, 2015  $2,407,882   $(27,317)  $111,102   $(2,699,916)  $(208,249)

 

   Debt   Common Shares/
Membership
Units
   Preferred
Shares/
Membership
Units
   Warrants   Total 
Balance as of January 1, 2014  $77,460,413   $19,884,409   $20,149,748   $2,702,267   $120,196,837 
Amortized discounts/premiums   146,419    -    -    -    146,419 
Paid in-kind interest   313,924    -    660,917    -    974,841 
Net realized gain (loss)   -    94,409    -    -    94,409 
Net change in unrealized appreciation (depreciation)   231,359    339,354    (258,156)   773,000    1,085,557 
Purchases   33,822,423    -    3,587,037    519,412    37,928,872 
Sales/Return of capital   (8,219,008)   (594,409)   -    -    (8,813,417)
Transfers in   -    -    -    -    - 
Transfers out   -    -    -    -    - 
Balance as of March 31, 2014  $103,755,530   $19,723,763   $24,139,546   $3,994,679   $151,613,518 
                          
Net change in unrealized appreciation (depreciation) from investments still held as of March 31, 2014  $231,359   $433,763   $(258,156)  $773,000   $1,179,966 

 

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 March 31, 2015 and December 31, 2014, respectively.

 

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As of March 31, 2015:

 

Assets at Fair Value  Fair Value at
March 31,
2015
   Valuation
Technique
  Unobservable Input  Range of
Inputs
   Weighted
Average
 
                      
Senior Secured - First Lien  $104,986,131   Yield to Maturity  Comparable Market Rate   7.75%-14.0%   11.35%
                      
Senior Secured - Second Lien  $52,307,529   Yield to Maturity  Comparable Market Rate   9.5%-11.0%   10.42%
                      
Senior Subordinated  $55,805,847   Yield to Maturity  Comparable Market Rate   10.0%-23.0%   12.11%
                      
Preferred Ownership  $23,862,072   Market Approach  Enterprise Value/LTM EBITDA Multiple   7.48x-8.46x    7.97x
                      
Common Ownership/ Common Warrants  $30,066,592   Market Approach  Enterprise Value/LTM EBITDA Multiple   10.52x-10.69x    10.61x
                      
Total  $267,028,171                 

 

As of December 31, 2014:

 

Assets at Fair Value  Fair Value at
December 31,
2014
   Valuation
Technique
  Unobservable Input  Range of
Inputs
   Weighted
Average
 
                      
Senior Secured - First Lien  $97,395,708   Yield to Maturity  Comparable Market Rate   8.75% - 36.3%    11.82%
                      
Senior Secured - Second Lien  $46,748,798   Yield to Maturity  Comparable Market Rate   9.5% - 11.0%    10.27%
                      
Senior Subordinated  $54,986,207   Yield to Maturity  Comparable Market Rate   13.0% - 20.0%    11.23%
                      
Preferred Ownership  $24,402,133   Market Approach  Enterprise Value/LTM EBITDA Multiple   7.56x – 8.35x    7.95x
                      
Common Ownership/ Common Warrants  $26,941,008   Market Approach  Enterprise Value/LTM EBITDA Multiple   10.19x – 10.99x    10.59x
                      
Total  $250,473,854                 

  

4.Share Transactions/Partners’ Capital

 

For the three months ended March 31, 2015, there were no shares issued or proceeds received by the Company.

  

The Partnership held its initial closing on May 14, 2010, accepting capital commitments amounting to $105,850,000 from Limited Partners. Seven additional closings were held subsequent to May 14, 2010. The most recent of which being the final closing, took place on August 10, 2012, bringing total commitments to $210,200,000. As of March 31, 2014, Limited Partners have contributed $202,197,552 or 96.29% of their total capital commitments to the Partnership, respectively. As of March 31, 2014, the capital balances of Class A Limited Partners and Class B Limited Partners amounted to 65.91% and 28.55% of total partners’ capital, respectively. 

 

5.Distributions

 

Alcentra Capital Corporation

 

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, although the Company may decide to retain such capital gains for investment and pay a 4% excise tax on such excess.

 

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The following table reflects the Company’s dividends declared and paid or to be paid on its common stock:

 

Date Declared  Record Date  Payment Date  Amount Per Share 
June 24, 2014  June 30, 2014  July 7, 2014  $0.178 
August 12, 2014  September 30, 2014  October 6, 2014  $0.340 
November 4, 2014  December 30, 2014  January 6, 2015  $0.340 
March 10, 2015  March 31, 2015  April 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.

 

BNY Mellon-Alcentra Mezzanine III, L.P.

 

Proceeds from portfolio investments will be distributed to the partners in proportion to their contributions to such investment until the partners have received a) first, 100% to all Limited Partners until the Limited Partners have received an amount equal to their aggregate capital contributions made to the Partnership (including, capital contributions made to the Partnership to fund the Partnership’s organizational expenses, management fees and other ongoing costs); b) second, 100% to all Limited Partners until the Limited Partners have received preferred returns of 8% and 5%, for Class A Limited Partners and Class B Limited Partners, respectively, per annum on the aggregate capital contributions made to the Partnership (including, capital contributions made to the Partnership to fund the Partnership’s organizational expenses, management fees and other ongoing costs); c) third, for Class A Limited Partners only, 100% to the General Partner as a carried interest distribution until the General Partner has received an amount equal to 20% of the aggregate amount of distributions; and d) thereafter (a) 80% to such Partner and (b) 20% to the General Partner. Income from short-term investments is distributed to all partners in proportion to such partners’ contributions to such investments.

 

For the three months ended March 31, 2014, the Partnership made distributions to the General Partner and the Limited Partners totaling $3,941,341. For the three months ended March 31, 2014, distributions made to Class A Limited Partners and Class B Limited Partners amounted to 70.03% and 29.97% of total distributions, respectively.

 

Upon the termination of the Partnership, if it is determined that the General Partner has received carried interest distributions in excess of the amount it would have received had such distributions been determined on a cumulative basis, a clawback payment of such excess is required of the General Partner.

 

Distributions to Limited Partners during the three months ended March 31, 2014 are broken down as follows:

 

   For the three months
ended
March 31,
2014
 
Return of capital  $750,000 
Return on capital   3,191,341 
Total  $3,941,341 

 

6.Allocation of Profits and Losses

 

Allocations of Partnership profits are made in a manner which is consistent with, and gives effect to, the distribution procedures outlined in Note 5 above. Partnership losses are allocated to all partners in proportion to such partners’ capital commitments or to such partners’ percentage ownership in such investment from which the losses arose, or if there is no such investment, in proportion to their capital commitment. For the three months ended March 31, 2014, the General Partner was allocated carried interest distributions of $924,599. As a result of the completion of Alcentra’s initial public offering, the General Partner’s allocated carried interest as of May 7, 2014 was reallocated to the Limited Partners in accordance with the provisions of the Partnership’s Limited Partnership Agreement (December 31, 2013, as revised). Accordingly, the carried interest allocated to the General Partner through May 7, 2014 of approximately $6 million was reallocated to the Limited Partners.

 

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7.Related Party Transactions

 

Management Fee

 

Alcentra Capital Corporation

 

Under the Investment Advisory Agreement, we have agreed to pay Alcentra NY an annual base management fee based on our gross assets as well as an incentive fee based on our performance. The base management fee is calculated at an annual rate as follows: 1.75% of our 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 our gross assets are below $625 million; 1.625% if our gross assets are between $625 million and $750 million; and 1.5% if our gross assets are greater than $750 million. The various management fee percentages (i.e. 1.75%, 1.625% and 1.5%) would apply to our entire gross assets in the event our 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 quarter.

 

The incentive fee 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 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 we receive 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 we have received such income in cash.

 

For the three months ended March 31, 2015, the Company recorded expenses for base management fees of $1,148,005, of which $0 was waived by the Adviser and $1,148,005 was payable at March 31, 2015. For the three months ended March 31, 2014, the Partnership recorded an expense for base management fee of $699,473 of which $1,000 was payable at March 31, 2014.

 

Our Adviser may waive its fees (base management and incentive fee), without recourse against or reimbursement by us, for the remainder of the quarter in which the initial public offering is completed and the subsequent four quarters to the extent required in order for the Company 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 months ended March 31, 2015, the Company incurred incentive fees of $1,807,567, of which $1,001,467 was waived by the Adviser.

 

For the three months ended March 31, 2015 and March 31, 2014, the Company recorded waivers of management and incentive fees which totaled $1,001,467 and $0, respectively.

  

BNY Mellon-Alcentra Mezzanine III, L.P.

 

For the period from the Commencement Date to the fifth anniversary of the Final Closing Date, the Partnership will pay to the Manager a management fee at an annual rate equal to the product of 1.50% for each Class A Limited Partner and 1.00% - 1.25% for each Class B Limited Partner, in each case multiplied by such Limited Partner’s capital commitment. After the fifth anniversary of the Final Closing Date, the management fee will be paid at annual rates of 1.50% and 1.00% - 1.25% for Class A Limited Partners and Class B Limited Partners, respectively, in each case multiplied by the aggregate amount of such Limited Partner’s capital contributions used to fund the cost of investments that have not been the subject of a disposition less the aggregate amount of such Limited Partner’s capital contributions with respect to all investments which have not been disposed of prior to the date of such distribution and which have been permanently written off. The management fee is payable quarterly in advance. For the three months ended March 31, 2014, Class A Limited Partners were charged $528,719, and Class B Limited Partners were charged $170,754, in management fees.

 

The management fee is reduced by the placement fees and Excess Organization Expenses paid by the Partnership. The management fee is further reduced by 100% of all transaction fees, investment fees, monitoring fees, management fees and directors’ fees received by the General Partner or any affiliate thereof, net of unreimbursed out-of-pocket expenses. For the three months ended March 31, 2014, there were no placement fees, Excess Organizational Expenses, or fees received by the Manager that reduced management fee expense in the reporting period.

 

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Certain employees of the Manager are Limited Partners of the Partnership. As of May 7, 2014, an affiliate of the Partnership also had a $50.0 million commitment to the Partnership as a Limited Partner. For the three months ended March 31, 2014, this Limited Partner has contributed $48,460,603, or 96.92%, of its total capital commitments to the Partnership.

 

8.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. We have obtained directors’ and officers’ liability insurance on behalf of our directors and officers.

 

For the three months ended March 31, 2015, the Company recorded directors fee expense of $38,000, of which $38,000 was payable at March 31, 2015. For the three months ended March 31, 2014, the Company did not record any directors’ fees expense.

 

9.Purchases and Sales (Investment Transactions)

 

Investment purchases, sales and principal payments/paydowns are summarized below for the three months ending March 31, 2015 and March 31, 2014.

 

   For the three months ended March 31, 
   2015   2014 
Investment purchases, at cost (including PIK interest)  $23,528,472   $38,903,713 
Investment sales, proceeds (including Principal payments/paydown proceeds)   15,519,311    8,813,417 

 

10.Alcentra Capital InterNotes®

 

On January 30, 2015, we entered into a Selling Agent Agreement (the “Selling Agent Agreement”) with Incapital LLC, as purchasing agent for our issuance and sale from time to time of up to $40 million of Alcentra Capital InterNotes® (the “InterNotes® Offering”). Additional agents may be appointed by us from time to time in connection with the InterNotes Offering and become parties to the Selling Agent Agreement.

 

These notes are direct unsecured obligations and each series of notes will be issued by a separate trust. 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 three months ended March 31, 2015, we issued $6.0 million in aggregate principal amount of our Alcentra Capital InterNotes for net proceeds of $5.8 million. These notes were issued with a stated interest rate of 6.5% and 6.375%. These notes mature between March 15, 2020 and January 15, 2022.

 

The following table summarizes the Alcentra Capital InterNotes® issued and outstanding during the three months ended March 31, 2015.

 

Tenor at

Origination

(in years)

  Principal
Amount  
(000’s omitted)
  

Interest Rate

Range

   Weighted
Average
Interest Rate
   Maturity Date Range
7  $1,331    6.500%      January 15, 2022
5   2,055    6.375%       February 15, 2020
5   1,000    6.375%       February 15, 2020
5   1,050    6.375%       February 15, 2020
5   500    6.375%       March 15, 2020
   $5,936              

 

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 $0.115 million of fees which are being amortized over the term of the notes and are included within deferred financing costs on the Consolidated Statement of Assets and Liabilities as of March 31, 2015. During the three months ended March 31, 2015 we recorded $50,236 of interest costs and amortization of financing costs on the Alcentra Capital InterNotes® as interest expense.

 

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11.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. Effective December 19, 2014 the Company entered into an amendment to the Credit Facility to upsize the revolver to a commitment size of $115 million. The Credit Facility is secured primarily by the Company’s assets. The stated maturity date for the Credit Facility is May 8, 2017, which may be extended by mutual agreement. Costs of $2,313,355 were incurred in connection with obtaining and amending the Credit Facility, which have been recorded as deferred financing costs on the 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.

 

Borrowings under the Credit Facility bear interest, subject to the Company’s election, at a rate per annum equal to (i) the one, three or six month LIBOR, as applicable, plus 3.25% or (ii) 2.25% plus the highest of (A) a prime rate, (B) the Federal Funds rate plus 0.5% and (C) three month LIBOR plus 1.0%. 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 March 31, 2015, the Company was in compliance in all material respects with the terms of the Credit Facility.

 

As of March 31, 2015 and March 31, 2014 the Company had United States dollar borrowings of $57.0 million and $62.5 million outstanding under the Credit Facility, respectively. For the three months ended March 31, 2015, the Company borrowed an average of $55.9 million with a weighted average interest rate of 4.03%.

 

The Partnership entered into a credit agreement with the Administrator under which the Partnership can borrow an aggregate principal amount of $15 million for the financing of portfolio investments. Interest is charged at the Alternative Rate, defined as the higher of (a) the Federal Fund Rate and (b) the Overnight LIBOR Rate, plus 130 basis points. The interest rate, period to date, has ranged from 1.39% to 1.40%. The credit agreement is set to mature on dates between May 17, 2014 and June 29, 2014. As of March 31, 2014, the Partnership had outstanding borrowings of $15,000,000. For the three months ended March 31, 2014, the Partnership borrowed an average of $15,000,000. On April 17, 2014, the Partnership repaid the outstanding borrowing of $15,000,000.

 

12.Market and Other Risk Factors

 

At March 31, 2015, 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-five 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.

 

Economic conditions in 2014 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.

 

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13.Commitments and Contingencies

 

In the normal course of business, the Company and the Partnership enter 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 March 31, 2015, the Company had $13,959,025 unfunded commitments under loan and financing agreements. As of March 31, 2015 and December 31, 2014, the Partnership’s unfunded commitment under loan and financing agreements are presented below.

 

   As of 
   March 31, 
2015
   December 31, 
2014
 
A2Z Wireless Holdings, Inc.  $2,709,025   $- 
Alpine Waste   5,000,000    5,000,000 
Dentistry for Children, Inc.   3,500,000    3,500,000 
HealthFusion, Inc.   2,500,000    2,500,000 
IGT   250,000    500,000 
Nation Safe Drivers (NSD)   -    826,202 
Total  $13,959,025   $12,326,202 

 

14.Classification of Portfolio Investments

 

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

 

   Cost    Fair Value    % of Net
Assets *
 
Industry               
Healthcare Services  $22,959,453   $23,823,453    11.83%
Automotive   19,839,321    19,839,321    9.85%
Technology & Telecom   14,306,542    17,351,000    8.62%
Infrastructure Maintenance   16,331,898    17,007,307    8.45%
Education   14,277,267    15,854,267    7.87%
Retail Distribution   14,250,000    14,250,000    7.08%
Oil & Gas Services   12,831,084    13,110,086    6.51%
Disaster Recovery Services   12,489,180    12,807,773    6.36%
Waste Management   12,469,625    12,409,720    6.16%
Healthcare: Orthopedic Products   11,782,698    12,000,000    5.96%
Restoration Services   11,883,397    11,885,139    5.90%
Wholesale   10,049,853    10,935,081    5.43%
Technology   8,112,000    10,458,999    5.19%
Industrial Services   10,156,020    10,261,824    5.10%
Waste Services   9,011,375    9,011,375    4.48%
Media & Entertainment   12,086,405    8,555,003    4.25%
Telecommunications   8,336,058    8,506,183    4.22%
Media: Broadcasting & Subscription   7,402,023    7,575,000    3.76%
Consumer Services   7,510,046    7,510,046    3.73%
Wholesale/Distribution   7,000,000    7,000,000    3.48%
Environmental/Recycling Services   6,294,326    4,713,294    2.34%
Food & Beverage   5,000,000    4,228,000    2.10%
Packaging   3,735,300    3,735,300    1.86%
Business Services   3,000,000    3,000,000    1.49%
Call Center Services   1,186,431    1,200,000    0.60%
Total  $262,300,302   $267,028,171    132.62%
                
Geographic Region            
South  $69,474,705   $70,983,104    35.25%
Eastern   49,901,464    52,164,571    25.91%
South East   44,192,848    44,587,892    22.14%
West   40,024,169    38,778,960    19.26%
Mid West   22,748,551    21,337,644    10.60%
South West   14,306,542    17,351,000    8.62%
Canada   14,250,000    14,250,000    7.08%
Puerto Rico   7,402,023    7,575,000    3.76%
Total  $262,300,302   $267,028,171    132.62%
                
Investment Type               
Senior Secured – First Lien  $103,630,901   $104,986,131    52.14%
Senior Subordinated   56,116,830    55,805,847    27.72%
Equity/Other   50,635,321    53,928,664    26.78%
Senior Secured – Second Lien   51,917,250    52,307,529    25.98%
Total  $262,300,302   $267,028,171    132.62%

 

*Fair value as a percentage of Net Assets

 

24
 

 

As of December 31, 2014, the Company’s portfolio investments were categorized as follows:

 

   Cost   Fair Value   % of Net
Assets *
 
Industry               
Healthcare Services  $22,877,700   $23,502,700    11.69%
Technology & Telecom   14,306,541    17,459,000    8.69%
Infrastructure Maintenance   15,861,076    16,102,785    8.01%
Education   14,277,267    15,717,008    7.82%
Retail Distributions   14,625,000    14,625,000    7.28%
Automotive   14,251,576    14,251,576    7.09%
Oil & Gas Services   12,767,248    13,044,000    6.49%
Disaster Recovery Services   12,290,398    12,596,562    6.26%
Restoration Services   12,116,713    12,119,289    6.03%
Healthcare: Orthopedic Products   11,760,000    12,000,000    5.97%
Waste Management   11,355,479    11,355,479    5.65%
Wholesale   9,960,374    10,849,399    5.40%
Industrial Services   9,899,901    10,006,651    4.98%
Media & Entertainment   11,886,858    9,605,545    4.78%
Technology   8,112,000    9,412,000    4.68%
Waste Services   9,000,000    9,000,000    4.48%
Healthcare & Pharmaceuticals   8,000,000    8,160,000    4.06%
Media: Broadcasting & Subscription   7,397,404    7,575,000    3.77%
Consumer Services   7,167,144    7,167,144    3.57%
Wholesale/Distribution   7,000,000    7,000,000    3.48%
Food & Beverage   5,000,000    4,591,000    2.28%
Environmental/Energy Services   6,268,232    4,576,000    2.28%
Packaging   3,716,716    3,716,716    1.85%
Business Services   3,000,000    3,000,000    1.49%
Call Center Services   1,185,145    1,201,000    0.60%
Total  $254,082,772   $258,633,854    128.68%
                
Geographic Region               
South  $63,408,612   $65,129,019    32.39%
South East   52,303,129    52,764,705    26.25%
Eastern   48,315,209    50,080,809    24.92%
West   39,380,867    38,346,543    19.08%
South West   14,306,541    17,459,000    8.69%
Canada   14,625,000    14,625,000    7.28%
Mid West   14,346,010    12,653,778    6.30%
Puerto Rico   7,397,404    7,575,000    3.77%
Total  $254,082,772   $258,633,854    128.68%
                
Investment Type               
Senior Secured – First Lien  $98,550,397   $97,395,708    48.46%
Equity/Other   53,792,879    59,503,141    29.60%
Senior Subordinated   55,408,294    54,986,207    27.36%
Senior Secured – Second Lien   46,331,202    46,748,798    23.26%
Total  $254,082,772   $258,633,854    128.68%

 

*Fair value as a percentage of Net Assets

 

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15.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 three months ended March 31, 2015.

  

Per share data (1)     
Net asset value, beginning of period  $14.87 
Net investment income (loss)   0.37 
Net realized and unrealized gains (losses)   0.01 
Provision for taxes on unrealized appreciation on investments   (0.01)
Net increase (decrease) in net assets resulting from operations   0.37 
      
Distributions to shareholders: (2)     
From net investment income   (0.34)
      
Net asset value, end of period  $14.90 
Market value per share, end of period  $13.30 
      
Total return based on net asset value (3)(4)   2.5%
Total return based on market value (3)(4)   (8.5)%
      
Shares outstanding at end of period   13,516,766 
      
Ratio/Supplemental Data:     
Net assets, at end of period  $201,354,331 
Ratio of total expenses before waiver to average net assets (5)   8.57%
Ratio of interest expense to average net assets (5)   1.59%
Ratio of incentive fees to average net assets (5)   3.64%
Ratio of waiver of management and incentive fees to average net assets (5)   2.02%
Ratio of net expenses to average net assets (5)   6.55%
Ratio of net investment income (loss) before waiver to average net assets (5)   8.01%
Ratio of net investment income (loss) after waiver to average net assets (5)   10.03%
      
Total Credit Facility payable outstanding  $56,954,490 
Total Notes payable outstanding  $5,986,236 
      
Asset coverage ratio (6)   4.2 
Portfolio turnover rate (4)(7)   6%

 

(1)The per share data was derived by using the 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.
(7)For the three months ended March 31, 2015.

  

The following performance ratios and internal rate of return (“IRR”) (since inception) are presented for the Limited Partners as a single class, taken as a whole. The actual ratios of each individual investor may vary and are dependent upon the specific allocations of income and expense to such investor and the timing of capital transactions for such investor.

 

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The net investment income (loss) ratio and the expense ratio are computed using the weighted average capital of the Limited Partners during the periods. The net investment income (loss) ratio does not include the effects of the carried interest allocation. The weighted average capital calculation reflects a measure of capital after each capital contribution, distribution or other significant change in capital at the end of each quarterly accounting period. The IRR was computed based on the actual dates of Limited Partners’ cash inflows (capital contributions) and outflows (cash and stock distributions), and the residual value of the Limited Partners’ capital accounts as of March 31 2014.

 

   For the three
months ended  
March 31, 2014
 
Net investment income (loss) ratio before carried interest allocation    10.79%
      
Expense ratio before carried interest allocation    2.80%
      
Carried interest allocation    0.77 
      
Expense ratio after carried interest allocation    3.57%
      
Cumulative IRR after carried interest allocation    11.04%

 

These financial highlights may not be indicative of future performance.

 

16.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 three month ended March 31, 2015 and as of and for the year ended December 31, 2014.

 

   As of      For the three months ended 
Balance Sheet  March 31, 2015   Income Statement  March 31, 2015 
            
Current Assets   20,053,747   Net Sales   5,192,525 
Noncurrent Assets   26,233,183   Gross Profit   1,443,361 
Current Liabilities   5,800,050   Net Income (Loss)   (987,289)
Noncurrent Liabilities   20,000,000         

 

   As of      For the year ended 
Balance Sheet  December 31, 2014   Income Statement  December 31, 2014 
            
Current Assets   30,648,653   Net Sales   71,694,426 
Noncurrent Assets   27,038,806   Gross Profit   25,815,319 
Current Liabilities   11,701,846   Net Income (Loss)   10,241,467 
Noncurrent Liabilities   20,219,922         

 

In addition to the risks associated with our investments in general, there are unique risks associated with our investments in each of these entities. In this regard, DRC Emergency Services LLC (“DRC ES”) derives significantly all of its revenue from contracts with federal, state and local governments and governmental agencies. As a result, if it does not comply with the terms of a contract or with regulations or statutes, it could be subject to downward contract price adjustments or refund obligations or could in extreme circumstances be assessed penalties or be debarred or suspended from obtaining future contracts for a specified period of time. Any such suspension or debarment or other sanction could have an adverse effect on its business.

 

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Similarly, 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 operations or financial condition.

 

On August 29, 2014, DRC ES was suspended from Federal Government contracting and from directly or indirectly receiving the benefits of federal assistance programs. In DRC ES’s opinion the suspension primarily resulted from alleged actions taken by former employees and subcontractors related to two particular contracts. None of the employees in question work for DRC ES or any of its affiliates. DRC ES is fully cooperating with all Government investigations. The suspension was terminated on October 1, 2014. At this time we believe the DRC ES’s contracts and customer relationships were not materially impacted by the suspension.

 

17.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 March 31, 2015, the following activity occurred:

 

On April 2, 2015, Alcentra funded a $10,000,000 investment in Radiant Logistics, Inc.(12.0 % subordinated note)

 

On April 6, 2015, a $0.34 per share dividend was paid to shareholders of record March 31, 2015

 

On April 15, 2015, Alcentra completed a $40 million note offering program which commenced on January 29, 2015. The unsecured notes mature on January 15, 2022, February 15, 2020, March 15, 2020 and April 15, 2020. The Notes bear interest at a rate of 6.5% and 6.375% semi-annually and have maturities ranging from five to seven years. The net proceeds of $39.2 million were used to reduce the outstanding borrowings on the credit facility.

 

On April 30, 2015, Alcentra funded a $9,500,000 investment in Alarm Capital Alliance, LLC (13% Cash, 3.25% PIK subordinated note)

 

On April 30, 2015, the Company amended its senior subordinated note investment in Battery Solutions, LLC and Battery Solutions Holdings, LLC. Approximately $3.3 million of the senior subordinated note was converted into Class E Preferred Units and Class F Units. Based on certain financial performance tests, the Company has the right to convert some of the Class E Preferred Units back to subordinated debt (with a corresponding reduction in Class F Units). The amended senior subordinated notes have a 14% coupon (6% cash and 8% PIK), with more of the coupon paid in cash starting in the second year following the conversion as long as certain conditions have been met. Battery Solutions has remained current on all their interest payments throughout this period. In addition, the fair market value of this investment was written up as EBITDA improved by 13% on a year-over-year basis.

 

On May 11, 2015, the Board of Directors approved the 2015 Second quarter dividend of $0.34 per share for shareholders of record date June 30, 2014 and payable July 6, 2015.

 

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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 intends to elect to be treated as a regulated investment company (“RIC”), commencing with its tax year ending December 31, 2014, under Subchapter M of the Internal Revenue.

 

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.

 

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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

 

Since Alcentra did not commence investment operations until May 8, 2014, the discussion and analysis of financial condition and results of operations as of March 31, 2014 described in this section pertains to the historical operations of Fund III given that Alcentra acquired substantially all of Fund III’s investment portfolio in connection with the acquisition of the Fund III Acquired Assets. However, ACC did not assume any liabilities of Fund III in connection with the acquisition of the Fund III Acquired Assets or contractual arrangements of Fund III, including with its lender or the Manager, in connection with the acquisition of the Fund III Acquired Assets other than to fund $2.6 million under revolving lines of credit. As a result, you should be mindful of the foregoing facts when reviewing the discussion and analysis set forth in this section as well as in connection with reviewing the financial information contained elsewhere in this Form 10-Q. In addition, the discussion and analysis below does not take into account or otherwise relate to the Warehouse Portfolio acquired by ACC from Alcentra Group.

 

As used in this section, the terms “we” and “us” refer to Fund III for the periods prior to the Offering and refer to ACC for the periods after the Offering.

 

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.

 

As of March 31, 2015, we had $267.0 million (at fair value) invested in 28 companies. Our portfolio included approximately 39% of first lien debt, 20% of second lien debt, 21% of mezzanine debt and 20% of equity investments. The composition of our investments as of March 31, 2015 was as follows:

 

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   Cost   Fair Value 
Senior Secured – First Lien  $103,630,901   $104,986,131 
           
Senior Secured – Second Lien   51,917,250    52,307,529 
           
Unsecured Debt   56,116,830    55,805,847 
           
Equity   50,635,321    53,928,664 
           
Total Investments  $262,300,302   $267,028,171 

 

As of December 31, 2014, we had $258.6 million (at fair value) invested in 28 portfolio companies. Our portfolio included approximately 37.6% of first lien debt, 18.0% of second lien debt, 21.2% of mezzanine debt and 23% of equity investments at fair value. The composition of our investments as of December 31, 2014 was as follows:

 

   Cost   Fair Value 
Senior Secured – First Lien  $98,550,397   $97,395,708 
           
Senior Secured – Second Lien   46,331,202    46,748,798 
           
Unsecured Debt   55,408,294    54,986,207 
           
Equity   53,792,879    59,503,141 
           
Total Investments  $254,082,772   $258,633,854 

  

Our investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of March 31, 2015 and December 31, 2014, we had $13.9 million and $12.3 million respectively of unfunded commitments under loan and financing agreements.

 

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The following is a summary of industry concentration of our investment portfolio as of March 31, 2015:

 

Industry  Cost   Fair Value   % of Total Investments 
Healthcare Services  $22,959,453   $23,823,453    8.92%
Automotive   19,839,321    19,839,321    7.43%
Technology & Telecom   14,306,542    17,351,000    6.50%
Infrastructure Maintenance   16,331,898    17,007,307    6.37%
Education   14,277,267    15,854,267    5.94%
Retail Distribution   14,250,000    14,250,000    5.34%
Oil & Gas Services   12,831,084    13,110,086    4.91%
Disaster Recovery Services   12,489,180    12,807,773    4.80%
Waste Management   12,469,625    12,409,720    4.65%
Healthcare: Orthopedic Products   11,782,698    12,000,000    4.49%
Restoration Services   11,883,397    11,885,139    4.45%
Wholesale   10,049,853    10,935,081    4.10%
Technology   8,112,000    10,458,999    3.92%
Industrial Services   10,156,020    10,261,824    3.84%
Waste Services   9,011,375    9,011,375    3.37%
Media & Entertainment   12,086,405    8,555,003    3.20%
Telecommunications   8,336,058    8,506,183    3.19%
Media: Broadcasting & Subscription   7,402,023    7,575,000    2.84%
Consumer Services   7,510,046    7,510,046    2.81%
Wholesale/Distribution   7,000,000    7,000,000    2.62%
Environmental/Recycling Services   6,294,326    4,713,294    1.77%
Food & Beverage   5,000,000    4,228,000    1.58%
Packaging   3,735,300    3,735,300    1.40%
Business Services   3,000,000    3,000,000    1.12%
Call Center Services   1,186,431    1,200,000    0.45%
Total  $262,300,302   $267,028,171    100.00%

 

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The following is a summary of industry concentration of our investment portfolio as of December 31, 2014:

 

Industry  Cost   Fair Value   % of Total Investments 
Healthcare Services  $22,877,700   $23,502,700    9.09%
Technology & Telecom   14,306,541    17,459,000    6.75%
Infrastructure Maintenance   15,861,076    16,102,785    6.23%
Education   14,277,267    15,717,008    6.08%
Retail Distribution   14,625,000    14,625,000    5.65%
Automotive   14,251,576    14,251,576    5.51%
Oil & Gas Services   12,767,248    13,044,000    5.04%
Disaster Recovery Services   12,290,398    12,596,562    4.87%
Restoration Services   12,116,713    12,119,289    4.69%
Healthcare: Orthopaedic Products   11,760,000    12,000,000    4.64%
Waste Management   11,355,479    11,355,479    4.39%
Wholesale   9,960,374    10,849,399    4.19%
Industrial Services   9,899,901    10,006,651    3.87%
Media & Entertainment   11,886,858    9,605,545    3.71%
Technology   8,112,000    9,412,000    3.64%
Waste Services   9,000,000    9,000,000    3.48%
Healthcare & Pharmaceuticals   8,000,000    8,160,000    3.16%
Media: Broadcasting & Subscription   7,397,404    7,575,000    2.93%
Consumer Services   7,167,144    7,167,144    2.77%
Wholesale/Distribution   7,000,000    7,000,000    2.71%
Environmental/Energy Services   6,268,232    4,576,000    1.77%
Food & Beverage   5,000,000    4,591,000    1.78%
Packaging   3,716,716    3,716,716    1.44%
Business Services   3,000,000    3,000,000    1.16%
Call Center Services   1,185,145    1,201,000    0.46%
Total  $254,082,772   $258,633,854    100.00%

  

At March 31, 2015 our average portfolio company investment at amortized cost and fair value was approximately $8.8 million and $8.9 million, respectively, and our largest portfolio company investment by amortized cost and fair value was approximately $16.5 million and $17.3 million, respectively. At December 31, 2014, our average portfolio company investment at amortized cost and fair value was approximately $8.8 million and $8.9 million, respectively, and our largest portfolio company investment by amortized cost and fair value was approximately $16.5 million and $16.8 million, respectively.

 

At March 31, 2015, 40.0% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR, and 60.0% bore interest at fixed rates. At December 31, 2014, 31.8% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR, and 68.2% bore interest at fixed rates.

 

The weighted average yield on all of our debt investments as of March 31, 2015 and December 31, 2014 was approximately 11.9% and 11.7%, respectively. The weighted average yield was computed using the effective interest rates for all of our debt investments, including accretion of original issue discount.

 

$120.0 million of the portfolio (44.9%) had a first dollar loss at 0.0x-1.0x EBITDA; $73.2 million of the portfolio (27.4%) had a first dollar loss at 1.0x-3.0x EBITDA; $36.2 million of the portfolio (13.5%) had a first dollar loss of 3.0x-4.0x EBITDA; and $21.2 million of the portfolio (7.9%) had a first dollar loss of 4.0x-4.5x EBITDA; and $3.8 million of the portfolio (1.4%) had a first dollar loss >4.5x EBITDA

 

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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.

  

RESULTS OF OPERATIONS

 

Comparison of the period ended March 31, 2015 and December 31, 2014

 

Investment Activity

 

During the three months ended March 31, 2015, we made $18.0 million of investments ($12.0 in a new investment and $6.0 in add on investments) and $8.5 million of repayments were received.

 

During the three months ended March 31, 2014, we made $38.0 million of investments in new and existing portfolio companies and $8.9 million of repayments were received.

 

Our level of investment activity can vary substantially from period to period depending on many factors, including the amount of debt and equity capital to middle market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we make.

  

Loans and Debt Securities on Non-Accrual Status

 

We will generally 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. As of March 31, 2015 and December 31, 2014, we had no loans on non-accrual status.

 

Results of Operations

 

An important measure of our financial performance is net increase (decrease) in net assets resulting from operations, which includes net investment income (loss), net realized gain (loss) and net unrealized appreciation (depreciation). Net investment income (loss) is the difference between our income from interest, dividends, fees and other investment income and our operating expenses including interest on borrowed funds. Net realized gain (loss) on investments is the difference between the proceeds received from dispositions of portfolio investments and their amortized cost. Net unrealized appreciation (depreciation) on investments is the net change in the fair value of our investment portfolio.

 

Comparison of the Three Months ended March 31, 2015 and 2014

 

Investment Income

 

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 that the total dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases. In addition, we may generate revenue in the form of prepayment fees, commitment, loan origination, structuring or due diligence fees, fees for providing significant managerial assistance and consulting fees.

 

For the three months ended March 31, 2015, total investment income totaled $8.2 million, a $4.2 million increase from $4.0 million of total investment income for the three months ended March 31, 2014. This increase was attributable to an increase in the portfolio size to 28 portfolio companies as of March 31, 2015 from 13 portfolio companies as of March 31, 2014. This resulted in an increase of $3.7 million of interest income (including PIK). There was also an increase in non-recurring other income of approximately $0.5million due to prepayment penalties, breakage fees and amendment fees.

 

 

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Operating Expenses

  

For the three months ended March 31, 2015, operating expenses totaled $1.3 million, a $1.2 million increase from $.120 million as of March 31, 2014. Operating expenses consist of interest and financing fees and general and administrative expenses. For the three months ended March 31, 2015 and March 31, 2014, interest and financing fees were $0.606 million and $0.040 million, respectively.

 

For the three months ended March 31, 2015, our general and administrative expenses totaled $0.687 million, a $0.608 million increase from $0.079 million as of March 31, 2014. In addition, our efficiency ratio (defined as general and administrative expenses as a percentage of total investment income) was 8.36%.

 

For the three months ended March 31, 2015 and 2014, we incurred base management fees payable to the Manager of $1.1 million and $ 0.7 million, respectively. For the three months ended March 31, 2015, we incurred incentive fees of $0.8 million, net of waivers. There were no incentive fees earned as of March 31, 2014.

 

Net Investment Income

 

As a result of the $4.2 million increase in total investment income and the $2.4 million increase in expenses, net investment income increased by $1.8 million to $4.9 million for the three months ended March 31, 2015 as compared to $3.1 million for the three months ended March 31, 2014.

 

Net Increase in Net Assets Resulting from Operations

  

For the three months ended March 31, 2015, the net increase in net assets totaled $4.9 million.

 

For the three months ended March 31, 2014, net increase in net assets resulting from operations totaled $6.5 million.

 

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 month period ended March 31, 2015, we recognized a provision for income tax on unrealized gain on investments of $1.86 million for the Taxable Subsidiaries. For the year ended December 31, 2014, the provision was $1.70 million.

 

Financial condition, liquidity and capital resources

 

Cash Flows from Operating and Financing Activities

 

For the three months ended March 31, 2015, we experienced a decrease in cash and cash equivalents in the amount of $6.0 million. During that period, our operating activities used $1.8 million in cash, primarily in connection with the purchase/repayments of investments and the increase in liabilities due to an increase in management and incentive fees. In addition, financing activities reduced cash by $4.2 million primarily from the paydown of our credit facility. As of March 31, 2015, we had $3.9 million of cash on hand.

 

For the three months ended March 31, 2014, we experienced an increase in cash and cash equivalents in the amount of $3.9 million. During that period, our operating activities used $26.9 million in cash, primarily in connection with the purchase of new investments. In addition, our financing activities provided cash of $30.9 million primarily from capital contributions received from limited partners. As of March 31, 2014, we had $4.6 million of cash on hand.

  

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 stock holders. 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.

 

 

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Financing Transactions

 

In connection with the Offering, 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. On December 22, 2014, Alcentra entered into an Incremental Commitment Agreement with ING Capital LLC and certain lenders thereto which provides for increased commitments under the Credit Facility of $35 million. The Credit Facility has a maturity date of May 8, 2018 and bears interest, at Alcentra’s election, at a rate per annum equal to (i) the one, three or six month LIBOR, as applicable, plus 3.25% or (ii) 2.25% plus the highest of (A) a prime rate, (B) the Federal Funds rate plus 0.5% and (C) three month LIBOR plus 1.0%. The Credit Facility is secured by a first priority security interest in all of Alcentra’s portfolio investments, the equity interests in certain of its direct and indirect subsidiaries and substantially all of its other assets. Alcentra is also subject to customary covenants and events of default typical of a facility of this type. As of March 31, 2015 total commitments under the Credit Facility were $115 million. Borrowings under the facility were $56.9 million and $62.5 million as of March 31, 2015 and December 31, 2014, respectively.

 

Fund III had entered into a credit agreement under which could borrow an aggregate principal amount of $15 million for the financing of portfolio investments. Borrowings under the credit agreement were $.0 million and $15.0 million as of March 31, 2015 and December 31, 2014, respectively. The credit agreement, which was not assumed by ACC in connection with the acquisition of Fund III Acquired Assets, terminated on April 24, 2014.

 

Interest is charged at the Alternative Rate, defined as the higher of (a) the Federal Fund Rate and (b) the Overnight LIBOR Rate, plus 130 basis points. The interest rate, period to date, ranged from 1.39% to 1.40%. Fund III recorded interest and fee expense of $0.1 million for the three months ended March 31, 2014. The average borrowings under the credit agreement for the three months ended March 31, 2014 were $15.0 million.

  

Regulated Investment Company Status and Distributions

 

We intend to elect to be treated as a RIC under Subchapter M of the Code for 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.  

 

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 ACC’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 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.

  

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The Adviser has agreed to waive its fees (base management and incentive fee), without recourse against or reimbursement by ACC, for the remainder of the quarter in which the Offering is completed and the subsequent four quarters to the extent required in order for ACC 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 on 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.

 

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. Our off-balance sheet arrangements consisted of $13.9 million and $12.3 million of unfunded commitments to provide debt financing to one of our portfolio companies as of March 31, 2015 and December 31, 2014, respectively.  

 

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Recent Developments

 

Subsequent to March 31, 2015, the following activity occurred:

 

On April 2, 2015, Alcentra funded a $10,000,000 investment in Radiant Logistics, Inc.(12.0 % subordinated note)

 

On April 6, 2015, a $0.34 per share dividend was paid to shareholders of record March 31, 2015

 

On April 15, 2015, Alcentra completed a $40 million note offering program which commenced on January 29, 2015. The unsecured notes mature on January 15, 2022, February 15, 2020, March 15, 2020 and April 15, 2020. The Notes bear interest at a rate of 6.5% and 6.375% semi-annually and have maturities ranging from five to seven years. The net proceeds of $39.2 million were used to reduce the outstanding borrowings on the credit facility.

 

On April 30, 2015, Alcentra funded a $9,500,000 investment in Alarm Capital Alliance,LLC (13% Cash, 3.25% PIK subordinated note)

 

On April 30, 2015, the Company amended its senior subordinated note investment in Battery Solutions, LLC and Battery Solutions Holdings, LLC. Approximately $3.3 million of the senior subordinated note was converted into Class E Preferred Units and Class F Units. Based on certain financial performance tests, the Company has the right to convert some of the Class E Preferred Units back to subordinated debt (with a corresponding reduction in Class F Units). The amended senior subordinated notes have a 14% coupon (6% cash and 8% PIK), with more of the coupon paid in cash starting in the second year following the conversion as long as certain conditions have been met. Battery Solutions has remained current on all their interest payments throughout this period. In addition, the fair market value of this investment was written up as EBITDA improved by 13% on a year-over-year basis.

 

On May 11, 2015, the Board of Directors approved the 2015 Second quarter dividend of $0.34 per share for shareholders of record date June 30, 2014 and payable July 6, 2015.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

We are subject to financial market risks, including changes in interest rates. For the three months ended March 31, 2015 and March 31, 2014, 40% and 12% , or 10 and 1 of the loans in our portfolio bore interest at floating rates, respectively. In the future, we expect other loans in our portfolio will have floating rates. For the three months ended March 31, 2015 and March 31, 2014, 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.

 

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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 March 31, 2015 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, 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 final prospectus filed with the SEC on May 9, 2014. 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

 

None.

 

Item 3.  Defaults Upon Senior Securities

 

Not applicable.

 

Item 4.  Mine Safety Disclosures

 

Not applicable.

 

Item 5.  Other Information

 

Not applicable.

 

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
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.

 

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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: May 12, 2015

 

  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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EXHIBIT INDEX

 

Exhibit Number   Description
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.