10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-K

 

 

(Mark One)

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

For the fiscal year ended December 31, 2019

or

 

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

For the transition period from                      to                     

Commission file number 814-01132

 

 

Crescent Capital BDC, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Maryland   47-3162282

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

11100 Santa Monica Blvd., Suite 2000, Los Angeles, CA   90025
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s Telephone Number, Including Area Code: (310) 235-5900

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

 

Title of each class

 

Trading

Symbol

 

Name of each exchange

on which registered

Common Stock, $0.001 par value per share   CCAP   The Nasdaq Stock Market LLC

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

Common Stock, par value $0.001 per share

(Title of class)

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒

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

Indicate by check mark whether the registrant has submitted electronically 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 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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

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

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Yes  ☐    No  ☒

The number of shares of the Registrant’s common stock, $.001 par value per share, outstanding at March 3, 2020 was 28,342,930

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s proxy statement for the 2020 annual meeting of stockholders to be filed not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K are incorporated by reference in Part III.

 

 

 


Table of Contents

CRESCENT CAPITAL BDC, INC.

INDEX TO ANNUAL REPORT ON FORM 10-K FOR

YEAR ENDED DECEMBER 31, 2019

 

         PAGE  

PART I

    

ITEM 1.

 

Business

     2  

ITEM 1A.

 

Risk Factors

     18  

ITEM 1B.

 

Unresolved Staff Comments

     46  

ITEM 2.

 

Properties

     46  

ITEM 3.

 

Legal Proceedings

     47  

ITEM 4.

 

Mine Safety Disclosures

     47  

PART II

    

ITEM 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     48  

ITEM 6.

 

Selected Financial Data

     50  

ITEM 7.

 

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

     52  

ITEM 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

     84  

ITEM 8.

 

Consolidated Financial Statements and Supplementary Data

     86  

ITEM 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     148  

ITEM 9A.

 

Controls and Procedures

     148  

ITEM 9B.

 

Other Information

     148  

PART III

    

ITEM 10.

 

Directors, Executive Officers and Corporate Governance

     149  

ITEM 11.

 

Executive Compensation

     149  

ITEM 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     149  

ITEM 13.

 

Certain Relationships and Related Transactions, and Director Independence

     149  

ITEM 14.

 

Principal Accountant Fees and Services

     149  

PART IV

    

ITEM 15.

 

Exhibits and Financial Statement Schedules

     150  

ITEM 16.

 

Form 10-K Summary

     152  
 

Signatures

     153  


Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about us, our current or prospective portfolio investments, our industry, our beliefs, and our assumptions. We believe that it is important to communicate our future expectations to our investors. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “will,” “should,” “targets,” “projects,” and variations of these words and similar expressions identify forward-looking statements, although not all forward-looking statements include these words. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and are difficult to predict, that could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.

The following factors and factors listed under “Risk Factors” in this report and other documents Crescent Capital BDC, Inc. has filed with the Securities and Exchange Commission, or SEC, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. The occurrence of the events described in these risk factors and elsewhere in this report could have a material adverse effect on our business, results of operation and financial position. The following factors are among those that may cause actual results to differ materially from our forward-looking statements:

 

   

uncertainty surrounding the financial stability of the United States, Europe and China;

 

   

the ability of our investment adviser to locate suitable investments for us and to monitor and administer our investments;

 

   

potential fluctuation in quarterly operating results;

 

   

potential impact of economic recessions or downturns;

 

   

adverse developments in the credit markets;

 

   

regulations governing our operation as a business development company;

 

   

operation in a highly competitive market for investment opportunities;

 

   

changes in interest rates may affect our cost of capital and net investment income;

 

   

financing investments with borrowed money;

 

   

potential adverse effects of price declines and illiquidity in the corporate debt markets;

 

   

lack of liquidity in investments;

 

   

the outcome and impact of any litigation;

 

   

the timing, form and amount of any dividend distributions;

 

   

risks regarding distributions;

 

   

potential adverse effects of new or modified laws and regulations;

 

   

the social, geopolitical, financial, trade and legal implications of Brexit;

 

   

potential resignation of the Advisor and or the Administrator;

 

   

uncertainty as to the value of certain portfolio investments;

 

   

defaults by portfolio companies;

 

   

our ability to successfully complete and integrate any acquisitions;

 

   

risks associated with original issue discount (“OID”) and payment-in-kind (“PIK”) interest income; and

 

   

the market price of our common stock may fluctuate significantly.

Although we believe that the assumptions on which these forward-looking statements are based upon are reasonable, some of those assumptions are based on the work of third parties and any of those assumptions could prove to be inaccurate; as a result, forward-looking statements based on those assumptions also could prove to be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this report should not be regarded as a representation by us that our plans and objectives will be achieved. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this report. We do not undertake any obligation to update or revise any forward-looking statements or any other information contained herein, except as required by applicable law. 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 safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which preclude civil liability for certain forward-looking statements, do not apply to the forward-looking statements in this report because we are an investment company.

 

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PART I

In this Annual Report, except where the context suggests otherwise, the terms “CCAP,” “we,” “us,” “our,” and “the Company” refer to Crescent Capital BDC, Inc. The term “Advisor” refers to Crescent Cap Advisors, LLC, a Delaware limited liability company. The term “Administrator” refers to CCAP Administration, LLC, a Delaware limited liability company. The term “CCG LP” refers to Crescent Capital Group LP and its affiliates.

 

Item 1.

Business

General

We were formed on February 5, 2015 (“Inception”) as a Delaware corporation structured as an externally managed, closed-end, non-diversified management investment company. We commenced investment operations on June 26, 2015 (“Commencement of Operations”). On January 30, 2020, we changed our state of incorporation from the State of Delaware to the State of Maryland. We have elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, we have elected to be treated for U.S. federal income tax purposes as a regulated investment company (a “RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). As a RIC, we will not be taxed on our income to the extent that we distribute such income each year and satisfy other applicable income tax requirements.

We are managed by the Advisor, an investment adviser that is registered with the Securities and Exchange Commission (the “SEC”) under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The Administrator provides the administrative services necessary for us to operate. Our management consists of investment and administrative professionals from the Advisor and Administrator along with our Board of Directors (the “Board”). The Advisor directs and executes our investment operations and capital raising activities subject to oversight from the Board, which sets our broad policies. The Board has delegated investment management of our investment assets to the Advisor. The Board consists of six directors, four of whom are independent.

A portion of the outstanding shares of our common stock, par value $0.001 per share, (the “Common Stock”) are owned by CCG LP. CCG LP is also the majority member of the Advisor and sole member of the Administrator. We have entered into a license agreement with CCG LP under which CCG LP granted us a non-exclusive, royalty-free license to use the name “Crescent Capital”. The Advisor has entered into a resource sharing agreement with CCG LP.

Our primary investment objective is to maximize the total return to our stockholders in the form of current income and capital appreciation through debt and related equity investments. We will seek to achieve our investment objective by investing primarily in secured debt (including senior secured, unitranche and second lien debt) and unsecured debt (including senior unsecured, mezzanine and subordinated debt), as well as related equity securities of private U.S. middle-market companies. By “middle-market companies,” we mean companies that have annual earnings before interest, income taxes, depreciation and amortization (“EBITDA”), which we believe is a useful proxy for cash flow, of $10 million to $250 million. We may on occasion invest in larger or smaller companies. Our investments may include non-cash income features, including payment-in-kind (“PIK”) interest and original issue discount (“OID”). We may also invest in securities that are rated below investment grade (e.g., junk bonds) by rating agencies or that would be rated below investment grade if they were rated. As a BDC, we may also invest up to 30% of our portfolio opportunistically in “non-qualifying” portfolio investments. See “Item 1(c). Description of Business—Regulation as a Business Development Company—Qualifying Assets.”

Our investment objective is accomplished through:

 

   

accessing the origination channels that have been developed and established by CCG LP;

 

   

originating investments in what we believe to be middle-market companies with strong business fundamentals, generally controlled by private equity investors that require capital for growth, acquisitions, recapitalizations, refinancings and leveraged buyouts;

 

   

applying the underwriting standards of CCG LP; and

 

   

leveraging the experience and resources of CCG LP to monitor our investments.

Our investment philosophy emphasizes capital preservation through credit selection and risk mitigation. We expect our targeted portfolio to provide downside protection through conservative cash flow and asset coverage requirements, priority in the capital structure and information requirements.

 

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As a BDC under the Act and a RIC under the Code, our portfolio is subject to diversification and other requirements. See “—Certain U.S. Federal Income Tax Consequences.”

Our operations comprise only a single reportable segment. On July 23, 2015, we formed CBDC Universal Equity, Inc. (the “Taxable Subsidiary”), a wholly-owned subsidiary. This subsidiary allows us to hold equity securities of a portfolio company organized as pass-through entities while continuing to satisfy the requirements of a RIC under the Code. On February 25, 2016, we formed Crescent Capital BDC Funding, LLC (“CCAP SPV”), a Delaware limited liability company and wholly owned subsidiary. The financial statements of these two entities are consolidated into our financial statements.

We may borrow money from time to time within the levels permitted by the 1940 Act (which generally allows us to incur leverage for up to one-half of our assets). In determining whether to borrow money, we will analyze the maturity, covenant package and rate structure of the proposed borrowings as well as the risks of such borrowings compared to our investment outlook. The use of borrowed funds or the proceeds of preferred stock offerings to make investments would have its own specific set of benefits and risks, and all of the costs of borrowing funds or issuing preferred stock would be borne by holders of our common stock. See “Item 1A. Risk Factors—Risks Relating to Our Business and Structure—We are subject to risks associated with the current interest rate environment, and to the extent we use debt to finance our investments, changes in interest rates may affect our cost of capital and net investment income. Further, changes in LIBOR or its discontinuation may adversely affect the value of LIBOR-indexed securities, loans, and other financial obligations or extensions of credit in our portfolio.

Alcentra Capital Acquisition

On January 31, 2020, we completed our acquisition of Alcentra Capital Corporation, a Maryland corporation (“Alcentra Capital”) (the “Alcentra Acquisition”) pursuant to the terms and conditions of that certain Agreement and Plan of Merger, dated as of August 12, 2019 (as amended on September 27, 2019, the “Merger Agreement”) with Alcentra Capital, Atlantis Acquisition Sub, Inc., a Maryland corporation and one of our wholly owned subsidiaries (the “Acquisition Sub”) and, solely for limited purposes, the Advisor. To effect the acquisition, Acquisition Sub merged with and into Alcentra Capital, with Alcentra Capital surviving the merger as our wholly owned subsidiary (the “First Merger”). Immediately thereafter and as a single integrated transaction, Alcentra Capital merged with and into us, with us as the surviving company (the “Second Merger” and, together with the First Merger, the “Mergers”). Following the consummation of the Mergers, on February 3, 2020 our Common Stock began publicly trading on the NASDAQ Global Market (“NASDAQ”) under the symbol “CCAP”.

Pursuant to the Merger Agreement, Alcentra Capital stockholders received the right to the following merger consideration in exchange for each share of Alcentra Capital common stock outstanding immediately prior to the effective time of the First Merger, in accordance with the Merger Agreement: (a) $1.50 per share in cash consideration from us (less a $0.80 final dividend declared by Alcentra Capital), (b) $1.68 per share in cash consideration from our Advisor and (c) stock consideration at the fixed exchange ratio of 0.4041 shares of our common stock, thereby resulting in our then-existing stockholders owning approximately 82% of us and Alcentra Capital’s then-existing stockholders owning approximately 18% of us.

In connection with the Alcentra Acquisition and effective February 1, 2020, the Advisor agreed to: (a) reduce the base management fee under our investment advisory agreement from 1.50% to 1.25%, (b) waive a portion of the base management fee from February 1, 2020 through July 31, 2021 so that only 0.75% will be charged for such time period, (c) waive the income-based portion of the incentive fee from February 1, 2020 through July 31, 2021 and (d) increase the hurdle rate under the income-based portion of the incentive fee from 1.50% to 1.75% per quarter (or from 6.00% to 7.00% annualized).

The Investment Advisor

The Advisor, a Delaware limited liability company and an affiliate of CCG LP, acts as our investment adviser. The Advisor is a registered investment adviser under the Advisers Act. Our investment activities are managed by the Advisor, which is responsible for originating prospective investments, conducting research and due diligence investigations on potential investments, analyzing investment opportunities, negotiating and structuring our investments and monitoring our investments and portfolio companies on an ongoing basis. The Advisor has entered into a Resource Sharing Agreement (the “Resource Sharing Agreement”) with CCG LP, pursuant to which CCG LP provides the Advisor with experienced investment professionals (including the members of the Advisor’s investment committee) and access to the resources of CCG LP so as to enable the Advisor to fulfill its obligations under the Investment Advisory Agreement. Through the Resource Sharing Agreement, the Advisor capitalizes on the deal origination, credit underwriting, due diligence, investment structuring, execution, portfolio management and monitoring experience of CCG LP’s investment professionals.

About CCG LP

Crescent Capital Corporation, a predecessor to the business of CCG LP, was formed in 1991 by Mark Attanasio and Jean-Marc Chapus as an asset management firm specializing in below-investment grade debt securities. In 1995, Crescent Capital Corporation was acquired by The TCW Group, Inc. (“TCW”) and rebranded as TCW’s Leveraged Finance Group. On January 1, 2011, Messrs. Attanasio and Chapus, along with the entire investment team, spun out of TCW and formed CCG LP, an employee-owned, registered investment adviser. With its headquarters in Los Angeles, CCG LP has over 180 employees based in four offices in the U.S. and Europe. Messrs. Attanasio and Chapus head CCG LP’s management committee, which oversees all of CCG LP’s operations.

 

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The Board of Directors

Our business and affairs are managed under the direction of our Board. Our Board consists of six members, four of whom are not “interested persons” of CCAP, the Advisor, the Administrator or their respective affiliates as defined in Section 2(a)(19) of the 1940 Act. We refer to these individuals as our “Independent Directors.” The Independent Directors compose a majority of our Board. Our Board elects our officers, who serve at the discretion of our Board. The responsibilities of our Board include quarterly determinations of the fair value of our assets, corporate governance activities, oversight of our financing arrangements and oversight of our investment activities.

Investment Strategy

We follow CCG LP’s approach to investing, which is based upon fundamental credit research and risk analysis. This approach reflects CCG LP’s view that the cornerstone of successful investing is fundamental credit analysis.

Specifically, we pursue an investment strategy targeting companies primarily in the middle-market. We believe that the middle-market is attractive as a result of the lack of available lending sources to smaller companies. We believe many financing providers have chosen to focus on large corporate clients and managing capital markets transactions rather than lending to middle-market businesses. Further, many financial institutions and traditional lenders are faced with constrained balance sheets and are requiring existing borrowers to reduce leverage. We also believe hedge funds and collateralized debt obligation/collateralized loan obligation managers are less likely to pursue investment opportunities in our target market as a result of reduced liquidity for new investments. Specifically, CCG LP’s sourcing platform should enable it, on our behalf and through our Advisor, to identify and invest in creditworthy borrowers. In addition, to take advantage of investment opportunities in middle-market companies that are identified for us by CCG LP, we may invest alongside other pools of capital, including bank debt, high-yield and mezzanine funds managed by CCG LP. See “Item 13. Certain Relationships and Related Transactions, and Director Independence” for a discussion of certain conflicts of interest of CCG LP and certain limitations on our ability to co-invest with other accounts advised by CCG LP.

We target investments in companies that exhibit one or more of the following characteristics:

 

   

businesses with strong franchises and sustainable competitive advantages;

 

   

businesses operating in industries with barriers to entry;

 

   

businesses in industries with positive long-term dynamics;

 

   

businesses with cash flows that are dependable and predictable;

 

   

businesses with management teams with demonstrated track records and economic incentives; or

 

   

businesses controlled by private equity investors that require capital for growth, acquisitions, and leveraged buyouts.

We seek to create a diversified portfolio of investments across various industries as a method to manage risk and capitalize on specific sector trends, although our investments may be concentrated in a small number of industries.

Investment Focus

Generally, we focus on investing in secured debt (including senior secured, unitranche and second lien debt) and unsecured debt (including senior unsecured, mezzanine and subordinated debt), as well as related equity securities of private U.S. middle-market companies. By “middle-market companies,” we mean companies that have annual EBITDA, which we believe is a useful proxy for cash flow, of $10 million to $250 million. We may on occasion invest in larger or smaller companies.

A “first lien” loan is typically senior on a lien basis to other liabilities in the issuer’s capital structure and has the benefit of a first-priority security interest in assets of the issuer. The security interest ranks above the security interest of any second-lien lenders in those assets.

“Unitranche” loans are first lien loans that may extend deeper in a company’s capital structure than traditional first lien debt and may provide for a waterfall of cash flow priority among different lenders in the unitranche loan. In certain instances, we may find another lender to provide the “first out” portion of such loan and retain the “last out” portion of such loan, in which case, the “first out” portion of the loan would generally receive priority with respect to payment of principal, interest and any other amounts due thereunder over the “last out” portion that we would continue to hold. In exchange for the greater risk of loss, the “last out” portion earns a higher interest rate.

 

 

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“Second lien” investments are loans with a second priority lien on the assets of the portfolio company. We obtain security interests in the assets of the portfolio company that serve as collateral in support of the repayment of such loans. This collateral serves as collateral in support of the repayment of these loans.

The term “mezzanine” refers to an investment in a company that, among other factors, includes debt that generally ranks senior to a borrower’s equity securities and junior in right of payment to such borrower’s other indebtedness. We may make multiple investments in the same portfolio company.

We generally invest in securities that are rated below investment grade (e.g., junk bonds) by rating agencies or that would be rated below investment grade if they were rated. See “Item 1A. Risk Factors—Risks Relating to Our Investments— We may invest in high yield debt, or junk bonds, which has greater credit and liquidity risk than more highly rated debt obligations.” Our investments may include non-cash income features, including PIK interest and OID. See “Item 1A. Risk Factors—Risks Relating to Our Investments— Our investments in OID and PIK interest income may expose us to risks associated with such income being required to be included in accounting income and taxable income prior to receipt of cash.

Our business model is focused on the direct origination of loans to middle-market companies. The companies in which we invest use our capital to support organic growth, acquisitions, market or product expansion and recapitalizations. We expect to generate revenues primarily in the form of interest income from the investments we hold in addition to income from dividends on direct equity investments, capital gains on the sales of loans and debt and equity securities and various loan origination and other fees.

We may purchase interests in loans or make debt investments, either (i) directly from our target companies as primary market or private credit investments (i.e., private credit transactions), or (ii) primary or secondary market bank loan or high yield transactions in the broadly syndicated “over-the-counter” market (i.e., broadly syndicated loans and bonds). Although our focus is to invest in less liquid private credit transactions, broadly syndicated loans and bonds are generally more liquid than and complement our private credit transactions. In addition, and because we often receive more attractive financing terms on broadly syndicated loans and bonds than we do on our less liquid assets, we are able to leverage the broadly syndicated portfolio in such a way that can maximize the levered return potential of our portfolio.

Investment Decision Process

Through the resources of CCG LP, the Advisor has access to origination capabilities and research resources, experienced investment professionals, internal information systems and a credit analysis framework and investment process. Over the years, CCG LP has designed its investment process to seek those investments which it believes have the most attractive risk/reward characteristics. The process involves several levels of review and is coordinated in an effort to identify risks in potential investments. Our Advisor applies CCG LP’s expertise to screen many of our investment opportunities as described below. Depending on the type of the investment and the obligor, the Advisor may apply all or some of these levels of review, in its discretion. Based upon a favorable outcome of the diligence process described below, our Advisor’s investment committee will make a final decision on such investment and such investment will only be funded after approval.

Private Credit Originations: New private credit investment opportunities are initially reviewed by a CCG LP senior investment professional to determine whether additional consideration is warranted. Factors influencing this decision include fundamental business considerations, including borrower industry, borrower financial leverage and quality of management as well as private equity sponsor involvement (if any). In the event of a positive review, potential investments will be further reviewed with senior and junior investment professionals of CCG LP. If the team agrees on the fundamental attractiveness of the investment, the review phase will proceed with preliminary strategic and financial analyses. At this point, CCG LP will utilize its credit analysis methodology to outline credit and operating statistics and identify key business characteristics through a dialogue with the proposed portfolio company’s management. Following this analysis, CCG LP will develop an initial structure and pricing proposal for the investment and preliminarily inform the investment committee of such proposal.

After satisfactory preliminary analysis and review, a due diligence phase will begin, including completion of credit analysis, on-site due diligence (if deemed necessary), visits and meetings with management, reference checks and could include consultation with third-party experts. The credit analysis is a detailed, bottom-up analysis on the proposed portfolio company that generally includes an assessment of its market, competition, products, management and the equity sponsor or owner. Detailed financial analysis will also be performed at this stage with a focus on historical financial results. Projected financial information developed by the proposed portfolio company is analyzed and sensitized by CCG LP based upon the portfolio company’s historical results and CCG LP’s assessment of the portfolio company’s future prospects. The sensitivity analysis will highlight the variability of revenues and earnings, “worst case” debt service coverage and available sources of liquidity. As part of the overall evaluation, comparisons are made to similar companies to help assess a portfolio company’s asset coverage of debt, interest servicing capacity and competitive strength within its industry and market. At the completion of due diligence, the investment committee will complete a checklist to verify that all identified issues have been covered or mitigated. Additionally during this stage, CCG LP will typically work with the management of the proposed portfolio company and its other capital providers to develop the structure of an investment, including negotiating among these parties on how our investment is expected to perform relative to the other forms of capital in its capital structure.

 

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Syndicated Investments: For syndicated investments, CCG LP seeks to pursue an investment process based upon evaluation of the credit fundamentals of issuers. The foundation of this process is the “bottom-up” credit research process that CCG LP employs across multiple strategies. In selecting investments, CCG LP’s investment professionals perform comprehensive analysis of credit worthiness, including an assessment of the business, an evaluation of management, an analysis of business strategy and industry trends, an examination of financial results and projections and a review of the security’s proposed terms. Credit research is a critical component of the investment process. In selecting investments, CCG LP’s respective portfolio management teams analyze opportunities with an emphasis on principal preservation (i.e., an issuer’s ability to service its debt and maintain cash flow).

Investment Funding

Upon completion of the investment decision process described above, the investment team working on an investment delivers a memorandum to the Advisors’ investment committee. Once an investment has been approved by the investment committee, the Advisor moves through a series of steps with the respective investment team towards negotiation of final documentation.

Investment Monitoring

The Advisor monitors our portfolio companies on an ongoing basis by monitoring the financial trends of each portfolio company to determine if it is meeting its business plans and to assess the appropriate course of action for each company. We consider board observation rights, where appropriate, regular dialogue with company management and equity sponsors and detailed internally generated monitoring reports to be critical to our performance. As part of the monitoring process, the Advisor regularly assesses the risk profile of each of our investments and, on a quarterly basis, grades each investment on a risk scale of 1 to 5. Risk assessment is not standardized in our industry and our risk assessment may not be comparable to ones used by our competitors. Our assessment is based on the following categories:

 

1

Involves the least amount of risk in our portfolio. The investment/borrower is performing above expectations since investment, and the trends and risk factors are generally favorable, which may include the financial performance of the borrower or a potential exit.

 

2

Involves an acceptable level of risk that is similar to the risk at the time of investment. The investment/borrower is generally performing as expected, and the risk factors are neutral to favorable.

 

3

Involves an investment/borrower performing below expectations and indicates that the investment’s risk has increased somewhat since investment. The borrower’s loan payments are generally not past due and more likely than not the borrower will remain in compliance with debt covenants. An investment rating of 3 requires closer monitoring.

 

4

Involves an investment/borrower performing materially below expectations and indicates that the loan’s risk has increased materially since investment. In addition to the borrower being generally out of compliance with debt covenants, loan payments may be past due (but generally not more than 180 days past due). Placing loans on non-accrual status should be considered for investments rated 4.

 

5

Involves an investment/borrower performing substantially below expectations and indicates that the loan’s risk has substantially increased since investment. Most or all of the debt covenants are out of compliance and payments are substantially delinquent. Loans rated 5 are not anticipated to be repaid in full and the fair market value of the loan should be reduced to the anticipated recovery amount. Loans with an investment rating of 5 should be placed on non-accrual status.

Investment Advisory Agreement

Our investment activities are managed by our Advisor, which is responsible for originating prospective investments, conducting research and due diligence investigations on potential investments, analyzing investment opportunities, negotiating and structuring our investments and monitoring our investments and portfolio companies on an ongoing basis. On June 2, 2015, we entered into an investment advisory agreement (the “Investment Advisory Agreement”) with the Advisor, pursuant to which we have agreed to pay the Advisor a base management fee and an incentive fee for its services. The cost of both the base management fee and the incentive fee are ultimately borne by our stockholders.

Base Management Fee

The base management fee is calculated at an annual rate of 1.5% of our gross assets, including assets purchased with borrowed funds or other forms of leverage but excluding cash and cash equivalents. For services rendered under the Investment Advisory Agreement, the base management fee is payable quarterly in arrears. The base management fee is calculated based on the average value of our gross assets at the end of the two most recently completed calendar quarters, and appropriately adjusted for any share issuances or repurchases during the current calendar quarter. Base management fees for any partial month or quarter will be appropriately pro-rated. For purposes of the Investment Advisory Agreement, cash equivalents means U.S. government securities and commercial paper maturing within one year of purchase. The Advisor agreed to certain fee waivers prior to the completion of a Qualified IPO, including but not limited to, waiving its right to receive management fees in excess of the sum of (i) 0.25% of the aggregate committed but undrawn capital and (ii) 0.75% of the aggregate gross assets excluding cash (including capital drawn to pay our expenses).

 

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Additionally, on August 12, 2019, we entered into an agreement with the Advisor (the “Transaction Support Agreement”) in connection with the Alcentra Acquisition. Under the terms of the Transaction Support Agreement, among other things, we agreed to enter into an amendment to our Investment Advisory Agreement to (i) permanently reduce the management fee from 1.50% to 1.25% and (ii) waive a portion of the base management fee from February 1, 2020 through July 31, 2021 such that the base management fee shall be charged at an annual rate of 0.75% of our gross assets for such time period. These amendments contemplated by the Transaction Support Agreement went into effect through the completion of the Alcentra Acquisition, which closed on January 31, 2020.

Incentive Fee

We pay the Advisor on incentive fee. The incentive fee consists of two parts—an incentive fee based on income and an incentive fee based on capital gains.

The first part, the income incentive fee, which is described in more detail in the bullet points below, is calculated and payable quarterly in arrears and (a) equals 100% of the excess of our pre-incentive fee net investment income for the immediately preceding calendar quarter, over a preferred return of 1.5% per quarter (6% annualized), (the “Hurdle”), and a catch-up feature, until the Advisor has received, (i) prior to a Qualified IPO, 15%, or (ii) after a Qualified IPO, 17.5%, of the pre-incentive fee net investment income for the current quarter up to, (i) prior to a Qualified IPO, 1.7647%, or (ii) after a Qualified IPO, 1.8182% (the “Catch-up”), and (b) (i) prior to a Qualified IPO, 15% or (ii) after a Qualified IPO, 17.5%, of all remaining pre-incentive fee net investment income above the “Catch-up.”

The second part, the capital gains incentive fee, is determined and payable in arrears as of the end of each fiscal year (or upon a Qualified IPO or termination of the Investment Advisory Agreement), (i) prior to a Qualified IPO, 15%, or (ii) after a Qualified IPO, 17.5%, of our realized capital gains, if any, on a cumulative basis from Inception through the end of the fiscal year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees.

The Advisor agreed to waive the income based portion of the incentive fee from February 1, 2020 through July 31, 2021 following the closing of the Alcentra Acquisition on January 31, 2020.

Income Incentive Fee

Pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive from portfolio companies but excluding fees for providing managerial assistance) accrued during the calendar quarter, minus operating expenses for the quarter (including the base management fee, any expenses payable under the Administration Agreement, and any interest expense and dividends paid on any outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature such as market discount, OID, debt instruments with PIK interest, preferred stock with PIK dividends and zero-coupon securities, accrued income that we have not yet received in cash. See “Item 1A. Risk Factors—Risks Relating to Our Business and Structure—Our management and incentive fee structure may create incentives for the Advisor that are not fully aligned with the interests of our stockholders and may induce the Advisor to make speculative investments.”

Pre-incentive fee net investment income does not include any realized or unrealized capital gains or losses or unrealized capital appreciation or depreciation. Because of the structure of the incentive fee, it is possible that we may pay an incentive fee in a quarter where we incur a loss. For example, if we receive pre-incentive fee net investment income in excess of the Hurdle rate for a quarter, we will pay the applicable incentive fee even if we have incurred a loss in that quarter due to realized and unrealized capital losses.

In calculating the income incentive fee, pre-incentive fee net investment income is compared to a “Hurdle Amount” equal to the product of (i) the Hurdle rate of 1.50% per quarter (6.00% annualized) and (ii) our net assets (defined as total assets less indebtedness and before taking into account any incentive fees payable during the period), at the end of the immediately preceding calendar quarter. If market interest rates rise, we may be able to invest our funds in debt instruments that provide for a higher return, which would increase our pre-incentive fee net investment income and make it easier for the Advisor to surpass the fixed Hurdle rate and receive an incentive fee based on such net investment income. PIK interest and OID will also increase our pre-incentive fee net investment income and make it easier to surpass the fixed Hurdle rate. Our pre-incentive fee net investment income used to calculate this part of the incentive fee is also included in the amount of our total assets (other than cash and cash equivalents but including assets purchased with borrowed amounts) used to calculate the 1.5% base management fee.

 

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Under the terms of the Transaction Support Agreement that went into effect on January 31, 2020, among other things, the Advisor agreed to (i) increase the incentive fee hurdle from 6% to 7% annualized and (ii) waive the income based portion of the incentive fee from February 1, 2020 through July 31, 2021.

Prior to closing of the Alcentra Acquisition on January 31, 2020, we paid the income incentive fee in each calendar quarter as follows:

 

   

no income incentive fee in the calendar quarter in which our pre-incentive fee net investment income did not exceed the Hurdle;

 

   

100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the Hurdle but is less than or equal to an amount (the “Pre-Qualified IPO Catch-Up Amount”) determined on a quarterly basis by multiplying 1.7647% by our net assets (as defined above) at the beginning of each applicable calendar quarter. The Pre-Qualified IPO Catch-Up Amount is intended to provide the Advisor with an incentive fee of 15% on all of our pre-incentive fee net investment income when our pre-incentive fee net investment income reaches the Pre-Qualified IPO Catch-Up Amount in any calendar quarter; and

 

   

for any calendar quarter in which our pre-incentive fee net investment income exceeds the Pre-Qualified IPO Catch-Up Amount, the income incentive fee shall equal 15% of the amount of our pre-incentive fee net investment income for the calendar quarter.

On and after the closing of the Alcentra Acquisition on January 31, 2020, we will pay the income incentive fee in each calendar quarter as follows:

 

   

no income incentive fee in any calendar quarter in which the our pre-incentive fee net investment income does not exceed the Hurdle Amount;

 

   

100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the Hurdle Amount but is less than or equal to an amount (the “Post-Qualified IPO Catch-Up Amount”) determined on a quarterly basis by multiplying 1.8182% by our net assets (as defined above) at the beginning of each applicable calendar quarter. The Post-Qualified IPO Catch-Up Amount is intended to provide the Advisor with an incentive fee of 17.5% on all of our pre-incentive fee net investment income when our pre-incentive fee net investment income reaches the Post-Qualified IPO Catch-Up Amount in any calendar quarter; and

 

   

for any calendar quarter in which our pre-incentive fee net investment income exceeds the Post-Qualified IPO Catch-Up Amount, the income incentive fee shall equal 17.5% of the amount of our pre-incentive fee net investment income for the calendar quarter.

These calculations are appropriately pro-rated for any period of less than three months and adjusted for any share issuances or repurchases by us during the current quarter. We do not currently have a share repurchase program and share repurchases will be effected only in extremely limited circumstances in accordance with applicable law. The income incentive fee shall be calculated for the first calendar quarter of 2020 at a weighted rate calculated based on the fee rates applicable before and after the closing of the Alcentra Acquisition based on the number of days in such calendar quarter before and after the closing of the Alcentra Acquisition.

Capital Gains Incentive Fee

The capital gains incentive fee is determined and payable in arrears in cash as of the end of each fiscal year (or upon termination of the Investment Advisory Agreement, as of the termination date), and equals (i) 15% of our realized capital gains as of the end of the fiscal year prior to the closing of the Alcentra Acquisition, and (ii) 17.5% of our realized capital gains as of the end of the fiscal year after the closing of the Alcentra Acquisition. In determining the capital gains incentive fee payable to the Advisor, we calculate the cumulative aggregate realized capital gains and cumulative aggregate realized capital losses since Inception, and the aggregate unrealized capital depreciation as of the date of the calculation, as applicable, with respect to each of the investments in our portfolio. For this purpose, cumulative aggregate realized capital gains, if any, equals the sum of the differences between the net sales price of each investment, when sold, and the original cost of such investment since Inception. Cumulative aggregate realized capital losses equals the sum of the amounts by which the net sales price of each investment, when sold, is less than the original cost of such investment since Inception. Aggregate unrealized capital depreciation equals the sum of the difference, if negative, between the valuation of each investment as of the applicable calculation date and the original cost of such investment. At the end of the applicable year, the amount of capital gains that serves as the basis for our calculation of the capital gains incentive fee equals the cumulative aggregate realized capital gains less cumulative aggregate realized capital losses, less aggregate unrealized capital depreciation, with respect to our portfolio of investments. If this number is positive at the end of such year, then the capital gains incentive fee for such year will equal 15% or 17.5%, as applicable, of such amount, less the aggregate amount of any capital gains incentive fees paid in respect of our portfolio in all prior years as calculated in accordance with the below after the closing of the Alcentra Acquisition.

 

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At the 2018 Annual Meeting of Stockholders, we received shareholder approval to extend the deadline to consummate a Qualified IPO (the “Qualified IPO Deadline”). The Qualified IPO Deadline was extended to June 30, 2022. In exchange for the Qualified IPO Deadline extension, the Advisor agreed to waive its rights under the Investment Advisory Agreement to the capital gain incentive fee for the period from April 1, 2018 through February 3, 2020, which is the date of our listing on the NASDAQ stock exchange.

Our Board will monitor the mix and performance of our investments over time and will seek to satisfy itself that the Advisor is acting in our interests and that our fee structure appropriately incentivizes the Advisor to do so.

Term

The Investment Advisory Agreement has been unanimously approved by the Board. Unless earlier terminated as described below, the Investment Advisory Agreement will remain in effect until February 1, 2021 and will remain in effect from year to year thereafter if approved annually by (i) the vote of the Board, or by the vote of a majority of our outstanding voting securities, and (ii) the vote of a majority of our independent directors. The Investment Advisory Agreement will automatically terminate in the event of its assignment (as defined in the 1940 Act). The Investment Advisory Agreement may be terminated by either party without penalty upon not less than 60 days’ written notice to the other. See “Item 1A. Risk Factors—Risks Relating to our Business and Structure—We are dependent upon key personnel of CCG LP and the Advisor.”

Indemnification

Under the Investment Advisory Agreement, the Advisor has not assumed any responsibility to us other than to render the services called for under that agreement. The Advisor will not be responsible for any action of the Board in following or declining to follow the Advisor’s advice or recommendations. Under the Investment Advisory Agreement, the Advisor, its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with the Advisor, including, without limitation, the Administrator, and any person controlling or controlled by the Advisor will not be liable to us, any of our subsidiaries, our directors, our stockholders or any subsidiary’s stockholders or partners for acts or omissions performed in accordance with and pursuant to the Investment Advisory Agreement, except those resulting from acts constituting gross negligence, willful misfeasance, bad faith or reckless disregard of the duties that the Advisor owes to us under the Investment Advisory Agreement. In addition, as part of the Investment Advisory Agreement, we have agreed to indemnify the Advisor and each of its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with the Advisor, from and against any claims or liabilities, including reasonable legal fees and other expenses reasonably incurred, arising out of or in connection with our business and operations or any action taken or omitted on our behalf pursuant to authority granted by the Investment Advisory Agreement, except where attributable to gross negligence, willful misfeasance, bad faith or reckless disregard of such person’s duties under the Investment Advisory Agreement. These protections may lead the Advisor to act in a riskier manner when acting on our behalf than it would when acting for its own account. The Investment Advisory Agreement may be terminated by either party without penalty on 60 days’ written notice to the other party.

United States federal and state securities laws may impose liability under certain circumstances on persons who act in good faith. Nothing in the Investment Advisory Agreement constitutes a waiver or limitation of any rights that we may have under any applicable federal or state securities laws.

Administration Agreement

On June 2, 2015, we also entered into an administration agreement (the “Initial Administration Agreement”) with the Administrator, an affiliate of CCG LP, pursuant to which the Administrator agreed to provide certain services and facilities services necessary for us to operate. On February 1, 2020, we entered into the Amended and Restated Administration Agreement (as amended and restated, the “Administration Agreement”) by and between us and the Administrator. Pursuant to the Administration Agreement, the Administrator has agreed to provide a variety of services, including providing office space, equipment and office services, maintaining financial records, preparing reports to stockholders and reports filed with the SEC, and managing the payment of expenses and the performance of administrative and professional services rendered by others. The Administrator has also hired a sub-administrator to assist in the provision of administrative services. We will reimburse the Administrator for its costs and expenses and our allocable portion of overhead incurred by it in performing its obligations under the Administration Agreement, including compensation paid to or compensatory distributions received by our officers (including our Chief Compliance Officer and Chief Financial Officer) and any of their respective staff who provide services to us, operations staff who provide services to us, and any other staff, to the extent they perform a role in our Sarbanes-Oxley internal control assessment. Our allocable portion of overhead is determined by the Administrator, which expects to use various methodologies such as allocation based on the percentage of time certain individuals devote, on an estimated basis, to our business and affairs, and is subject to oversight by the Board. The sub-administrator is paid its compensation for performing its sub-administrative services under the sub-administration agreement. The Administrator will waive its right to be reimbursed in the event that any such reimbursements would cause any distributions to our stockholders to constitute a return of capital. In addition, the Administrator is permitted to delegate its duties under the Administration Agreement to affiliates or third parties. To the extent the Administrator outsources any of its functions, we will pay the fees associated with such functions on a direct basis, without incremental profit to the Administrator.

 

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The Administration Agreement has been approved by our Board. Unless earlier terminated as described below, the Administration Agreement will remain in effect for a period of two years from their effective date and will remain in effect from year to year thereafter if approved annually by (i) the vote of our Board, or by the vote of a majority of our outstanding voting securities, and (ii) the vote of a majority of our independent directors. The Administration Agreement will automatically terminate in the event of assignment. The Administration Agreement may be terminated by either party without penalty upon not less than 60 days’ written notice to the other. See “Item 1A. Risk Factors—Risks Relating to Our Business and Structure—Dependence Upon Key Personnel of CCG LP.”

License Agreement

We have entered into a license agreement with CCG LP under which CCG LP granted us a non-exclusive, royalty-free license to use the name “Crescent Capital”.

Competition

Our primary competitors in providing financing to middle-market companies include public and private funds, other business development companies, commercial and investment banks, commercial financing companies and, to the extent they provide an alternative form of financing, private equity and hedge funds. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, we believe some competitors may have access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC or to the distribution and other requirements we must satisfy to maintain our qualification as a RIC.

We expect to use the expertise of the investment professionals of CCG LP to which we will have access to assess investment risks and determine appropriate pricing for our investments in portfolio companies. In addition, we expect that the relationships of the senior members of CCG LP will enable us to learn about, and compete effectively for, financing opportunities with attractive middle-market companies in the industries in which we seek to invest. For additional information concerning the competitive risks we face, see “Item 1A. Risk Factors—Risks Relating to our Business and Structure — We operate in an increasingly competitive market for investment opportunities, which could make it difficult for us to identify and make investments that are consistent with our investment objectives.”

Fees and Expenses

Our primary operating expenses will include the payment of fees to the Advisor under the Investment Advisory Agreement, our allocable portion of overhead expenses under the Administration Agreement with our Administrator, operating costs associated with our sub-administration, custodian and transfer agent agreements with State Street Bank and Trust Company (the “Sub-Administration Agreements”) and other operating costs described below. We will bear all other out-of-pocket costs and expenses of our operations and transactions, including:

 

   

allocated organization costs from the Advisor incurred prior to the Commencement of Operations up to a maximum of $1.5 million;

 

   

the cost of calculating our net asset value, including the cost of any third-party valuation services;

 

   

fidelity bond, directors’ and officers’ liability insurance and other insurance premiums;

 

   

direct costs, such as printing, mailing, long distance telephone and staff;

 

   

fees and expenses associated with independent audits and outside legal costs;

 

   

independent directors’ fees and expenses;

 

   

administration fees and expenses, if any, payable under the Administration Agreement (including payments based upon our allocable portion of the Administrator’s overhead in performing its obligations under the Administration Agreement, rent and the allocable portion of the cost of certain professional services provided to us, including but not limited to, our chief compliance officer, chief financial officer and their respective staffs);

 

   

U.S. federal, state and local taxes;

 

   

the cost of effecting sales and repurchases of shares of our common stock and other securities;

 

   

fees payable to third parties relating to making investments, including out-of-pocket fees and expenses associated with performing due diligence and reviews of prospective investments;

 

   

out-of-pocket fees and expenses associated with marketing efforts;

 

   

federal and state registration fees and any stock exchange listing fees;

 

   

brokerage commissions;

 

   

costs associated with our reporting and compliance obligations under the 1940 Act and other applicable U.S. federal and state securities laws;

 

   

debt service and other costs of borrowings or other financing arrangements; and

 

   

all other expenses reasonably incurred by us in connection with making investments and administering our business.

 

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We have agreed to repay the Advisor for initial organization costs and equity offering costs incurred prior to the Commencement of Operations up to a maximum of $1.5 million on a pro rata basis over the first $350 million of invested capital not to exceed 3 years from the initial capital commitment. The Advisor has agreed to extend the reimbursement period for the initial organization costs and equity offering costs to June 30, 2019. The Advisor is responsible for organization and private equity offerings costs in excess of $1.5 million.

Incentive Fees and costs relating to future offerings of securities would be incremental.

Capital Resources and Borrowings

We anticipate cash to be generated from future offerings of securities, and cash flows from operations, including interest earned from the temporary investment of cash in cash equivalents, U.S. government securities and other high-quality debt investments that mature in one year or less. Additionally, we are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance (150% after March 3, 2021 or earlier if we receive stockholder approval of the reduced asset coverage requirement). Furthermore, while any indebtedness and senior securities remain outstanding, we must make provisions to prohibit any distribution to our stockholders or the repurchase of such securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. In connection with borrowings, our lenders may require us to pledge assets, investor commitments to fund capital calls and/or the proceeds of those capital calls. In addition, the lenders may ask us to comply with positive or negative covenants that could have an effect on our operations.

For more information on our debt, see “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—Financial Condition, Liquidity and Capital Resources.

Dividend Reinvestment Plan (“DRIP”)

We adopted a dividend reinvestment plan that provides for reinvestment of our dividends and other distributions on behalf of our stockholders, unless a stockholder elects to receive cash. As a result, if our Board authorizes, and we declare, a cash dividend or other distribution, then stockholders who are participating in the dividend reinvestment plan, will have their cash dividends and distributions automatically reinvested in additional shares of Common Stock, rather than receiving cash dividends and distributions.

Prior to February 3, 2020, which is the date of our listing on NASDAQ, only stockholders who “opted in” to the dividend reinvestment plan had their cash dividends and distributions automatically reinvested in additional shares of Common Stock. After February 3, 2020, stockholders who do not “opt out” of the dividend reinvestment plan will have their cash dividends and distributions automatically reinvested in additional shares of the Company’s common stock. The elections of stockholders that made an election prior to February 3, 2020 remain effective.

Resource Sharing Agreement

We do not currently have any employees. We depend on the diligence, skill and network of business contacts of the investment professionals of the Advisor to achieve our investment objective. The Advisor is an affiliate of CCG LP and depends upon access to the investment professionals and other resources of CCG LP and its affiliates to fulfill its obligations to us under the Investment Advisory Agreement. The Advisor also depends upon CCG LP to obtain access to deal flow generated by the investment professionals of CCG LP and its affiliates. Each of our officers will also be an employee of the Advisor, CCG LP or its affiliates.

 

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Pursuant to its Resource Sharing Agreement with CCG LP, the Advisor will have access to the individuals who comprise our Advisor’s investment committee, and a team of additional experienced investment professionals who, collectively, comprise the Advisor’s investment team. The Advisor may hire additional investment professionals to provide services to us, based upon its needs.

Regulation as a Business Development Company

We are regulated as a BDC under the 1940 Act. A BDC must be organized in the United States for the purpose of investing in or lending primarily to private companies and making significant managerial assistance available to them. A BDC may use capital provided by public stockholders and from other sources to make long-term, private investments in businesses. A publicly-traded BDC provides stockholders the ability to retain the liquidity of a publicly-traded stock while sharing in the possible benefits, if any, of investing in primarily privately owned companies. Prior to February 3, 2020, which is the date of our listing on NASDAQ in connection with the Alcentra Acquisition, our stock was privately held.

We may not change the nature of our business so as to cease to be, or withdraw our election as, a BDC unless authorized by vote of a majority of the outstanding voting securities, as required by the 1940 Act. A majority of the outstanding voting securities of a company is defined under the 1940 Act as the lesser of: (a) 67% or more of such company’s voting securities present at a meeting if more than 50% of the outstanding voting securities of such company are present or represented by proxy, or (b) more than 50% of the outstanding voting securities of such company. We do not anticipate any substantial change in the nature of our business.

As with other companies regulated by the 1940 Act, a BDC must adhere to certain substantive regulatory requirements. A majority of our directors must be persons who are not interested persons, as that term is defined in the 1940 Act. Additionally, we are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect the BDC. Furthermore, as a BDC, we will be prohibited from protecting any director or officer against any liability to us or our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office. We may also be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our directors who are not interested persons and, in some cases, prior approval by the SEC through an exemptive relief order (other than in certain limited situations pursuant to current regulatory guidance).

Also, while we may borrow funds to make investments, our ability to use debt is limited in certain significant aspects. In particular, under the provisions of the 1940 Act, BDCs must have at least 200% asset coverage calculated pursuant to the 1940 Act (i.e., we are permitted to borrow one dollar for every dollar we have in assets less all liabilities and indebtedness not represented by senior securities issued by us) in order to incur debt or issue preferred stock (which we refer to collectively as “senior securities”) unless the BDC obtains approval (either stockholder approval or approval of a “required majority” of its board of directors) to apply the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act, as amended by the Small Business Credit Availability Act (the “SBCAA”), reducing the required asset coverage ratio applicable to the BDC from 200% to 150% (i.e., the revised regulatory leverage limitation permits BDCs to double the amount of borrowings, such that we would be able to borrow up to two dollars for every dollar we have in assets less all liabilities and indebtedness not represented by senior securities issued by us).

Currently, our asset coverage requirement applicable to senior securities is 200%. On March 3, 2020, the Board, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of the Board, approved the application of the modified asset coverage requirement set forth in Section 61(a)(2) of the 1940 Act, as amended by the SBCAA. As a result, effective on March 3, 2021 (unless we receive earlier stockholder approval), our asset coverage requirement applicable to senior securities will be reduced from 200% to 150%. As of December 31, 2019, our asset coverage was 225%.

We do not intend to acquire securities issued by any investment company that exceed the limits imposed by the 1940 Act. Under these limits, except for registered money market funds, we generally cannot acquire more than 3% of the voting stock of any investment company, invest more than 5% of the value of our total assets in the securities of one investment company or invest more than 10% of the value of our total assets in the securities of investment companies in the aggregate. The portion of our portfolio invested in securities issued by investment companies ordinarily will subject our stockholders to additional expenses. Our investment portfolio is also subject to diversification requirements by virtue of our intention to be a RIC for U.S. tax purposes.

We are subject to periodic examinations by the SEC for compliance with the 1940 Act.

As a BDC, we are subject to certain risks and uncertainties. See “Item 1A. Risk Factors.”

 

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Qualifying Assets

We may invest up to 30% of our portfolio opportunistically in “non-qualifying assets”. However, under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are referred to as “qualifying assets,” unless, at the time the acquisition is made, qualifying assets represent at least 70% of the BDC’s total assets. The principal categories of qualifying assets relevant to our business are the following:

 

  1.

Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. The principal categories of qualifying assets relevant to our business are the following:

 

  a)

Issuer is organized under the laws of, and has its principal place of business in, the United States;

 

  b)

Issuer is not an investment company (other than a small business investment company wholly owned by the BDC) or a company that would be an investment company but for certain exclusions under the 1940 Act; and

 

  c)

Issuer satisfies any of the following:

 

  i.

does not have any class of securities that is traded on a national securities exchange;

 

  ii.

has a class of securities listed on a national securities exchange, but has an aggregate market value of outstanding voting and non-voting common equity of less than $250 million;

 

  iii.

is controlled by a BDC or a group of companies including a BDC and the BDC has an affiliated person who is a director of the eligible portfolio company; or

 

  iv.

is a small and solvent company having total assets of not more than $4.0 million and capital and surplus of not less than $2.0 million.

 

  2.

Securities of any eligible portfolio company which we control.

 

  3.

Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its securities, was unable to meet its obligations as they came due without material assistance other than conventional lending or financing arrangements.

 

  4.

Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities and we already own 60% of the outstanding equity of the eligible portfolio company.

 

  5.

Securities received in exchange for or distributed on or with respect to securities described in (1) through (4) above, or pursuant to the exercise of warrants or rights relating to such securities.

 

  6.

Cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment.

Managerial Assistance to Portfolio Companies

A BDC must be operated for the purpose of making investments in the types of securities described under “Qualifying Assets” above. However, in order to count portfolio securities as qualifying assets for the purpose of the 70% test, the BDC must either control the issuer of the securities or must offer to make available to the issuer of the securities (other than small and solvent companies described above) significant managerial assistance; except that, where the BDC purchases such securities in conjunction with one or more other persons acting together, one of the other persons in the group may make available such managerial assistance. Making available managerial assistance means, among other things, any arrangement whereby the BDC, through its directors or officers, offers to provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company.

Monitoring Investments

In most cases, we will not have board influence over portfolio companies. In some instances, the Advisor’s investment professionals may obtain board representation or observation rights in conjunction with our investments. In conjunction with our Advisor’s investment committee and our Board, the Advisor will take an active approach in monitoring all investments, which includes reviews of financial performance on at least a quarterly basis and may include discussions with management and/or the equity sponsor. The monitoring process will begin with structuring terms and conditions which require the timely delivery and access to critical financial and business information regarding portfolio companies.

 

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Temporary Investments

Pending investment in other types of “qualifying assets,” as described above, our investments may consist of cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment, which we refer to, collectively, as “temporary investments,” so that 70% of our assets are qualifying assets. See “Item I. Certain U.S. Federal Income Tax Consequences—Election to be Taxed as a RIC.” Typically, we will invest in U.S. Treasury bills or in repurchase agreements, provided that such agreements are fully collateralized by cash or securities issued by the U.S. government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, if more than 25% of our gross assets constitute repurchase agreements from a single counterparty, we would not meet the diversification tests in order to qualify as a RIC. Thus, we do not intend to enter into repurchase agreements with a single counterparty in excess of this limit. Our Advisor will monitor the creditworthiness of the counterparties with which we enter into repurchase agreement transactions.

Senior Securities

We are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. In addition, while any senior securities remain outstanding, we must make provisions to prohibit any distribution to our stockholders or the repurchase of such securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. We may also borrow amounts up to 5% of the value of our total assets for temporary or emergency purposes without regard to asset coverage.

The SBCAA, which was signed into law on March 23, 2018, among other things, amended Section 61(a) of the 1940 Act to add a new Section 61(a)(2) that reduces the asset coverage requirement applicable to a BDC from 200% to 150% so long as the BDC meets certain disclosure requirements and obtains certain approvals. The reduced asset coverage requirement would permit a BDC to have a ratio of total consolidated assets to outstanding indebtedness of 2:1 as compared to a maximum of 1:1 under the 200% asset coverage requirement. On March 3, 2020, the Board, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of the Board, approved the modified asset coverage requirements under the SBCAA. As a result, our asset coverage requirements for senior securities will be changed from 200% to 150%, effective as of March 3, 2021, unless approved earlier by a vote of our stockholders, in which case the 150% minimum asset coverage ratio will be effective on the day after such approval.

The 1940 Act imposes limitations on a BDC’s issuance of preferred shares, which are considered “senior securities” and thus are subject to the 200% asset coverage requirement described above (150% after March 3, 2021 or earlier if we receive stockholder approval of the reduced asset coverage requirement). In addition, (i) preferred shares must have the same voting rights as the common stockholders (one share, one vote); and (ii) preferred stockholders must have the right, as a class, to appoint directors to the board of directors.

Code of Ethics

As required by Rule 17j-1 under the 1940 Act and Rule 204A-1 under the Advisers Act, respectively, we and the Advisor’s have adopted codes of ethics which apply to, among others, our and our Advisor’s executive officers, including our Chief Executive Officer and Chief Financial Officer, as well as our Advisor’s officers, directors and employees. Our codes of ethics generally will not permit investments by our and the Advisor’s personnel in securities that may be purchased or sold by us.

We hereby undertake to provide a copy of the codes to any person, without charge, upon request. Requests for a copy of the codes may be made in writing addressed to our Secretary, George Hawley, Crescent Capital BDC, Inc., 11100 Santa Monica Boulevard, Suite 2000, Los Angeles, California, 90025, Attention: CCAP Investor Relations, or by emailing us at investor.relations@crescentcap.com. Our code of ethics is available without charge on our website, at http://www.crescentbdc.com.

Compliance Policies and Procedures

We and our Advisor have adopted and implemented written policies and procedures reasonably designed to detect and prevent violation of the federal securities laws and we are required to review these compliance policies and procedures annually for their adequacy and the effectiveness of their implementation and designate a Chief Compliance Officer to be responsible for administering the policies and procedures. Joseph Hanlon currently serves as our Chief Compliance Officer.

 

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Sarbanes-Oxley Act of 2002 and NASDAQ Corporate Governance Regulations

The Sarbanes-Oxley Act imposes a wide variety of regulatory requirements on publicly-held companies and their insiders. Many of these requirements affect us. For example:

 

   

pursuant to Rule 13a-14 of the Exchange Act, our principal executive officer and principal financial officer must certify the accuracy of the financial statements contained in our periodic reports;

 

   

pursuant to Item 307 of Regulation S-K, our periodic reports must disclose our conclusions about the effectiveness of our disclosure controls and procedures;

 

   

pursuant to Rule 13a-15 of the Exchange Act, our management must prepare an annual report regarding its assessment of our internal control over financial reporting and (once we cease to be an emerging growth company under the JOBS Act or, if later, for the year following our first annual report required to be filed with the SEC) must obtain an audit of the effectiveness of internal control over financial reporting performed by our independent registered public accounting firm; and

 

   

pursuant to Item 308 of Regulation S-K and Rule 13a-15 of the Exchange Act, our periodic reports must disclose whether there were significant changes in our internal controls over financial reporting or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

The Sarbanes-Oxley Act requires us to review our current policies and procedures to determine whether we comply with the Sarbanes-Oxley Act and the regulations promulgated thereunder. We will continue to monitor our compliance with all regulations that are adopted under the Sarbanes-Oxley Act and will take actions necessary to ensure that we are in compliance therewith.

In addition, NASDAQ has adopted various corporate governance requirements as part of its listing standards. We monitor our compliance with such listing standards to the extent applicable and will take actions necessary to ensure that we remain in compliance therewith.

Proxy Voting Policies and Procedures

We will delegate our proxy voting responsibility to our Advisor. The Proxy Voting Policies and Procedures of the Advisor are set forth below. The guidelines are reviewed periodically by the Advisor and our non-interested directors, and, accordingly, are subject to change.

An investment adviser registered under the Advisers Act has a fiduciary duty to act solely in the best interests of its clients. As part of this duty, the Advisor recognizes that it must vote portfolio securities in a timely manner free of conflicts of interest and in the best interests of its clients.

These policies and procedures for voting proxies are intended to comply with Section 206 of, and Rule 206(4)-6 under, the Advisers Act.

The Advisor will vote all proxies based upon the guiding principle of seeking to maximize the ultimate long-term economic value of our stockholders’ holdings, and ultimately all votes are cast on a case-by-case basis, taking into consideration the contractual obligations under the relevant advisory agreements or comparable documents, and all other relevant facts and circumstances at the time of the vote. The Advisor will review on a case-by-case basis each proposal submitted to a stockholder vote to determine its impact on the portfolio securities held by us. Although the Advisor will generally vote against proposals that may have a negative impact on our portfolio securities, the Advisor may vote for such a proposal if there exists compelling long-term reasons to do so.

The Advisor’s proxy voting decisions are made by our Advisor’s investment committee. To ensure that the vote is not the product of a conflict of interest, the Advisor will require that: (1) anyone involved in the decision making process disclose to our Advisor’s investment committee, and disinterested directors, any potential conflict that he or she is aware of and any contact that he or she has had with any interested party regarding a proxy vote; and (2) employees involved in the decision making process or vote administration are prohibited from revealing how the Advisor intends to vote on a proposal in order to reduce any attempted influence from interested parties.

 

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Privacy Principles

We are committed to maintaining the privacy of our stockholders and to safeguarding their non-public personal information. The following information is provided to help investors understand what personal information we collect, how we protect that information and why, in certain cases, we may share information with select other parties.

Pursuant to our privacy policy, we will not disclose any non-public personal information concerning any of our stockholders who are individuals unless the disclosure meets certain permitted exceptions under Regulation S-P. We generally will not use or disclose any stockholder information for any purpose other than as required by law.

We may collect non-public information about investors, such as name, address, account number and the types and amounts of investments, and information about transactions with us or our affiliates, such as participation in other investment programs, ownership of certain types of accounts or other account data and activity. We may disclose the information that we collect from our stockholders or former stockholders, as described above, only to our affiliates and service providers and only as allowed by applicable law or regulation. Any party that receives this information will use it only for the services required by us and as allowed by applicable law or regulation, and is not permitted to share or use this information for any other purpose. To protect the non-public personal information of individuals, we permit access only by authorized personnel who need access to that information to provide services to us and our stockholders. In order to guard our stockholders’ non-public personal information, we maintain physical, electronic and procedural safeguards that are designed to comply with applicable law. Non-public personal information that we collect about our stockholders will generally be stored on secured servers. An individual stockholder’s right to privacy extends to all forms of contact with us, including telephone, written correspondence and electronic media, such as the Internet.

Pursuant to our privacy policy, we will provide a clear and conspicuous notice to each investor that details our privacy policies and procedures at the time of the investor’s subscription.

Reporting Obligations

We will furnish our stockholders with annual reports containing audited financial statements, quarterly reports, and such other periodic reports as we determine to be appropriate or as may be required by law. We are required to comply with all periodic reporting, proxy solicitation and other applicable requirements under the Exchange Act.

Stockholders and the public may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may also obtain information on the operation of the Public Reference Room by calling the SEC at (202) 551-8090. The SEC also maintains a website (www.sec.gov) that contains such information.

Election to be Taxed as a RIC

We qualify and intend to continue to qualify annually, as a RIC under Subchapter M of the Code, commencing with our taxable year ending on December 31, 2015. As a RIC, we generally will not pay corporate-level U.S. federal income taxes on any income or gains that we timely distribute to our stockholders as dividends. Rather, dividends we distribute generally will be taxable to our stockholders, and any net operating losses, foreign tax credits and other of our tax attributes generally will not pass through to our stockholders, subject to special rules for certain items such as net capital gains and qualified dividend income we recognize. See “—Taxation of U.S. Stockholders” and “—Taxation of Non-U.S. Stockholders” below.

To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements (as described below). In addition, to qualify as a RIC, we must timely distribute to our stockholders at least 90% of our investment company taxable income (determined without regard to the dividends paid deduction), which is generally our net ordinary income plus the excess of realized net short-term capital gains over realized net long-term capital losses, if any, for each taxable year (the “Annual Distribution Requirement”).

Taxation as a RIC

As a RIC and if we satisfy the Annual Distribution Requirement, then we will not be subject to U.S. federal income tax on the portion of our investment company taxable income and net capital gain (generally, net long-term capital gain in excess of net short-term capital loss) that we timely distribute (or are deemed to timely distribute) to our stockholders. We are subject to U.S. federal income tax at the regular corporate rates on any income or capital gain not distributed (or deemed distributed) to our stockholders.

 

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We generally are subject to a 4% nondeductible U.S. federal excise tax on certain undistributed income unless we distribute in a timely manner an amount at least equal to the sum of (1) 98% of our net ordinary income (taking into account certain deferrals and elections) for each calendar year, (2) 98.2% of our capital gains in excess of capital losses for the one-year period ending October 31 in that calendar year and (3) any net ordinary income and capital gains in excess of capital losses recognized, but not distributed, in preceding years (the “Excise Tax Avoidance Requirement”). We will not be subject to the U.S. federal excise tax on amounts on which we are required to pay U.S. federal income tax (such as retained net capital gains). Depending upon the level of taxable income earned in a year, we may choose to carry forward taxable income for distribution in the following year and pay the applicable U.S. federal excise tax.

To maintain our status as a RIC for U.S. federal income tax purposes, we must, among other things:

 

   

qualify and have in effect an election to be treated as a BDC under the 1940 Act at all times during each taxable year;

 

   

derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to loans of certain securities, gains from the sale of stock or other securities, net income derived from an interest in a “qualified publicly traded partnership” (as defined in the Code), or other income derived with respect to our business of investing in such stock or securities (the “90% Income Test”); and

 

   

diversify our holdings so that at the end of each quarter of the taxable year:

 

  i.

at least 50% of the value of our assets consists of cash, cash equivalents, U.S. government securities, securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of the issuer; and

 

  ii.

no more than 25% of the value of our assets is invested in (a) the securities, other than U.S. government securities or securities of other RICs, of one issuer or of two or more issuers that are controlled, as determined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses or (b) the securities of one or more qualified publicly traded partnerships (the “Diversification Tests”).

For U.S. federal income tax purposes, we will include in our taxable income certain amounts that we have not yet received in cash. For example, if we hold debt obligations that are treated under applicable U.S. federal income tax rules as having OID (such as debt instruments with PIK interest or, in certain cases, that have increasing interest rates or are issued with warrants), we must include in our taxable income in each year a portion of the OID that accrues over the life of the obligation, regardless of whether we receive cash representing such income in the same taxable year. We may also have to include in our taxable income other amounts that we have not yet received in cash, such as accruals on a contingent payment debt instrument or deferred loan origination fees that are paid after origination of the loan or are paid in non-cash compensation such as warrants or stock. Because such OID or other amounts accrued are included in our investment company taxable income for the year of accrual, we may be required to make distributions to our stockholders in order to satisfy the Annual Distribution Requirement and/or the Excise Tax Avoidance Requirement, even though we will have not received any corresponding cash payments. Accordingly, to enable us to make distributions to our stockholders that will be sufficient to enable us to satisfy the Annual Distribution Requirement, we may need to sell some of our assets at times and/or at prices that we would not consider advantageous, we may need to raise additional equity or debt capital or we may need to forego new investment opportunities or otherwise take actions that are disadvantageous to our business (or be unable to take actions that are advantageous to our business). If we are unable to obtain cash from other sources to enable us to satisfy the Annual Distribution Requirement, we may fail to qualify for the U.S. federal income tax benefits allowable to RICs and, thus, become subject to a corporate-level U.S. federal income tax (and any applicable state and local taxes).

Because we expect to use debt financing, we may be prevented by financial covenants contained in our debt financing agreements from making distributions to our stockholders in certain circumstances. In addition, under the 1940 Act, we are generally not permitted to make distributions to our stockholders while our debt obligations and other senior securities are outstanding unless certain “asset coverage” tests are met. Limits on our distributions to our stockholders may prevent us from satisfying the Annual Distribution Requirement and, therefore, may jeopardize our qualification for taxation as a RIC, or subject us to the 4% U.S. federal excise tax.

Although we do not presently expect to do so, we may borrow funds and sell assets in order to make distributions to our stockholders that are sufficient for us to satisfy the Annual Distribution Requirement. However, our ability to dispose of assets may be limited by (1) the illiquid nature of our portfolio and/or (2) other requirements relating to our status as a RIC, including the Diversification Tests. If we dispose of assets in order to meet the Annual Distribution Requirement or the Excise Tax Avoidance Requirement, we may make such dispositions at times that, from an investment standpoint, are not advantageous. Alternatively, although we currently do not intend to do so, to satisfy the Annual Distribution Requirement, we may declare a taxable dividend payable in our stock or cash at the election of each stockholder. In such case, for U.S. federal income tax purposes, the amount of the dividend paid in our common stock will generally be equal to the amount of cash that could have been received instead of our stock. See “—Taxation of Stockholders” below for a discussion of the tax consequences to stockholders upon receipt of such dividends.

 

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Distributions we make to our stockholders may be made from our cash assets or by liquidation of our investments, if necessary. We may recognize gains or losses from such liquidations. In the event we recognize net capital gains from such transactions, investors may receive a larger capital gain distribution than they would have received in the absence of such transactions.

Failure to Qualify as a RIC

If we fail to satisfy the 90% Income Test for any taxable year or the Diversification Tests for any quarter of a taxable year, we might nevertheless continue to qualify as a RIC for such year if certain relief provisions of the Code applied (which might, among other things, require us to pay certain corporate-level U.S. federal taxes or to dispose of certain assets). If we failed to qualify for treatment as a RIC and such relief provisions did not apply to us, we would be subject to U.S. federal income tax on all of our taxable income at regular corporate U.S. federal income tax rates (and we also would be subject to any applicable state and local taxes), regardless of whether we make any distributions to our stockholders. We would not be able to deduct distributions to our stockholders, nor would distributions to our stockholders be required to be made for U.S. federal income tax purposes. Any distributions we make generally would be taxable to our U.S. stockholders as ordinary dividend income and, subject to certain limitations under the Code, would be eligible for the 20% maximum rate applicable to individuals and other non-corporate U.S. stockholders, to the extent of our current or accumulated earnings and profits. Subject to certain limitations under the Code, U.S. stockholders that are corporations for U.S. federal income tax purposes would be eligible for the dividends-received deduction. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholder’s adjusted tax basis, and any remaining distributions would be treated as a capital gain.

Subject to a limited exception applicable to RICs that qualified as such under Subchapter M of the Code for at least one year prior to disqualification and that re-qualify as a RIC no later than the second year following the non-qualifying year, we could be subject to U.S. federal income tax on any unrealized net built-in gains in the assets held by us during the period in which we failed to qualify as a RIC that are recognized during the 10-year period after our requalification as a RIC, unless we made a special election to pay corporate-level U.S. federal income tax on such net built-in gains at the time of our requalification as a RIC. We may decide to be taxed as a regular corporation even if we would otherwise qualify as a RIC if we determine that treatment as a corporation for a particular year would be in our best interests.

AVAILABLE INFORMATION

We file with or submit to the SEC annual, quarterly and current periodic reports, proxy statements and other information meeting the informational requirements of the Exchange Act. This information is available free of charge on our website at http://www.crescentbdc.com. Information contained on our website is not incorporated into this Annual Report and you should not consider such information to be part of this Annual Report. Such information is also available from the EDGAR database on the SEC’s web site at http://www.sec.gov.

 

Item 1A.

Risk Factors

Investing in our common stock involves a number of significant risks. Before an investor invests in our common stock, the investor should be aware of various risks, including those described below. The investor should carefully consider these risk factors, together with all of the other information included in this Annual Report, before the investor decides whether to make an investment in our securities. The risks set out below are not the only risks we face. Additional risks and uncertainties not presently known to us or not presently deemed material by us may also impair business, financial condition, and/or operating results. If any of the following events occur, our business, financial condition, and results of operations could be materially and adversely affected. In such case, the net asset value of our common stock and the trading price, if any, of our securities could decline, and an investor may lose all or part of his or her investment.

Risks Relating to our Business and Structure

We have a limited operating history.

We were formed in February 2015 and commenced operations on June 26, 2015. As a result of our limited operating history, we are subject to the business risks and uncertainties associated with recently formed businesses, including the risk that we will not achieve our investment objective and that the value of an investor’s investment could decline substantially.

We are dependent upon key personnel of CCG LP and the Advisor.

We do not have any internal management capacity or employees. Our ability to achieve our investment objective will depend on our ability to manage our business and to grow our investments and earnings. This will depend, in turn, on the diligence, skill and network of business contacts of the senior professionals of CCG LP. We expect that these senior professionals will evaluate, negotiate, structure, close and monitor our investments in accordance with the terms of our Investment Advisory Agreement. We can offer no assurance, however, that senior professionals of CCG LP will continue to provide investment advice to us. If these individuals do not maintain their employment or other relationships with CCG LP and do not develop new relationships with other sources of investment opportunities available to us, we may not be able to grow our investment portfolio. In addition, individuals with whom the senior professionals of CCG LP have relationships are not obligated to provide us with investment opportunities. Therefore, we can offer no assurance that such relationships will generate investment opportunities for us.

 

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The Advisor is an affiliate of CCG LP and will depend upon access to the investment professionals and other resources of CCG LP to fulfill its obligations to us under the Investment Advisory Agreement. The Advisor will also depend upon such investment professionals to obtain access to deal flow generated by CCG LP. Under a Resource Sharing Agreement, CCG LP has agreed to provide the Advisor with the experienced investment professionals necessary to fulfill its obligations under the Investment Advisory Agreement. The Resource Sharing Agreement provides that CCG LP will make available to the Advisor experienced investment professionals and access to the resources of CCG LP for purposes of evaluating, negotiating, structuring, closing and monitoring our investments. Although we are a third-party beneficiary of the Resource Sharing Agreement, it may be terminated by either party on 60 days’ notice. We cannot assure investors that CCG LP will fulfill its obligations under the agreement. We cannot assure investors that the Advisor will enforce the Resource Sharing Agreement if CCG LP fails to perform, that such agreement will not be terminated by either party or that we will continue to have access to the investment professionals of CCG LP and its affiliates or their information and deal flow.

CCG LP’s and the Advisor’s investment professionals, which are currently composed of the same personnel, have substantial responsibilities in connection with the management of other CCG LP clients. The personnel of CCG LP may be called upon to provide managerial assistance to our portfolio companies. These demands on their time, which may increase as the number of investments grow, may distract them or slow our rate of investment.

The Advisor’s investment committee, which provides oversight over our investment activities, is provided to us by the Advisor under the Investment Advisory Agreement. The loss of any member of the Advisor’s investment committee or of other senior professionals of CCG LP would limit our ability to achieve our investment objective and operate as we anticipate. This could have a material adverse effect on our financial condition, results of operations and cash flows.

Further, we depend upon CCG LP to maintain its relationships with private equity sponsors, placement agents, investment banks, management groups and other financial institutions, and we expect to rely to a significant extent upon these relationships to provide us with potential investment opportunities. If CCG LP fails to maintain such relationships, or to develop new relationships with other sources of investment opportunities, we will not be able to grow our investment portfolio. In addition, individuals with whom the senior professionals of CCG LP have relationships are not obligated to provide us with investment opportunities, and we can offer no assurance that these relationships will generate investment opportunities in the future.

We may not replicate the historical results achieved by CCG LP.

Our primary focus in making investments may differ from those of existing investment funds, accounts or other investment vehicles that are or have been managed by members of the Advisor’s investment committee or by CCG LP. Past performance should not be relied upon as an indication of future results. There can be no guarantee that we will replicate our own historical performance, the historical success of CCG LP or the historical performance of investment funds, accounts or other investment vehicles that are or have been managed by members of the Advisor’s investment committee or by CCG LP or its employees, and we caution investors that our investment returns could be substantially lower than the returns achieved by them in prior periods. We cannot assure you that we will be profitable in the future or that the Advisor will be able to continue to implement our investment objectives with the same degree of success that it has had in the past. Additionally, all or a portion of the prior results may have been achieved in particular market conditions which may never be repeated. Moreover, current or future market volatility and regulatory uncertainty may have an adverse impact on our future performance.

We depend on CCG LP to manage our business effectively.

Our ability to achieve our investment objective will depend on our ability to manage our business and to grow our investments and earnings. This will depend, in turn, on CCG LP’s ability to identify, invest in and monitor portfolio companies that meet our investment criteria. The achievement of our investment objectives on a cost-effective basis will depend upon CCG LP’s execution of our investment process, its ability to provide competent, attentive and efficient services to us and, to a lesser extent, our access to financing on acceptable terms. CCG LP’s investment professionals will have substantial responsibilities in connection with the management of other investment funds, accounts and investment vehicles. The personnel of CCG LP may be called upon to provide managerial assistance to our portfolio companies. These activities may distract them from servicing new investment opportunities for us or slow our rate of investment. Any failure to manage our business and our future growth effectively could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

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Global capital markets could enter a period of severe disruption and instability. These conditions have historically affected and could again materially and adversely affect debt and equity capital markets in the United States and around the world and our business.

From time to time, the global capital markets may experience periods of disruption and instability resulting in increasing spreads between the yields realized on riskier debt securities and those realized on risk-free securities and a lack of liquidity in parts of the debt capital markets, significant write-offs in the financial services sector relating to subprime mortgages and the re-pricing of credit risk in the broadly syndicated market. Deteriorating market conditions could result in increasing volatility and illiquidity in the global credit, debt and equity markets generally. The duration and ultimate effect of such market conditions cannot be forecasted. Deteriorating market conditions and uncertainty regarding economic markets generally could result in declines in the market values of potential investments or declines in the market values of investments after they are made or acquired by us and affect the potential for liquidity events involving such investments or portfolio companies.

Such declines may be exacerbated by other events, such as the failure of significant financial institutions or hedge funds, dislocations in other investment markets or other extrinsic events. Applicable accounting standards require us to determine the fair value of our investments as the amount that would be received in an orderly transaction between market participants at the measurement date. While most of our investments are not publicly traded, as part of the valuation process we consider a number of measures, including comparison to publicly traded securities. As a result, volatility in the public capital markets can adversely affect our investment valuations.

During any such periods of market disruption and instability, we and other companies in the financial services sector may have limited access, if any, to alternative markets for debt and equity capital. Equity capital may be difficult to raise because, subject to some limited exceptions that will apply to us as a BDC, we will generally not be able to issue additional shares of our common stock at a price less than net asset value (“NAV”) without first obtaining approval for such issuance from our stockholders and independent directors. In addition, our ability to incur indebtedness (including by issuing preferred stock) is limited by applicable regulations such that our asset coverage, as defined in the 1940 Act, must equal at least 200% (or 150% if certain disclosure and approval requirements are met) immediately after each time we incur indebtedness. The debt capital that will be available, if any, may be at a higher cost and on less favorable terms and conditions in the future. Any inability to raise capital could have a negative effect on our business, financial condition and results of operations.

A prolonged period of market illiquidity may cause us to reduce the volume of loans and debt securities we originate and/or fund and adversely affect the value of our portfolio investments, which could have a material and adverse effect on our business, financial condition, results of operations and cash flows.

Global economic, political and market conditions, including uncertainty about the financial stability of the United States, could have a significant adverse effect on our business, financial condition and results of operations.

Downgrades by rating agencies to the U.S. government’s credit rating or concerns about its credit and deficit levels in general, could cause interest rates and borrowing costs to rise, which may negatively impact both the perception of credit risk associated with our debt portfolio and our ability to access the debt markets on favorable terms. In addition, a decreased U.S. government credit rating could create broader financial turmoil and uncertainty, which may weigh heavily on our financial performance and the value of our Common Stock.

Deterioration in the economic conditions in the Eurozone and globally, including instability in financial markets, may pose a risk to our business. In recent years, financial markets have been affected at times by a number of global macroeconomic and political events, including the following: large sovereign debts and fiscal deficits of several countries in Europe and in emerging markets jurisdictions, levels of non-performing loans on the balance sheets of European banks, the potential effect of any European country leaving the Eurozone, the potential effect of the United Kingdom leaving the European Union, and market volatility and loss of investor confidence driven by political events. Market and economic disruptions have affected, and may in the future affect, consumer confidence levels and spending, personal bankruptcy rates, levels of incurrence and default on consumer debt and home prices, among other factors. We cannot assure you that market disruptions in Europe, including the increased cost of funding for certain governments and financial institutions, will not impact the global economy, and we cannot assure you that assistance packages will be available, or if available, be sufficient to stabilize countries and markets in Europe or elsewhere affected by a financial crisis. To the extent uncertainty regarding any economic recovery in Europe negatively impacts consumer confidence and consumer credit factors, our business, financial condition and results of operations could be significantly and adversely affected.

 

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The Chinese capital markets have also experienced periods of instability over the past several years. The current political climate has also intensified concerns about a potential trade war between the U.S. and China in connection with each country’s recent or proposed tariffs on the other country’s products. These market and economic disruptions and the potential trade war with China have affected, and may in the future affect, the U.S. capital markets, which could adversely affect our business, financial condition or results of operations.

The current global financial market situation, as well as various social and political circumstances in the U.S. and around the world, including wars and other forms of conflict, terrorist acts, security operations and catastrophic events such as fires, floods, earthquakes, tornadoes, hurricanes and global health epidemics (including the coronavirus currently affecting China and the wider global community), may contribute to increased market volatility and economic uncertainties or deterioration in the U.S. and worldwide. Additionally, the U.S. government’s credit and deficit concerns, the European sovereign debt crisis, and the potential trade war with China, could cause interest rates to be volatile, which may negatively impact our ability to access the debt markets on favorable terms.

Adverse developments in the credit markets may impair our ability to enter into new debt financing arrangements.

During the economic downturn in the United States that began in mid-2007, many commercial banks and other financial institutions stopped lending or significantly curtailed their lending activity. In addition, in an effort to stem losses and reduce their exposure to segments of the economy deemed to be high risk, some financial institutions limited refinancing and loan modification transactions and reviewed the terms of existing facilities to identify bases for accelerating the maturity of existing lending facilities. If these conditions recur, it may be difficult for us to enter into a new credit or other borrowing facility, obtain other financing to finance the growth of its investments, or refinance any outstanding indebtedness on acceptable economic terms, or at all.

The Advisor, the investment committee of the Advisor, CCG LP and their affiliates, officers, directors and employees may face certain conflicts of interest.

As a result of our arrangements with CCG LP, the Advisor and the Advisor’s investment committee, there may be times when the Advisor or such persons have interests that differ from those of our stockholders, giving rise to a conflict of interest.

The members of the Advisor’s investment committee serve, or may serve, as officers, directors, members, or principals of entities that operate in the same or a related line of business as we do, or of investment funds, accounts, or investment vehicles managed by CCG LP and/or its affiliates. Similarly, CCG LP and its affiliates may have other clients with similar, different or competing investment objectives.

In serving in these multiple capacities, they may have obligations to other clients or investors in those entities, the fulfillment of which may not be in the best interests of, or which may be adverse to the interests of, us or our stockholders. For example, CCG LP has, and will continue to have management responsibilities for other investment funds, accounts and investment vehicles. There is a potential that we will compete with these funds, and other entities managed by CCG LP and its affiliates, for capital and investment opportunities. As a result, members of the Advisor’s investment committee who are affiliated with CCG LP will face conflicts in the allocation of investment opportunities among us, and other investment funds, accounts and investment vehicles managed by CCG LP and its affiliates and may make certain investments that are appropriate for us but for which we receive a relatively small allocation or no allocation at all. CCG LP intends to allocate investment opportunities among eligible investment funds, accounts and investment vehicles in a manner that is fair and equitable over time and consistent with its allocation policy. However, we can offer no assurance that such opportunities will be allocated to us fairly or equitably in the short-term or over time and we may not be given the opportunity to participate in investments made by investment funds managed by CCG LP or its affiliates. We expect that CCG LP and the Advisor will agree with our Board that, subject to applicable law, allocations among us and other investment funds, accounts and investment vehicles managed by CCG LP will generally be made based on capital available for investment in the asset class being allocated and the respective governing documents of such investment funds, accounts and investment vehicles. We expect that available capital for our investments will be determined based on the amount of cash on-hand, existing commitments and reserves, if any, the targeted leverage level, targeted asset mix and diversification requirements and other investment policies and restrictions set by our Board or as imposed by applicable laws, rules, regulations or interpretations. However, there can be no assurance that we will be able to participate in all investment opportunities that are suitable to us.

Further, to the extent permitted by applicable law, we and our affiliates may own investments at different levels of a portfolio company’s capital structure or otherwise own different classes of a portfolio company’s securities, which may give rise to conflicts of interest or perceived conflicts of interest. Conflicts may also arise because decisions regarding our portfolio may benefit our affiliates. Our affiliates may pursue or enforce rights with respect to one of its portfolio companies, and those activities may have an adverse effect on us.

 

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Principals and employees of CCG LP, the Advisor or their affiliates may, from time to time, possess material non-public information, limiting our investment discretion.

The executive officers and directors, principals and other employees of CCG LP, including members of the Advisor’s investment committee, may serve as directors of, or in a similar capacity with, portfolio companies in which we invest, the securities of which are purchased or sold on our behalf and may come into possession of material non-public information with respect to issuers in which we may be considering making an investment. In the event that material non-public information is obtained with respect to such companies, or we become subject to trading restrictions under the internal trading policies of those companies, the policies of CCG LP or as a result of applicable law or regulations, we could be prohibited for a period of time or indefinitely from purchasing or selling the securities of such companies, or we may be precluded from providing such information or other ideas to other funds affiliated with CCG LP that might benefit from such information, and this prohibition may have an adverse effect on us.

Our management and incentive fee structure may create incentives for the Advisor that are not fully aligned with our stockholders’ interests and may induce the Advisor to make speculative investments.

In the course of our investing activities, we will pay management and incentive fees to the Advisors. We have entered into the Investment Advisory Agreement with the Advisor that provides that these fees are based on the value of our gross assets (which includes assets purchased with borrowed amounts or other forms of leverage but excludes cash and cash equivalents), instead of net assets (defined as total assets less indebtedness and before taking into account any incentive fees payable). As a result, investors in our common stock will invest on a “gross” basis and receive distributions on a “net” basis after expenses, including the costs of leverage, resulting in a lower rate of return than one might achieve if distributions were made on a gross basis. Because our management fees are based on the value of our gross assets, incurrence of debt or the use of leverage will increase the management fees due to the Advisor. As such, the Advisor may have an incentive to use leverage to make additional investments. In addition, as additional leverage would magnify positive returns, if any, on our portfolio, the incentive fee would become payable to the Advisor (i.e., exceed the Hurdle Amount (as defined herein under the heading “Income Incentive Fee”)) at a lower average return on our portfolio. Thus, if we incur additional leverage, the Advisor may receive additional incentive fees without any corresponding increase (and potentially with a decrease) in the performance of our portfolio.

Additionally, under the incentive fee structure, the Advisor may benefit when capital gains are recognized and, because the Advisor will determine when to sell a holding, the Advisor will control the timing of the recognition of such capital gains. As a result of these arrangements, there may be times when the management team of the Advisor has interests that differ from those of our stockholders, giving rise to a conflict. Furthermore, there is a risk the Advisor will make more speculative investments in an effort to receive this payment. PIK interest and OID would increase our pre-incentive fee net investment income by increasing the size of the loan balance of underlying loans and increasing our assets under management and would make it easier for the Advisor to surpass the Hurdle Amount and increase the amount of incentive fees payable to the Advisor.

The part of the incentive fee payable to the Advisor relating to our net investment income is computed and paid on income that may include interest income that has been accrued but not yet received in cash. This fee structure may give rise to a conflict of interest for the Advisor to the extent that it encourages the Advisor to favor debt financings that provide for deferred interest, rather than current cash payments of interest. The Advisor may have an incentive to invest in deferred interest securities in circumstances where it would not have done so but for the opportunity to continue to earn the incentive fee even when the issuers of the deferred interest securities would not be able to make actual cash payments to us on such securities. This risk could be increased because, under the Investment Advisory Agreement, the Advisor is not obligated to reimburse us for incentive fees it receives even if we subsequently incur losses or never receives in cash the deferred income that was previously accrued.

Our Board is charged with protecting our interests by monitoring how the Advisor addresses these and other conflicts of interest associated with its services and compensation. While our Board is not expected to review or approve each investment decision or incurrence of leverage, our independent directors will periodically review the Advisor’s services and fees as well as its portfolio management decisions and portfolio performance. In connection with these reviews, our independent directors will consider whether the Advisor’s fees and expenses (including those related to leverage) remain appropriate.

We may invest, to the extent permitted by law, in the securities and instruments of other investment companies, including private funds, and, to the extent it so invests, bear its ratable share of any such investment company’s expenses, including management and performance fees. We also remain obligated to pay management and incentive fees to the Advisor with respect to the assets invested in the securities and instruments of other investment companies. With respect to each of these investments, each of our stockholders bears his or her share of the management and incentive fees of the Advisor as well as indirectly bearing the management and performance fees and other expenses of any investment companies in which we invest.

 

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Conflicts of interest may be created by the valuation process for certain portfolio holdings.

We make many of our portfolio investments in the form of loans and securities that are not publicly traded and for which no market based price quotation is available. As a result, our Board will determine the fair value of these loans and securities in good faith as described below in “—The majority of our portfolio investments are recorded at fair value as determined in good faith by our Board and, as a result, there may be uncertainty as to the value of our portfolio investments.” Each of the interested members of our Board has an indirect pecuniary interest in the Advisor. The participation of the Advisor’s investment professionals in our valuation process, and the pecuniary interest in the Advisor by certain members of the our Board, could result in a conflict of interest as the Advisor’s management fee is based, in part, on the value of our gross assets, and our incentive fees will be based, in part, on realized gains and realized and unrealized losses.

Conflicts may arise related to other arrangements with CCG LP and the Advisor and other affiliates.

We have entered into a license agreement with CCG LP under which CCG LP has agreed to grant us a non-exclusive, royalty-free license to use the name “Crescent Capital.” In addition, the Administration Agreement with the Administrator, an affiliate of CCG LP, requires we pay to the Administrator our allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the Administration Agreement, such as rent and our allocable portion of the cost of our chief financial officer and chief compliance officer and their respective staffs. In addition, the Advisor has entered into a Resource Sharing Agreement with CCG LP pursuant to which CCG LP provides the Advisor with the resources necessary to fulfill its obligations under the Investment Advisory Agreement. These agreements create conflicts of interest that the independent members of our Board will monitor. For example, under the terms of the license agreement, we will be unable to preclude CCG LP from licensing or transferring the ownership of the “Crescent Capital” name to third parties, some of whom may compete against us. Consequently, it will be unable to prevent any damage to goodwill that may occur as a result of the activities of CCG LP or others. Furthermore, in the event the license agreement is terminated, we will be required to change our name and cease using “Crescent Capital” as part of our name. Any of these events could disrupt our recognition in the market place, damage any goodwill it may have generated and otherwise harm its business.

Our Investment Advisory Agreement was negotiated with the Advisor and the Administration Agreement was negotiated with the Administrator, which are both our related parties.

The Investment Advisory Agreement, and the Administration Agreement were negotiated between related parties (with the exception that certain terms of the Prior Investment Advisory Agreement that were negotiated with Alcentra Capital). Consequently, their terms, including fees payable to the Advisor, may not be as favorable to us as if they had been negotiated exclusively with an unaffiliated third party. In addition, we may desire not to enforce, or to enforce less vigorously, its rights and remedies under these agreements because of our desire to maintain our ongoing relationship with the Advisor, the Administrator and their respective affiliates. Any such decision, however, could breach our fiduciary obligations to its stockholders.

The Advisor has limited liability and is entitled to indemnification under the Investment Advisory Agreement.

Under the Investment Advisory Agreement, the Advisor has not assumed any responsibility to us other than to render the services called for under that agreement. The Advisor will not be responsible for any action of our Board in following or declining to follow the Advisor’s advice or recommendations. Under the Investment Advisory Agreement the Advisor, its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with the Advisor, including, without limitation, its general partner and the Administrator, and any person controlling or controlled by the Advisor will not be liable to us, any of our subsidiaries, our directors, our stockholders or any subsidiary’s stockholders or partners for acts or omissions performed in accordance with and pursuant to the Investment Advisory Agreement, except those resulting from acts constituting gross negligence, willful misfeasance, bad faith or reckless disregard of the duties that the Advisor owes to us under the Investment Advisory Agreement. In addition, as part of the Investment Advisory Agreement, we have agreed to indemnify the Advisor and each of its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with the Advisor, including, without limitation, its general partner and the Administrator, and hold them harmless from and against all damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) incurred by such party in or by reason of any pending, threatened or completed action, suit, investigation or other proceeding (including an action or suit by or in the right of us or our security holders) arising out of or otherwise based upon the performance of any of the Advisor’s duties or obligations under the Investment Advisory Agreement or otherwise as an investment adviser of us, except in respect of any liability to us or our security holders to which such party would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of the Advisor’s duties or by reason of the reckless disregard of the Advisor’s duties and obligations under the Investment Advisory Agreement. These protections may lead the Advisor to act in a riskier manner when acting on our behalf than the Advisor would when acting for its own account.

 

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Our ability to enter into transactions with our affiliates is restricted.

We are prohibited under the 1940 Act from participating in certain transactions with our affiliates without the prior approval of our independent directors and, in some cases, the SEC. We consider the Advisor and its affiliates, including CCG LP, to be our affiliates for such purposes. In addition, any person that owns, directly or indirectly, 5% or more of our outstanding voting securities will be our affiliate for purposes of the 1940 Act, and we are generally prohibited from buying or selling any security from or to such affiliate without the prior approval of our independent directors. We consider the Advisor and its affiliates, including CCG LP, to be our affiliates for such purposes. The 1940 Act also prohibits certain “joint” transactions with certain of our affiliates, which could include investments in the same portfolio company, without prior approval of our independent directors and, in some cases, of the SEC. We are prohibited from buying or selling any security from or to any person who owns more than 25% of our voting securities or certain of that person’s affiliates, or entering into prohibited joint transactions with such persons, absent the prior approval of the SEC.

We may, however, invest alongside CCG LP’s investment funds, accounts and investment vehicles in certain circumstances where doing so is consistent with our investment strategy as well as applicable law and SEC staff interpretations or exemptive orders. For example, we may invest alongside such investment funds, accounts and investment vehicles consistent with guidance promulgated by the SEC staff to purchase interests in a single class of privately placed securities so long as certain conditions are met, including that CCG LP, acting on our behalf and on behalf of such investment funds, accounts and investment vehicles, negotiates no term other than price. We may also invest alongside CCG LP’s investment funds, accounts and investment vehicles as otherwise permissible under regulatory guidance, applicable regulations or exemptive orders and CCG LP’s allocation policy. If the Company is prohibited by applicable law from investing alongside CCG LP’s investment funds, accounts and investment vehicles with respect to an investment opportunity, we may not be able to participate in such investment opportunity. This allocation policy provides that allocations among us and investment funds, accounts and investment vehicles managed by CCG LP and its affiliates will generally be made pro rata based on capital available for investment, as determined, in our case, by our Board as well as the terms of our governing documents and those of such investment funds, accounts and investment vehicles. It is our policy to base our determinations on such factors as: the amount of cash on-hand, existing commitments and reserves, if any, our targeted leverage level, our targeted asset mix and diversification requirements and other investment policies and restrictions set by our Board or imposed by applicable laws, rules, regulations or interpretations. We expect that these determinations will be made similarly for investment funds, accounts and investment vehicles managed by CCG LP. However, we can offer no assurance that investment opportunities will be allocated to us fairly or equitably in the short-term or over time.

In situations where co-investment with investment funds, accounts and investment vehicles managed by CCG LP is not permitted or appropriate, such as when there is an opportunity to invest in different securities of the same issuer or where the different investments could be expected to result in a conflict between our interests and those of CCG LP’s clients, subject to the limitations described in the preceding paragraph, CCG LP will need to decide which client will proceed with the investment. Similar restrictions limit our ability to transact business with our officers or directors or their affiliates. These restrictions will limit the scope of investment opportunities that would otherwise be available to us.

We, the Advisor and CCG LP have been granted exemptive relief from the SEC which permits greater flexibility to negotiate the terms of co-investments if our Board determines that it would be advantageous for us to co-invest with investment funds, accounts and investment vehicles managed by CCG LP in a manner consistent with our investment objectives, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors. We believe that co-investment by us and investment funds, accounts and investment vehicles managed by CCG LP may afford us additional investment opportunities and an ability to achieve a more varied portfolio. Accordingly, our exemptive order permits us to invest with investment funds, accounts and investment vehicles managed by CCG LP in the same portfolio companies under circumstances in which such investments would otherwise not be permitted by the 1940 Act. The exemptive relief permitting co-investment transactions generally applies only if our independent directors and directors who have no financial interest in such transaction review and approve in advance each co-investment transaction.

Our ability to sell or otherwise exit investments also invested in by other CCG LP investment vehicles is restricted.

We may be considered affiliates with respect to certain of our portfolio companies because our affiliates, which may include certain investment funds, accounts or investment vehicles managed by CCG LP, also hold interests in these portfolio companies and as such these interests may be considered a joint enterprise under the 1940 Act. To the extent that our interests in these portfolio companies may need to be restructured in the future or to the extent that we choose to exit certain of these transactions, our ability to do so will be limited. We intend to seek exemptive relief in relation to certain joint transactions; however, there is no assurance that we will obtain relief that would permit us to negotiate future restructurings or other transactions that may be considered a joint enterprise.

 

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We operate in an increasingly competitive market for investment opportunities, which could make it difficult for us to identify and make investments that are consistent with our investment objectives.

A number of entities compete with us to make the types of investments that we make and plan to make. We compete with public and private funds, commercial and investment banks, commercial financing companies and, to the extent they provide an alternative form of financing, private equity and hedge funds. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, we believe some of our competitors may have access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC or the source-of-income, asset diversification and distribution requirements we must satisfy to maintain our RIC qualification. The competitive pressures we face may have a material adverse effect on our business, financial condition, results of operations and cash flows. As a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we may not be able to identify and make investments that are consistent with our investment objectives.

With respect to the investments we make, we will not seek to compete based primarily on the interest rates we will offer, and we believe that some of our competitors may make loans with interest rates that will be lower than the rates we offer. In the secondary market for acquiring existing loans, we expect to compete generally on the basis of pricing terms. With respect to all investments, we may lose some investment opportunities if we do not match our competitors’ pricing, terms and structure. However, if we match our competitors’ pricing, terms and structure, we may experience decreased net interest income, lower yields and increased risk of credit loss. We may also compete for investment opportunities with investment funds, accounts and investment vehicles managed by CCG LP. Although CCG LP will allocate opportunities in accordance with its policies and procedures, allocations to such investment funds, accounts and investment vehicles will reduce the amount and frequency of opportunities available to us and may not be in the best interests of us and our stockholders. Moreover, the performance of investments will not be known at the time of allocation. See —“The Advisor, the investment committee of the Advisor, CCG LP and their affiliates, officers, directors and employees may face certain conflicts of interest.”

We will be subject to corporate level income tax if we are unable to qualify as a RIC.

To qualify as a RIC under the Code, we must meet certain source-of-income, asset diversification and distribution requirements. The distribution requirement for a RIC is satisfied if we distribute at least 90% of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, to our stockholders on an annual basis. We will be subject, to the extent we use debt financing, to certain asset coverage ratio requirements under the 1940 Act and financial covenants under loan and credit agreements that could, under certain circumstances, restrict us from making distributions necessary to qualify as a RIC. If we are unable to obtain cash from other sources, we may fail to qualify as a RIC and, thus, may be subject to corporate-level income tax. To qualify as a RIC, we must also meet certain asset diversification requirements at the end of each calendar quarter. Failure to meet these tests may result in our having to dispose of certain investments quickly in order to prevent the loss of our qualifications as a RIC. Because most of our investments will be in private or thinly traded public companies, any such dispositions could be made at disadvantageous prices and may result in substantial losses. If we fail to qualify as a RIC for any reason and become subject to corporate income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distributions to our stockholders and the amount of funds available for new investments. Such a failure would have a material adverse effect on us and our stockholders.

An investment in our common stock presents an above average degree of risk.

The investments we make in accordance with our investment objective may result in a higher amount of risk than associated with alternative investment options, and higher volatility or loss of principal. Our investments in portfolio companies may be speculative and, therefore, an investment in our common stock may not be suitable for someone with lower risk tolerance. In addition, our common stock is intended for long-term investors who can accept the risks of investing primarily in illiquid loans and other debt or debt-like instruments and should not be treated as a trading vehicle.

 

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We may need to raise additional capital.

We intend to access the capital markets periodically to issue debt or equity securities or borrow from financial institutions in order to obtain additional capital to fund new investments and grow our portfolio of investments. Unfavorable economic conditions could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. A reduction in the availability of new capital could limit our ability to grow. In addition, we will be required to distribute in respect of each taxable year at least 90% of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, for such taxable year to our stockholders to maintain our qualification as a RIC. Amounts so distributed will not be available to fund new investments or repay maturing debt. An inability on our part to access the capital markets successfully could limit our ability to grow our business and execute our business strategy fully and could decrease our earnings, if any, which would have an adverse effect on the value of our securities.

Further, we may pursue growth through acquisitions or strategic investments in new businesses. Completion and timing of any such acquisitions or strategic investments may be subject to a number of contingencies and risks. There can be no assurance that the integration of an acquired business will be successful or that an acquired business will prove to be profitable or sustainable.

Regulations governing our operation as a BDC affect our ability to, and the way in which we may, raise additional capital.

We may issue debt securities or preferred stock and/or borrow money from banks or other financial institutions, which we refer to collectively as “senior securities,” up to the maximum amount permitted by the 1940 Act. Under the provisions of the 1940 Act, we will be permitted as a BDC to issue senior securities in amounts such that our asset coverage ratio, as defined in the 1940 Act, equals at least 200% (or 150% if certain disclosure and approval requirements are met) of our gross assets less all liabilities and indebtedness not represented by senior securities, after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be required to sell a portion of our investments at a time when such sales may be disadvantageous to us in order to repay a portion of its indebtedness. If we issue senior securities, we will be exposed to typical risks associated with leverage, including an increased risk of loss.

Furthermore, equity capital may be difficult to raise because, subject to some limited exceptions we are not generally able to issue and sell our common stock at a price below NAV per share. We may, however, sell our common stock, or warrants, options or rights to acquire shares of our common stock, at a price below the then-current NAV per share of our common stock if the our Board determines that such sale is in our best interests, and if our stockholders, including a majority of those stockholders that are not affiliated with us, approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price that, in the determination of our Board, closely approximates the market value of such securities (less any distributing commission or discount). We do not currently have authorization from our stockholders to issue our common stock at a price below the then-current NAV per share.

Stockholders may be required to pay tax in excess of the cash they receive.

Under our dividend reinvestment plan, if a stockholder owns shares of our common stock, the stockholder will have all cash distributions automatically reinvested in additional shares of our common stock unless such stockholder, or his, her or its nominee on such stockholder’s behalf, specifically “opts out” of the dividend reinvestment plan by delivering a written notice to the plan administrator prior to the record date of the next distribution. If a stockholder does not “opt out” of the dividend reinvestment plan, that stockholder will be deemed to have received, and for U.S. federal income tax purposes will be taxed on, the amount reinvested in our common stock to the extent the amount reinvested was not a tax-free return of capital. As a result, a stockholder may have to use funds from other sources to pay U.S. federal income tax liability on the value of the common stock received. Even if a stockholder chooses to “opt out” of the dividend reinvestment plan, we will have the ability to declare a large portion of a dividend in shares of our common stock instead of in cash in order to satisfy the Annual Distribution Requirement (as defined herein under the heading Item 1(c). Description of Business—Regulation as a Business Development Company—Election to Be Taxed as a RIC”). As long as a portion of this dividend is paid in cash and certain requirements are met, the entire distribution will be treated as a dividend for U.S. federal income tax purposes. As a result, a stockholder generally will be subject to tax on 100% of the fair market value of the dividend on the date the dividend is received by the stockholder in the same manner as a cash dividend, even though most of the dividend was paid in shares of common stock.

We may have difficulty paying our required distributions if it recognizes income before, or without, receiving cash representing such income.

For U.S. federal income tax purposes, we will include in income certain amounts that we have not yet received in cash, such as the accretion of OID. This may arise if we receive warrants in connection with the making of a loan and in other circumstances, or through contracted PIK interest, which represents contractual interest added to the loan balance and due at the end of the loan term. Such OID, which could be significant relative to our overall investment activities, or increases in loan balances as a result of contracted PIK arrangements, will be included in income before we receive any corresponding cash payments. We also may be required to include in income certain other amounts that we will not receive in cash.

 

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Since in certain cases we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the requirement to distribute at least 90% of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, to maintain our qualification as a RIC. In such a case, we may have to sell some of our investments at times we would not consider advantageous, raise additional debt or equity capital or reduce new investment originations to meet these distribution requirements. If we are not able to obtain such cash from other sources, we may fail to qualify as a RIC and thus be subject to corporate-level income tax.

We may be subject to withholding of U. S. Federal income tax on distributions for non-U.S. stockholders.

Distributions by a RIC generally are treated as dividends for U.S. tax purposes, and will be subject to U.S. income or withholding tax unless the stockholder receiving the dividend qualifies for an exemption from U.S. tax, or the distribution is subject to one of the special look-through rules described below. Distributions paid out of net capital gains can qualify for a reduced rate of taxation in the hands of an individual U.S. stockholder, and an exemption from U.S. tax in the hands of a non-U.S. stockholder.

Properly reported dividend distributions by RICs paid out of certain interest income (such distributions, “interest-related dividends”) are generally exempt from U.S. withholding tax for non-U.S. stockholders. Under such exemption, a non-U.S. stockholder generally may receive interest-related dividends free of U.S. withholding tax if the stockholder would not have been subject to U.S. withholding tax if it had received the underlying interest income directly. No assurance can be given as to whether any of our distributions will be eligible for this exemption from U.S. withholding tax or, if eligible, will be designated as such by us. In particular, the exemption does apply to distributions paid in respect of a RIC’s non-U.S. source interest income, its dividend income or its foreign currency gains. In the case shares of our common stock held through an intermediary, the intermediary may withhold U.S. federal income tax even if we designate the payment as a dividend eligible for the exemption. Also, because our common stock will be subject to significant transfer restrictions, and an investment in our common stock will generally be illiquid, non-U.S. stockholders whose distributions on our common stock are subject to U.S. withholding tax may not be able to transfer their shares of our common stock easily or quickly or at all.

We may retain income and capital gains in excess of what is permissible for excise tax purposes and such amounts will be subject to 4% U.S. federal excise tax, reducing the amount available for distribution to stockholders.

We may retain some income and capital gains in the future, including for purposes of providing it with additional liquidity, which amounts would be subject to the 4% U.S. federal excise tax. In that event, we will be liable for the tax on the amount by which it does not meet the foregoing distribution requirement. See Item 1(c). Description of Business—Regulation as a Business Development Company—Taxation as a RIC.

Our business may be adversely affected if it fails to maintain its qualification as a RIC.

To maintain RIC tax treatment under the Code, we must meet the Annual Distribution Requirement, 90% Income Test and Diversification Tests described below and defined and further described in “Item 1(c). Description of Business—Regulation as a Business Development Company—Election to Be Taxed as a RIC.” The Annual Distribution Requirement will be satisfied if we distribute dividends to our stockholders in respect of each taxable year of an amount generally at least equal to 90% of its investment company taxable income, determined without regard to any deduction for distributions paid. In this regard, a RIC may, in certain cases, satisfy the Annual Distribution Requirement by distributing dividends relating to a taxable year after the close of such taxable year under the “spillback dividend” provisions of Subchapter M of the Code. We will be subject to tax, at regular corporate rates, on any retained income and/or gains, including any short-term capital gains or long-term capital gains. We must also satisfy the Excise Tax Avoidance Requirement, which is an additional distribution requirement with respect to each calendar year in order to avoid the imposition of a 4% excise tax on the amount of any under-distribution. Because we use debt financing, we are subject to (i) an asset coverage ratio requirement under the 1940 Act and are subject to (ii) certain financial covenants under loan and credit agreements that could, under certain circumstances, restrict us from making distributions necessary to satisfy the distribution requirements. If we are unable to obtain cash from other sources, or chose or be required to retain a portion of our taxable income or gains, it could (i) be required to pay excise tax and (ii) fail to qualify for RIC tax treatment, and thus become subject to corporate-level income tax on its taxable income (including gains).

The 90% Income Test will be satisfied if we earn at least 90% of its gross income each taxable year from distributions, interest, gains from the sale of stock or securities, or other income derived from the business of investing in stock or securities. The Diversification Tests will be satisfied if we meet certain asset diversification requirements at the end of each quarter of our taxable year. To satisfy the Diversification Tests, at least 50% of the value of our assets at the close of each quarter of each taxable year must consist of cash, cash equivalents (including receivables), U.S. government securities, securities of other RICs, and other acceptable securities, and no more than 25% of the value of its assets can be invested in the securities, other than U.S. government securities or securities of other RICs, of one issuer, of two or more issuers that are controlled, as determined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses or of certain “qualified publicly traded partnerships.” Failure to meet these requirements may result in us having to dispose of certain investments quickly in order to prevent the loss of RIC status. Because most of our investments will be in private companies, and therefore will be relatively illiquid, any such dispositions could be made at disadvantageous prices and could result in substantial losses.

 

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We may invest in certain debt and equity investments through taxable subsidiaries and the net taxable income of these taxable subsidiaries will be subject to federal and state corporate income taxes. We also may invest in certain foreign debt and equity investments that could be subject to foreign taxes (such as income tax, withholding, and value added taxes). If we fail to maintain RIC tax treatment for any reason and are subject to corporate income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution, and the amount of our distributions.

Certain investors are limited in their ability to make significant investments in us.

Private funds that are excluded from the definition of “investment company” either pursuant to Section 3(c)(1) or 3(c)(7) of the 1940 Act are restricted from acquiring directly or through a controlled entity more than 3% of our total outstanding voting stock (measured at the time of the acquisition). Investment companies registered under the 1940 Act and BDCs, such as us, are also currently subject to this restriction as well as other limitations under the 1940 Act that would restrict the amount that they are able to invest in our securities. As a result, certain investors will be limited in their ability to make significant investments in us at a time that they might desire to do so. The SEC has proposed Rule 12d1-4 under the 1940 Act. Subject to certain conditions, proposed Rule 12d1-4 would provide an exemption to permit acquiring funds to invest in the securities of other registered investment companies and BDCs in excess of the limits currently prescribed by the 1940 Act.

Our business could be adversely affected in the event we default under our existing credit facilities or any future credit or other borrowing facility.

We have entered into, and additionally may enter into, one or more credit facilities. The closing of any additional credit facilities is contingent on a number of conditions including, without limitation, the negotiation and execution of definitive documents relating to such credit facility. If we obtain any additional credit facilities, we intend to use borrowings under such credit facilities to make additional investments and for other general corporate purposes. However, there can be no assurance that we will be able to close such additional credit facilities or obtain other financing.

In the event we default under one of our credit facilities or any other future borrowing facility, our business could be adversely affected as we may be forced to sell a portion of our investments quickly and prematurely at what may be disadvantageous prices to us in order to meet our outstanding payment obligations and/or support working capital requirements under the relevant credit facility or such future borrowing facility, any of which would have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, following any such default, the agent for the lenders under any future borrowing facility could assume control of the disposition of any or all of our assets, including the selection of such assets to be disposed and the timing of such disposition, which would have a material adverse effect on our business, ability to pay dividends, financial condition, results of operations and cash flows. If we were unable to obtain a waiver of a default from the lenders or holders of that indebtedness, as applicable, those lenders or holders could accelerate repayment under that indebtedness, which might result in cross-acceleration of other indebtedness. An acceleration could have a material adverse impact on our business, financial condition and results of operations.

In addition, following any such default, the agent for the lenders under the relevant credit facility or such future credit or other borrowing facility could assume control of the disposition of any or all of our assets, including the selection of such assets to be disposed and the timing of such disposition, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Lastly, as a result of any such default, we may be unable to obtain additional leverage, which could, in turn, affect our return on capital.

 

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Our strategy involves a high degree of leverage. We intend to continue to finance our investments with borrowed money, which will magnify the potential for gain or loss on amounts invested and increases the risk of investing in us. The risks of investment in a highly leveraged fund include volatility and possible distribution restrictions.

The use of leverage magnifies the potential for gain or loss on amounts invested. The use of leverage is generally considered a speculative investment technique and increases the risks associated with investing in our securities. However, we have borrowed from, and may in the future issue debt securities to, banks, insurance companies and other lenders. Lenders of these funds have fixed dollar claims on our assets that are superior to the claims of our common stockholders, and we would expect such lenders to seek recovery against our assets in the event of a default. We may pledge up to 100% of our assets and may grant a security interest in all of our assets under the terms of any debt instruments we may enter into with lenders. In addition, under the terms of our credit facilities and any borrowing facility or other debt instrument we may enter into, we are likely to be required to use the net proceeds of any investments that we sell to repay a portion of the amount borrowed under such facility or instrument before applying such net proceeds to any other uses. If the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged, thereby magnifying losses or eliminating our stake in a leveraged investment. Similarly, any decrease in our revenue or income will cause our net income to decline more sharply than it would have had we not borrowed. Such a decline would also negatively affect our ability to make dividend payments on our common stock or preferred stock. Our ability to service any debt will depend largely on our financial performance and will be subject to prevailing economic conditions and competitive pressures. In addition, our common stockholders will bear the burden of any increase in our expenses as a result of our use of leverage, including interest expenses and any increase in the base management fee payable to the Advisor.

There can be no assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our credit facilities or otherwise in an amount sufficient to enable us to repay our indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before it matures. There can be no assurance that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. If we cannot service our indebtedness, we may have to take actions such as selling assets or seeking additional equity. There can be no assurance that any such actions, if necessary, could be effected on commercially reasonable terms or at all, or on terms that would not be disadvantageous to stockholders or on terms that would not require us to breach the terms and conditions of our existing or future debt agreements.

As a BDC, we are generally required to meet a coverage ratio of total assets to total borrowings and other senior securities, which include all of our borrowings and any preferred stock that we may issue in the future, of at least 200%. If this ratio declines below 200%, we will not be able to incur additional debt and could be required to sell a portion of our investments to repay some debt when we are otherwise disadvantageous for us to do so. This could have a material adverse effect on our operations, and we may not be able to make distributions. The amount of leverage that we employ will depend on the Advisor’s assessment of market and other factors at the time of any proposed borrowing. We cannot assure stockholders that we will be able to obtain credit at all or on terms acceptable to it. The SBCAA, which was signed into law in March 2018, modifies the applicable section of the 1940 Act and decreases the asset coverage requirements applicable to BDCs from 200% to 150% (subject to either stockholder approval or approval of both a majority of the board of directors and a majority of directors who are not interested persons). On March 3, 2020, the Board, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act of the Board, approved the modified asset coverage requirements under the SBCAA. As a result, the Company’s asset coverage requirements for senior securities will be changed from 200% to 150%, effective as of March 3, 2021, unless approved earlier by a vote of our stockholders, in which case the 150% minimum asset coverage ratio will be effective on the day after such approval. As of December 31, 2019, our total outstanding indebtedness was $325.4 million and our asset coverage ratio, computed in accordance with the 1940 Act, was 225%.

We are subject to risks associated with the current interest rate environment, and to the extent we use debt to finance our investments, changes in interest rates may affect our cost of capital and net investment income. Further, changes in LIBOR or its discontinuation may adversely affect the value of LIBOR-indexed securities, loans, and other financial obligations or extensions of credit in our portfolio.

An increase in interest rates from their comparatively low present levels may make it more difficult for our portfolio companies to service their obligations under the debt investments that we hold. Rising interest rates could also cause portfolio companies to shift cash from other productive uses to the payment of interest, which may have a material adverse effect on their business and operations and could, over time, lead to increased defaults.

In addition, concerns have been publicized that some of the member banks surveyed by the British Bankers’ Association (the “BBA”) in connection with the calculation of LIBOR across a range of maturities and currencies may have been under-reporting or otherwise manipulating the inter-bank lending rate applicable to them in order to profit on their derivatives positions or to avoid an appearance of capital insufficiency or adverse reputational or other consequences that may have resulted from reporting inter-bank lending rates higher than those they actually submitted. A number of BBA member banks have entered into settlements with their regulators and law enforcement agencies with respect to alleged manipulation of LIBOR, and investigations by regulators and governmental authorities in various jurisdictions are ongoing. These developments may have adversely affected the interest rates on securities, loans, and other financial obligations or extensions of credit whose interest payments were determined by reference to LIBOR. Any future similar developments could, in turn, reduce the value of such instruments held by or due to us.

 

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In July 2017, the head of the United Kingdom Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. Such announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. It appears highly likely that LIBOR will be discontinued or modified by 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee of the Federal Reserve Board, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index calculated by short-term repurchase agreements, backed by U.S. Treasury securities (the “Secured Overnight Financing Rate,” or “SOFR”). It is currently unknown whether this or any other alternative reference rates will attain market acceptance as replacements for LIBOR. The unavailability of LIBOR presents risks to us, including the risk that any pricing or adjustments to our investments resulting from a substitute reference rate may adversely affect our performance or NAV. There is no definitive information regarding the future of LIBOR or of any particular replacement index rate. As such, the potential effect of any such event on our cost of capital and net investment income cannot yet be determined.

There can be no assurance that all of the LIBOR-indexed securities, loans, and other financial obligations or extensions of credit in which we are invested do or will include, or be amended to include, an alternative rate-setting methodology to be used in the event that LIBOR ceases to exist. In addition, any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for or value of any LIBOR- linked securities, loans, and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations.

To the extent we borrow money to make investments, our net investment income will depend, in part, upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. As a result, we can offer no assurance that a significant change in market interest rates would not have a material adverse effect on our net investment income in the event we use debt to finance our investments. In periods of rising interest rates, our cost of funds would increase, which could reduce our net investment income.

In addition, a rise in the general level of interest rates typically leads to higher interest rates applicable to our debt investments. Accordingly, an increase in interest rates may result in an increase of the amount of our pre-incentive fee net investment income, which could make it easier for us to meet or exceed the Hurdle Amount and, as a result, increase the in incentive fees payable to the Advisor.

We are and may be subject to restrictions under our credit facilities and any future credit or other borrowing facility that could adversely impact our business.

Our credit facilities, and any future borrowing facility, may be backed by all or a portion of our loans and securities on which the lenders may have a security interest. We currently pledge and may pledge up to 100% of our assets and may grant a security interest in all of our assets under the terms of any debt instrument we enter into with lenders. Like with its current credit facilities, we expect that any future security interests we grant will be set forth in a pledge and security agreement and evidenced by the filing of financing statements by the agent for the lenders, and we expect that the custodian for our securities serving as collateral for such loan would include in the custodian’s electronic systems notices indicating the existence of such security interests and, following notice of occurrence of an event of default, if any, and during its continuance, will only accept transfer instructions with respect to any such securities from the lender or its designee. Under our current credit facilities, we are subject to customary events of default. If we were to default under the terms of our current credit facilities and any future borrowing facility, the agent for the applicable lenders would be able to assume control of the timing of disposition of the assets pledged under the facility, which could include any or all of our assets securing such debt. Such remedial action would have a material adverse effect on our business, financial condition, results of operations and cash flows.

In addition, the security interests as well as negative covenants under its credit facilities, or any other future borrowing facility, may limit our ability to create liens on assets to secure additional debt and may make it difficult for us to restructure or refinance indebtedness at or prior to maturity or obtain additional debt or equity financing. In addition, if our borrowing base under our credit facilities or any other borrowing facility were to decrease, we would be required to secure additional assets in an amount equal to any borrowing base deficiency. In the event that all of our assets are secured at the time of such a borrowing base deficiency, we could be required to repay advances under the relevant credit facility or any other borrowing facility or make deposits to a collection account, either of which could have a material adverse impact on our ability to fund future investments and to pay dividends.

In addition, under our credit facilities, or any other future borrowing facility, we may be limited as to how borrowed funds may be used, which may include restrictions on geographic and industry concentrations, loan size, payment frequency and status, average life, collateral interests and investment ratings, as well as regulatory restrictions on leverage which may affect the amount of funding that may be obtained.

 

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There may also be certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs, a violation of which could limit further advances and, in some cases, result in an event of default. An event of default under our credit facilities or any other borrowing facility could result in an accelerated maturity date for all amounts outstanding thereunder, which could have a material adverse effect on our business and financial condition. This could reduce our revenues and, by delaying any cash payment allowed to us under the relevant credit facility or any other borrowing facility until the lenders have been paid in full, reduce our liquidity and cash flow and impair its ability to grow its business and maintain its qualification as a RIC.

We may be the target of litigation.

We may be the target of securities litigation in the future, particularly if the value of shares of our common stock fluctuates significantly. We could also generally be subject to litigation, including derivative actions by stockholders. In addition, our investment activities subject it to litigation relating to the bankruptcy process and the normal risks of becoming involved in litigation by third parties. This risk is somewhat greater where we exercise control or significant influence over a portfolio company’s direction. Any litigation could result in substantial costs and divert management’s attention and resources from our business and cause a material adverse effect on our business, financial condition and results of operations.

There is a risk that investors in our common stock may not receive dividends or that our dividends may not grow over time and that investors in our debt securities may not receive all of the interest income to which they are entitled.

We intend to make distributions on a quarterly basis to our stockholders out of assets legally available for distribution. We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. If we declare a dividend and if more stockholders opt to receive cash distributions rather than participate in its reinvestment plan, we may be forced to sell some of its investments in order to make cash dividend payments.

In addition, due to the asset coverage test applicable to us as a BDC, we may be limited in our ability to make distributions. Certain of our credit facilities may also limit our ability to declare dividends if we default under certain provisions. Further, if we invest a greater amount of assets in equity securities that do not pay current dividends, it could reduce the amount available for distribution.

The above-referenced restrictions on distributions may also inhibit our ability to make required interest payments to holders of our debt, which may cause a default under the terms of its debt agreements. Such a default could materially increase our cost of raising capital, as well as cause us to incur penalties under the terms of its debt agreements.

If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to qualify as a BDC or be precluded from investing according to our current business strategy.

To maintain its status as a BDC, we are not permitted to acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Subject to certain exceptions for follow-on investments and distressed companies, an investment in an issuer that has outstanding securities listed on a national securities exchange may be treated as a qualifying asset only if such issuer has a common equity market capitalization that is less than $250.0 million at the time of such investment. Subject to certain exceptions for follow-on investments and investments in distressed companies, an investment in an issuer that has outstanding securities listed on a national securities exchange may be treated as qualifying assets only if such issuer has a common equity market capitalization that is less than $250.0 million at the time of such investment.

We may be precluded from investing in what we believe are attractive investments if such investments are not qualifying assets for purposes of the 1940 Act. If we do not invest a sufficient portion of our assets in qualifying assets, we could violate the 1940 Act provisions applicable to BDCs. As a result of such violation, specific rules under the 1940 Act could prevent us, for example, from making follow-on investments in existing portfolio companies (which could result in the dilution of our position) or could require us to dispose of investments at inappropriate times in order to come into compliance with the 1940 Act. If we need to dispose of such investments quickly, it could be difficult to dispose of such investments on favorable terms. We may not be able to find a buyer for such investments and, even if we do find a buyer, we may have to sell the investments at a substantial loss. Any such outcomes would have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

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The majority of our portfolio investments are recorded at fair value as determined in good faith by our Board and, as a result, there may be uncertainty as to the value of our portfolio investments.

Many of our portfolio investments are in the form of loans and securities that are not publicly traded. The fair value of loans, securities and other investments that are not publicly traded may not be readily determinable, and we will value these investments at fair value as determined in good faith by our Board, including to reflect significant events affecting the value of our investments. Most, if not all, of our investments (other than cash and cash equivalents) will be classified as Level 3 under the FASB Accounting Standards Codification, Fair Value Measurements and Disclosures (ASC Topic 820). This means that our portfolio valuations will be based on unobservable inputs and our own assumptions about how market participants would price the asset or liability in question. We expect that inputs into the determination of fair value of our portfolio investments will require significant management judgment or estimation. Even if observable market data are available, such information may be the result of consensus pricing information or broker quotes, which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimers materially reduces the reliability of such information. We retain the services of one or more independent service providers to review the valuation of these loans and securities. However, the ultimate determination of fair value will be made by our Board and not by such third-party valuation firm. The types of factors that our Board may take into account in determining the fair value of our investments generally include, as appropriate, comparison to publicly-traded securities including such factors as yield, maturity and measures of credit quality, the enterprise value of a portfolio company, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, changes in the interest rate environment and the credit markets generally that may affect the price at which similar investments may be made in the future, comparisons to publicly traded companies, relevant credit market indices and other relevant factors.

Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these loans and securities existed. Also, since these valuations are, to a large extent, based on estimates, comparisons and qualitative evaluations of private information, our fair valuation process could make it more difficult for investors to accurately value our investments and could lead to undervaluation or overvaluation of our securities. In addition, the valuation of these types of securities may result in substantial write-downs and earnings volatility. Also, privately held companies frequently have less diverse product lines and smaller market presence than larger public competitors.

Our NAV could be adversely affected if our determinations regarding the fair value of our investments were materially higher than the values that we ultimately realize upon the disposal of such loans and securities. Further, our NAV as of a particular date may be materially greater than or less than the value that would be realized if our assets were to be liquidated as of such date. For example, if we were required to sell a certain asset or all or a substantial portion of our assets on a particular date, the actual price that we would realize upon the disposition of such asset or assets could be materially less than the value of such asset or assets as reflected in our NAV. Volatile market conditions could also cause reduced liquidity in the market for certain assets, which could result in liquidation values that are materially less than the values of such assets as reflected in the NAV.

We will adjust quarterly the valuation of our portfolio to reflect our Board’s determination of the fair value of each investment in our portfolio. Any changes in fair value are recorded in our statement of operations as net change in unrealized appreciation or depreciation.

We may experience fluctuations in our quarterly operating results.

We could experience fluctuations in our quarterly operating results due to a number of factors, including the interest rate payable on the loans and debt securities we acquire, the default rate on such loans and securities, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. In light of these factors, results for any period should not be relied upon as being indicative of performance in future periods.

New or modified laws or regulations governing our operations may adversely affect our business.

We and our portfolio companies are subject to regulation by laws at the U.S. federal, state and local levels. These laws and regulations, as well as their interpretation, may change from time to time, including as the result of interpretive guidance or other directives from the U.S. President and others in the executive branch, and new laws, regulations and interpretations may also come into effect. Any such new or changed laws or regulations could have a material adverse effect on our business. In addition, if we do not comply with applicable laws and regulations, we could lose any licenses that we then hold for the conduct of its business and may be subject to civil fines and criminal penalties.

 

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Additionally, changes to the laws and regulations governing our operations, including those associated with RICs, may cause us to alter our investment strategy in order to avail our self of new or different opportunities or result in the imposition of corporate-level taxes on us. Such changes could result in material differences to the strategies and plans set forth therein and may shift our investment focus from the areas of expertise of CCG LP to other types of investments in which CCG LP may have little or no expertise or experience. Any such changes, if they occur, could have a material adverse effect on our results of operations and the value of an investor’s investment. If we invest in commodity interests in the future, the Advisor may determine not to use investment strategies that trigger additional regulation by the U.S. Commodity Futures Trading Commission (“CFTC”) or may determine to operate subject to CFTC regulation, if applicable. If we or the Advisor were to operate subject to CFTC regulation, we may incur additional expenses and would be subject to additional regulation.

On March 23, 2018, the SBCAA was signed into law. The SBCAA, among other things, modified the applicable provisions of the 1940 Act to reduce the required asset coverage ratio applicable to a BDC from 200% to 150% subject to certain approval, time and disclosure requirements (including either stockholder approval or approval of a “required majority” of its board of directors). On March 3, 2020, our board of directors, including a “required majority” of our board of directors, approved the application of the modified asset coverage requirement set forth in Section 61(a)(2) of the 1940 Act, as amended by the SBCAA. As a result, effective on March 3, 2021 (unless we receive earlier stockholder approval), our asset coverage requirement applicable to senior securities will be reduced from 200% to 150% (i.e., the revised regulatory leverage limitation permits BDCs to double the amount of borrowings, such that we would be able to borrow up to two dollars for every dollar we have in assets less all liabilities and indebtedness not represented by senior securities issued by us), and the risks associated with an investment in us may increase. In addition, on March 20, 2019, the SEC proposed a series of rule and form amendments pursuant to the SBCAA. However, in the absence of final rules, the revisions required under the SBCAA became self-implementing on March 24, 2019. In the continued absence of transition guidance and through the effectiveness of the final rules, the appropriate mechanisms for implementing offering reform may remain in flux.

On May 24, 2018, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act, which increased from $50 billion to $250 billion the asset threshold for designation of “systemically important financial institutions” or “SIFIs” subject to enhanced prudential standards set by the Federal Reserve Board, staggering application of this change based on the size and risk of the covered bank holding company. On May 30, 2018, the Federal Reserve Board voted to consider changes to the Volcker Rule that would loosen compliance requirements for all banks.

Further, there has been increasing commentary amongst regulators and intergovernmental institutions, including the Financial Stability Board and International Monetary Fund, on the topic of so called “shadow banking” (a term generally taken to refer to credit intermediation involving entities and activities outside the regulated banking system). We are an entity outside the regulated banking system and certain of our activities may be argued to fall within this definition and, in consequence, may be subject to regulatory developments. As a result, we and the Advisor could be subject to increased levels of oversight and regulation. This could increase costs and limit operations. In an extreme eventuality, it is possible that such regulations could render our continued operation unviable and lead to our premature termination or restructuring.

Changes to U.S. tariff and import/export regulations may have a negative effect on our portfolio companies and, in turn, harm us.

There has been ongoing discussion and commentary regarding potential significant changes to U.S. trade policies, treaties and tariffs. The current administration, along with the U.S. Congress, has created significant uncertainty about the future relationship between the United States and other countries with respect to trade policies, treaties and tariffs. These developments, or the perception that any of them could occur, may have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global trade and, in particular, trade between the impacted nations and the United States. Any of these factors could depress economic activity and restrict our portfolio companies’ access to suppliers or customers and have a material adverse effect on their business, financial condition and results of operations, which in turn would negatively impact us.

The interest rates of our term loans to our portfolio companies that extend beyond 2021 might be subject to change based on recent regulatory changes.

In July 2017, the head of the United Kingdom Financial Conduct Authority announced the desire to phase out the use of LIBOR by the end of 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with the Secured Overnight Financing Rate, or SOFR, a new index calculated by short-term repurchase agreements, backed by Treasury securities. Although there have been a few issuances utilizing SOFR or the Sterling Over Night Index Average, an alternative reference rate that is based on transactions, it is unknown whether these alternative reference rates will attain market acceptance as replacements for LIBOR. If LIBOR ceases to exist, we may need to renegotiate any credit agreements extending beyond 2021 with our prospective portfolio companies that utilize LIBOR as a factor in determining the interest rate. There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. As such, the potential effect of any such event on our cost of capital and net investment income cannot yet be determined.

 

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The United Kingdom referendum decision to leave the European Union may create significant risks and uncertainty for global markets and our investments.

The decision made in the United Kingdom referendum to leave the European Union has led to volatility in global financial markets, and in particular in the markets of the United Kingdom and across Europe, and may also lead to weakening in consumer, corporate and financial confidence in the United Kingdom and Europe. The United Kingdom and European Union announced in March 2018 an agreement in principle to transitional provisions under which European Union law would remain in force in the United Kingdom until the end of December 2020, but this remains subject to the successful conclusion of an agreement between the United Kingdom and the European Union. In the absence of such an agreement there would be no transitional provisions and the United Kingdom would exit the European Union and the relationship between the United Kingdom and the European Union would be based on the World Trade Organization rules (a “hard Brexit). On October 28, 2019, the United Kingdom came to an agreement with the European Union to delay the deadline for withdrawal; however, the United Kingdom parliament did not approve the withdrawal agreement by January 31, 2020 and there was a hard Brexit on that date. While it is not currently possible to determine the extent of the impact a hard Brexit may have on our investments, certain measures are being proposed and/or will be introduced, at the European Union level or at the member state level, which are designed to minimize disruption in the financial market.

Notwithstanding the foregoing, the extent and process by which the United Kingdom will ultimately exit the European Union, and the longer term economic, legal, political and social framework to be put in place between the United Kingdom and the European Union are unclear at this stage and are likely to lead to ongoing political and economic uncertainty and periods of exacerbated volatility in both the United Kingdom and in wider European markets for some time. In particular, the decision made in the United Kingdom referendum may lead to a call for similar referenda in other European jurisdictions which may cause increased economic volatility and uncertainty in the European and global markets. This volatility and uncertainty may have an adverse effect on the economy generally and on our ability, and the ability of our portfolio companies, to execute our respective strategies and to receive attractive returns.

In particular, currency volatility may mean that our returns and the returns of our portfolio companies will be adversely affected by market movements and may make it more difficult, or more expensive, for us to implement appropriate currency hedging. Potential declines in the value of the British Pound and/or the euro against other currencies, along with the potential downgrading of the United Kingdom’s sovereign credit rating, may also have an impact on the performance of any of our portfolio companies located in the United Kingdom or Europe.

Our Board may change our investment objectives, operating policies and strategies without prior notice or stockholder approval.

Our Board has the authority, except as otherwise provided in the 1940 Act, to modify or waive certain of our investment objectives, operating policies and strategies without prior notice and without stockholder approval. However, absent stockholder approval, we may not change the nature of our business so as to cease to be, or withdraw our election as, a BDC. Under Maryland law, we also cannot be dissolved without prior stockholder approval. We cannot predict the effect any changes to our current operating policies and strategies would have on our business, operating results and the market price of its common stock. Nevertheless, any such changes could adversely affect our business and impair our ability to make distributions to our stockholders.

The Advisor and the Administrator each have the ability to resign on 60 days’ notice, and we may not be able to find a suitable replacement within that time, resulting in a disruption in operations that could adversely affect our financial condition, business and results of operations.

The Advisor has the right under the Investment Advisory Agreement to resign as our investment adviser at any time upon not less than 60 days’ written notice, whether we have found a replacement or not. Similarly, the Administrator has the right under the Administration Agreement to resign at any time upon not less than 60 days’ written notice, whether we have found a replacement or not. If the Adviser or the Administrator were to resign, we may not be able to find a new investment adviser or administrator, as applicable, or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 60 days, or at all. If we are unable to do so quickly, our operations are likely to experience a disruption, our financial condition, business and results of operations as well as our ability to pay distributions to our stockholders are likely to be adversely affected and the market price of our shares may decline. In addition, the coordination of our internal management and investment or administrative activities, as applicable, is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed by the Adviser and the Administrator, as applicable. Even if we are able to retain a comparable service provider or individuals performing such services are retained, whether internal or external, their integration and lack of familiarity with our investment objectives may result in additional costs and time delays that may adversely affect our business, financial condition, results of operations and cash flows.

In addition, if the Advisor resigns or is terminated, we would lose the benefits of our relationship with CCG LP, including the use of its communication and information systems, insights into our existing portfolio, market expertise, sector and macroeconomic views and due diligence capabilities, as well as any investment opportunities referred to us by CCG LP, and we would be required to change our name, which may have a material adverse impact on its operations.

 

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We are highly dependent on information systems, and systems failures or cyber-attacks could significantly disrupt its business, which may, in turn, negatively affect the value of shares of our common stock and our ability to pay distributions.

Our business is highly dependent on the communications and information systems of CCG LP, to which we have access through the Administrator. In addition, certain of these systems are provided to CCG LP by third-party service providers. Any failure or interruption of such systems, including as a result of the termination of an agreement with any such third-party service provider, could cause delays or other problems in our activities. This, in turn, could have a material adverse effect on our operating results and negatively affect the market price of our Common Stock and its ability to pay dividends to its stockholders.

Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of its confidential information and/or damage to its business relationships.

A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen information, misappropriation of assets, increased cybersecurity protection and insurance costs, litigation and damage to our business relationships. This could result in significant losses, reputational damage, litigation, regulatory fines or penalties, or otherwise adversely affect our business, financial condition or results of operations. In addition, we may be required to expend significant additional resources to modify its protective measures and to investigate and remediate vulnerabilities or other exposures arising from operational and security risks. We face risks posed to our information systems, both internal and those provided to it by third-party service providers. We, the Advisor and its affiliates have implemented processes, procedures and internal controls to help mitigate cybersecurity risks and cyber intrusions, but these measures, as well as our increased awareness of the nature and extent of a risk of a cyber-incident, may be ineffective and do not guarantee that a cyber-incident will not occur or that our financial results, operations or confidential information will not be negatively impacted by such an incident.

Third parties with which we do business (including those that provide services to us) may also be sources or targets of cybersecurity or other technological risks. We outsource certain functions and these relationships allow for the storage and processing of our information and assets, as well as certain investor, counterparty, employee and borrower information.

While we engage in actions to reduce our exposure resulting from outsourcing, ongoing threats may result in unauthorized access, loss, exposure or destruction of data, or other cybersecurity incidents, with increased costs and other consequences, including those described above. Privacy and information security laws and regulation changes, and compliance with those changes, may also result in cost increases due to system changes and the development of new administrative processes.

We and the Advisor are subject to regulations and SEC oversight. If we or the Advisor fail to comply with applicable requirements, it may adversely impact our results relative to companies that are not subject to such regulations.

As a BDC, we are subject to a portion of the 1940 Act. In addition, we have elected to be treated, and intend to operate in a manner so as to continuously qualify, as a RIC in accordance with the requirements of Subchapter M of the Code. The 1940 Act and the Code impose various restrictions on the management of a BDC, including related to portfolio construction, asset selection, and tax. These restrictions may reduce the chances that we will achieve the same results as other vehicles managed by CCG LP and/or the Advisor.

However, if we do not maintain our status as a BDC, we would be subject to regulation as a registered closed-end investment company under the 1940 Act. As a registered closed-end investment company, we would be subject to substantially more regulatory restrictions under the 1940 Act which would significantly decrease our operating flexibility.

In addition to these and other requirements applicable to us, the Advisor is subject to regulatory oversight by the SEC. To the extent the SEC raises concerns or has negative findings concerning the manner in which we or the Advisor operates, it could adversely affect our business.

We are subject to risks related to corporate social responsibility.

Our business faces increasing public scrutiny related to environmental, social and governance (“ESG”) activities. We risk damage to our brand and reputation if we fail to act responsibly in a number of areas, such as diversity and inclusion, environmental stewardship, support for local communities, corporate governance and transparency and considering ESG factors in our investment processes.

 

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Adverse incidents with respect to ESG activities could impact the value of our brand, the cost of our operations and relationships with investors, all of which could adversely affect our business and results of operations. Additionally, new regulatory initiatives related to ESG could adversely affect our business.

Risks Relating to Our Investments

Economic recessions or downturns could impair our portfolio companies, and defaults by our portfolio companies will harm our operating results.

Many of the portfolio companies in which we expect to make investments are likely to be susceptible to economic slowdowns or recessions and may be unable to repay their loans during such periods. Therefore, the number of our non-performing assets is likely to increase and the value of our portfolio is likely to decrease during such periods. Adverse economic conditions may also decrease the value of collateral securing some of our loans and debt securities and the value of our equity investments. If the value of collateral underlying our loan declines during the term of the loan, a portfolio company may not be able to obtain the necessary funds to repay the loan at maturity through refinancing. Decreasing collateral value may hinder a portfolio company’s ability to refinance our loan because the underlying collateral cannot satisfy the debt service coverage requirements necessary to obtain new financing. Thus, economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit its access to the capital markets or result in a decision by lenders not to extend credit to us. We consider a number of factors in making our investment decisions, including, but not limited to, the financial condition and prospects of a portfolio company and its ability to repay our loan. Unfavorable economic conditions could negatively affect the valuations of our portfolio companies and, as a result, make it more difficult for such portfolio companies to repay or refinance our loan. Therefore, these events could prevent us from increasing our investments and harm our operating results. A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, acceleration of the time when the loans are due, termination of the portfolio company’s loans and foreclosure on its assets, which could trigger cross-defaults under other agreements and jeopardize its ability to meet its obligations under the loans and debt securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company, which may include the waiver of certain financial covenants. Furthermore, if one of our portfolio companies were to file for bankruptcy protection, depending on the facts and circumstances, including the extent to which we actually provide significant managerial assistance to that portfolio company, a bankruptcy court might re-characterize our debt holding and subordinate all or a portion of our claim to claims of other creditors, even though we may have structured our investment as senior secured debt.

Our portfolio companies may be unable to repay or refinance outstanding principal on their loans at or prior to maturity, and rising interests rates may make it more difficult for portfolio companies to make periodic payments on their loans.

Our portfolio companies may be unable to repay or refinance outstanding principal on their loans at or prior to maturity. This risk and the risk of default is increased to the extent that the loan documents do not require the portfolio companies to pay down the outstanding principal of such debt prior to maturity. In addition, if general interest rates rise, there is a risk that our portfolio companies will be unable to pay escalating interest amounts, which could result in a default under their loan documents with us. Any failure of one or more portfolio companies to repay or refinance its debt at or prior to maturity or the inability of one or more portfolio companies to make ongoing payments following an increase in contractual interest rates could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We may hold the debt securities of leveraged companies.

Investment in leveraged companies involves a number of significant risks. Leveraged companies in which we invest may have limited financial resources and may be unable to meet their obligations under their loans and debt securities that we hold. Such developments may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of our realizing any guarantees that it may have obtained in connection with its investment. Smaller leveraged companies also may have less predictable operating results and may require substantial additional capital to support their operations, finance their expansion or maintain their competitive position.

Leveraged companies may experience bankruptcy or similar financial distress. The bankruptcy process has a number of significant inherent risks. Many events in a bankruptcy proceeding are the product of contested matters and adversary proceedings and are beyond the control of the creditors. A bankruptcy filing by a portfolio company may adversely and permanently affect the portfolio company. If the proceeding is converted to a liquidation, the value of the portfolio company may not equal the liquidation value that was believed to exist at the time of the investment. The duration of a bankruptcy proceeding is also difficult to predict, and a creditor’s return on investment can be adversely affected by delays until the plan of reorganization or liquidation ultimately becomes effective.

 

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The administrative costs in connection with a bankruptcy proceeding are frequently high and would be paid out of the debtor’s estate prior to any return to creditors. Because the standards for classification of claims under bankruptcy law are vague, our influence with respect to the class of securities or other obligations that we own may be lost by increases in the number and amount of claims in the same class or by different classification and treatment. In the early stages of the bankruptcy process, it is often difficult to estimate the extent of, or even to identify, any contingent claims that might be made. In addition, certain claims that have priority by law (for example, claims for taxes) may be substantial.

We typically invest in middle-market companies, which involves higher risk than investments in large companies.

Investment in private and middle-market companies involves a number of significant risks. Generally, little public information exists about these companies, and we will rely on the ability of CCG LP’s investment professionals to obtain adequate information to evaluate the potential returns from investing in these companies. If we are unable to uncover all material information about these companies, we may not make a fully informed investment decision and may lose money on its investments. Middle-market companies may have limited financial resources and may be unable to meet their obligations under their loans and debt securities that we hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of our realizing any guarantees that it may have obtained in connection with its investment. In addition, such companies typically have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as general economic downturns. Additionally, middle-market companies are more likely to depend on the management talents and efforts of a small group of persons. Therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on one or more of the portfolio companies we invest in and, in turn, on us. Middle-market companies also may be parties to litigation and may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence. In addition, our executive officers, directors and the Advisor may, in the ordinary course of business, be named as defendants in litigation arising from our investments in portfolio companies.

In addition, investment in middle-market companies involves a number of other significant risks, including:

 

   

they typically have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as general economic downturns;

 

   

they generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position;

 

   

changes in laws and regulations, as well as their interpretations, may adversely affect their business, financial structure or prospects; and

 

   

they may have difficulty accessing the capital markets to meet future capital needs, which may limit their ability to grow or to repay their outstanding indebtedness upon maturity.

The due diligence process that the Advisor undertakes in connection with our investments may not reveal all the facts that may be relevant in connection with an investment.

The Advisor’s due diligence may not reveal all of a company’s liabilities and may not reveal other weaknesses in its business. There can be no assurance that our due diligence process will uncover all relevant facts that would be material to an investment decision. Before making an investment in, or a loan to, a company, the Advisor will assess the strength and skills of the company’s management team and other factors that it believes are material to the performance of the investment. In making the assessment and otherwise conducting customary due diligence, the Advisor will rely on the resources available to it and, in some cases, an investigation by third parties. This process is particularly important and highly subjective with respect to newly organized entities because there may be little or no information publicly available about the entities. We may make investments in, or loans to, companies, including middle market companies, which are not subject to public company reporting requirements, including requirements regarding preparation of financial statements, and will, therefore, depend upon the compliance by investment companies with their contractual reporting obligations and the ability of the Advisor’ investment professionals to obtain adequate information to evaluate the potential returns from investing in these companies. If we and the Advisor are unable to uncover all material information about these companies, we may not make a fully informed investment decision and may lose money on its investments. As a result, the evaluation of potential investments and the ability to perform due diligence on and effective monitoring of investments may be impeded, and we may not realize the returns that it expects on any particular investment. In the event of fraud by any company in which we invest or with respect to which we make a loan, we may suffer a partial or total loss of the amounts invested in that company.

 

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The lack of liquidity in our investments may adversely affect our business.

All of our assets may be invested in illiquid loans and securities, and a substantial portion of our investments in leveraged companies will be subject to legal and other restrictions on resale or will otherwise be less liquid than more broadly traded public securities. The illiquidity of these investments may make it difficult for us to sell such investments if the need arises. In addition, if we are required to liquidate all or a portion of its portfolio quickly, we may realize significantly less than the value at which it has previously recorded its investments. Some of our debt investments may contain interest rate reset provisions that may make it more difficult for the borrowers to make periodic interest payments to us. In addition, some of our debt investments may not pay down principal until the end of their lifetimes, which could result in a substantial loss to us if the portfolio companies are unable to refinance or repay their debts at maturity.

We may invest in high yield debt, or junk bonds, which has greater credit and liquidity risk than more highly rated debt obligations.

We may also invest in debt securities which will not be rated by any rating agency and, if they were rated, would be rated as below investment grade quality. Below investment grade securities, which are often referred to as “junk,” have predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. They may also be illiquid and difficult to value.

Price declines and illiquidity in the corporate debt markets may adversely affect the fair value of our portfolio investments, reducing NAV through increased net unrealized depreciation.

As a BDC, we are required to carry its investments at market value or, if no market value is ascertainable, at fair value as determined in good faith by the our Board, as described above in “—Risks Relating to our Business and Structure—The majority of our portfolio investments are recorded at fair value as determined in good faith by the our Board and, as a result, there may be uncertainty as to the value of our portfolio investments.”

When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we use the pricing indicated by the external event to corroborate our valuation. While most of our investments are not publicly traded, applicable accounting standards require us to assume as part of its valuation process that its investments are sold in a principal market to market participants (even if we plan on holding an investment through its maturity). As a result, volatility in the capital markets can also adversely affect our investment valuations. We record decreases in the market values or fair values of our investments as unrealized depreciation. Declines in prices and liquidity in the corporate debt markets may result in significant net unrealized depreciation in our portfolio. The effect of all of these factors on our portfolio may reduce our NAV by increasing net unrealized depreciation in our portfolio. Depending on market conditions, we could incur substantial realized losses and may suffer additional unrealized losses in future periods, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We are a non-diversified investment company within the meaning of the 1940 Act, and therefore it is not limited by the 1940 Act with respect to the proportion of its assets that may be invested in securities of a single issuer or industry.

We are classified as a non-diversified investment company within the meaning of the 1940 Act, which means that we are not limited by the 1940 Act with respect to the proportion of our assets that we may invest in securities of a single issuer. Beyond the asset diversification requirements associated with our qualification as a RIC under the Code, we do not have fixed guidelines for diversification. To the extent that we assume large positions in the securities of a small number of issuers or our investments are concentrated in relatively few industries, our NAV may fluctuate to a greater extent than that of a diversified investment company as a result of changes in the financial condition or the market’s assessment of the issuer. We may also be more susceptible to any single economic or regulatory occurrence than a diversified investment company.

Our portfolio may be concentrated in a limited number of portfolio companies and industries, which will subject us to a risk of significant loss if any of these companies defaults on its obligations under any of its debt instruments or if there is a downturn in a particular industry.

Our failure to make follow-on investments in our portfolio companies could impair the value of our portfolio.

Following an initial investment in a portfolio company, we may make additional investments in that portfolio company as “follow-on” investments, in seeking to:

 

   

increase or maintain in whole or in part our position as a creditor or equity ownership percentage in a portfolio company;

 

   

exercise warrants, options or convertible securities that were acquired in the original or subsequent financing; or

 

   

preserve or enhance the value of our investment.

 

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We have discretion to make follow-on investments, subject to the availability of capital resources. Failure on our part to make follow-on investments may, in some circumstances, jeopardize the continued viability of a portfolio company and our initial investment, or may result in a missed opportunity for us to increase our participation in a successful operation.

Even if we have sufficient capital to make a desired follow-on investment, we may elect not to make a follow-on investment because we may not want to increase its level of risk, because we prefer other opportunities or because we are inhibited by compliance with BDC requirements of the 1940 Act or the desire to maintain our qualification as a RIC. Our ability to make follow-on investments may also be limited by CCG LP’s allocation policy.

Additionally, certain loans that we may make to portfolio companies may be secured on a second priority basis by the same collateral securing senior secured debt of such companies. The first priority liens on the collateral will secure the portfolio company’s obligations under any outstanding senior debt and may secure certain other future debt that may be permitted to be incurred by the portfolio company under the agreements governing the loans. The holders of obligations secured by first priority liens on the collateral will generally control the liquidation of, and be entitled to receive proceeds from, any realization of the collateral to repay their obligations in full before us. In addition, the value of the collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from sales of all of the collateral would be sufficient to satisfy the loan obligations secured by the second priority liens after payment in full of all obligations secured by the first priority liens on the collateral. If such proceeds were not sufficient to repay amounts outstanding under the loan obligations secured by the second priority liens, then we, to the extent not repaid from the proceeds of the sale of the collateral, will only have an unsecured claim against the portfolio company’s remaining assets, if any.

We may also make unsecured loans to portfolio companies, meaning that such loans will not benefit from any interest in collateral of such companies. Liens on such portfolio companies’ collateral, if any, will secure the portfolio company’s obligations under its outstanding secured debt and may secure certain future debt that is permitted to be incurred by the portfolio company under its secured loan agreements. The holders of obligations secured by such liens will generally control the liquidation of, and be entitled to receive proceeds from, any realization of such collateral to repay their obligations in full before us. In addition, the value of such collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from sales of such collateral would be sufficient to satisfy our unsecured loan obligations after payment in full of all secured loan obligations. If such proceeds were not sufficient to repay the outstanding secured loan obligations, then our unsecured claims would rank equally with the unpaid portion of such secured creditors’ claims against the portfolio company’s remaining assets, if any. Additionally, we invest in unitranche loans (loans that combine both senior and mezzanine debt, generally in a first lien position), which may provide for a waterfall of cash flow priority between different lenders in the unitranche loan. In certain instances, we may find another lender to provide the “first out” portion of such loan and retain the “last out” portion of such loan, in which case the “first out” portion of the loan would generally receive priority with respect to repayment of principal, interest and any other amounts due thereunder over the “last out” portion of the loan that we would continue to hold.

The rights we may have with respect to the collateral securing the loans we make to our portfolio companies with senior debt outstanding may also be limited pursuant to the terms of one or more intercreditor agreements that we enter into with the holders of such senior debt. Under a typical intercreditor agreement, at any time that obligations that have the benefit of the first priority liens are outstanding, any of the following actions that may be taken in respect of the collateral will be at the direction of the holders of the obligations secured by the first priority liens:

 

   

the ability to cause the commencement of enforcement proceedings against the collateral;

 

   

the ability to control the conduct of such proceedings;

 

   

the approval of amendments to collateral documents;

 

   

releases of liens on the collateral; and

 

   

waivers of past defaults under collateral documents.

We may not have the ability to control or direct such actions, even if its rights are adversely affected.

Our subordinated investments may be subject to greater risk than investments that are not similarly subordinated.

We may make subordinated investments that rank below other obligations of the obligor in right of payment. Subordinated investments are subject to greater risk of default than senior obligations as a result of adverse changes in the financial condition of the obligor or in general economic conditions. If we make a subordinated investment in a portfolio company, the portfolio company may be highly leveraged, and its relatively high debt-to-equity ratio may create increased risks that its operations might not generate sufficient cash flow to service all of its debt obligations.

 

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The disposition of our investments may result in contingent liabilities.

We currently expect that substantially all of our investments will involve loans and private securities. In connection with the disposition of an investment in loans and private securities, we may be required to make representations about the business and financial affairs of the portfolio company typical of those made in connection with the sale of a business. We may also be required to indemnify the purchasers of such investment to the extent that any such representations turn out to be inaccurate or with respect to potential liabilities. These arrangements may result in contingent liabilities that ultimately result in funding obligations that we must satisfy through its return of distributions previously made to us.

We will be subject to the risk that the debt investments we make in our portfolio companies may be repaid prior to maturity.

We expect that our investments will generally allow for repayment at any time subject to certain penalties. When such prepayment occurs, we intend to generally reinvest these proceeds in temporary investments, pending their future investment in accordance with our investment strategy. These temporary investments will typically have substantially lower yields than the debt being prepaid, and we could experience significant delays in reinvesting these amounts. Any future investment may also be at lower yields than the debt that was repaid. As a result, our results of operations could be materially adversely affected if one or more of our portfolio companies elects to prepay amounts owed to us. Additionally, prepayments could negatively impact our ability to pay, or the amount of, dividends on our Common Stock, which could result in a decline in the market price of our shares.

We may be subject to risks under hedging transactions and may become subject to risk if it invests in non-U.S. securities.

The 1940 Act generally requires that 70% of our investments be in issuers each of whom is organized under the laws of, and has its principal place of business in, any state of the United States, the District of Columbia, Puerto Rico, the Virgin Islands or any other possession of the United States. However, our portfolio may include debt securities of non-U.S. companies, including emerging market issuers, to the limited extent such transactions and investments would not cause us to violate the 1940 Act. We expect that these investments would focus on the same secured debt, unsecured debt and related equity security investments that we make in U.S. middle-market companies and, accordingly, would be complementary to our overall strategy and enhance the diversity of our holdings. Investing in loans and securities of emerging market issuers involves many risks including economic, social, political, financial, tax and security conditions in the emerging market, potential inflationary economic environments, regulation by foreign governments, different accounting standards and political uncertainties. Economic, social, political, financial, tax and security conditions also could negatively affect the value of emerging market companies. These factors could include changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the United States, higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations or judgments or foreclosing on collateral, lack of uniform accounting and auditing standards and greater price volatility.

Engaging in either hedging transactions or investing in foreign loans and securities would entail additional risks to our stockholders. We could, for example, use instruments such as interest rate swaps, caps, collars and floors and, if we were to invest in foreign loans and securities, we could use instruments such as forward contracts or currency options and borrow under a credit facility in currencies selected to minimize our foreign currency exposure. In each such case, we generally would seek to hedge against fluctuations of the relative values of our portfolio positions from changes in market interest rates or currency exchange rates. Hedging against a decline in the values of our portfolio positions would not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of the positions declined. However, such hedging could establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfolio positions. Such hedging transactions could also limit the opportunity for gain if the values of the underlying portfolio positions increased. Moreover, it might not be possible to hedge against an exchange rate or interest rate fluctuation that was so generally anticipated that we would not be able to enter into a hedging transaction at an acceptable price.

While we may enter into such transactions to seek to reduce currency exchange rate and interest rate risks, unanticipated changes in currency exchange rates or interest rates could result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged could vary. Moreover, for a variety of reasons, we might not seek to establish a perfect correlation between the hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation could prevent us from achieving the intended hedge and expose us to risk of loss. In addition, it might not be possible for us to hedge fully or perfectly against currency fluctuations affecting the value of securities denominated in non-U.S. currencies because the value of those loans and securities would likely fluctuate as a result of factors not related to currency fluctuations.

 

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We may not realize anticipated gains on the equity interests in which it invests.

When we invest in loans and debt securities, it may acquire warrants or other equity securities of portfolio companies as well. We may also invest in equity securities directly. To the extent we hold equity investments, we will attempt to dispose of them and realize gains upon such disposition. However, the equity interests we receive may not appreciate in value and, may decline in value. As a result, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses it experiences.

Our investments in OID and PIK interest income may expose us to risks associated with such income being required to be included in accounting income and taxable income prior to receipt of cash.

Our investments may include OID and PIK instruments. To the extent OID and PIK interest income constitute a portion of our income, we will be exposed to risks associated with such income being required to be included in an accounting income and taxable income prior to receipt of cash, including the following:

 

   

OID instruments and PIK securities may have unreliable valuations because the accretion of OID as interest income and the continuing accruals of PIK securities require judgments about their collectability and the collectability of deferred payments and the value of any associated collateral;

 

   

OID income may also create uncertainty about the source of our cash dividends;

 

   

OID instruments may create heightened credit risks because the inducement to the borrower to accept higher interest rates in exchange for the deferral of cash payments typically represents, to some extent, speculation on the part of the borrower;

 

   

for accounting purposes, cash distributions to stockholders that include a component of accreted OID income do not come from paid-in capital, although they may be paid from the offering proceeds. Thus, although a distribution of accreted OID income may come from the cash invested by the stockholders, the 1940 Act does not require that shareholders be given notice of this fact;

 

   

generally, we must recognize income for income tax purposes no later than when it recognizes such income for accounting purposes;

 

   

the higher interest rates on PIK securities reflects the payment deferral and increased credit risk associated with such instruments and PIK securities generally represent a significantly higher credit risk than coupon loans;

 

   

the presence of accreted OID income and PIK interest income create the risk of non-refundable cash payments to the Advisor in the form of incentive fees on income based on non-cash accreted OID income and PIK interest income accruals that may never be realized;

 

   

even if accounting conditions are met, borrowers on such securities could still default when our actual collection is expected to occur at the maturity of the obligation;

 

   

OID and PIK create the risk that incentive fees will be paid to the Advisor based on

 

   

non-cash accruals that ultimately may not be realized, which the Advisor will be under no obligation to reimburse us or these fees; and

 

   

PIK interest has the effect of generating investment income and increasing the incentive fees payable at a compounding rate. In addition, the deferral of PIK interest also reduces the loan-to-value ratio at a compounding rate.

You may receive shares of our Common Stock as dividends, which could result in adverse tax consequences to you.

In order to satisfy the Annual Distribution Requirement applicable to RICs, we have the ability to declare a large portion of a dividend in shares of our Common Stock instead of in cash. As long as a portion of such dividend is paid in cash and certain requirements are met, the entire distribution would be treated as a dividend for U.S. federal income tax purposes. As a result, a stockholder would be taxed on 100% of the dividend in the same manner as a cash dividend, even though most of the dividend was paid in shares of our Common Stock.

Changes in healthcare laws and other regulations applicable to some of our portfolio companies businesses may constrain their ability to offer their products and services.

Changes in healthcare or other laws and regulations applicable to the businesses of some of our portfolio companies may occur that could increase their compliance and other costs of doing business, require significant systems enhancements, or render their products or services less profitable or obsolete, any of which could have a material adverse effect on their results of operations. There has also been an increased political and regulatory focus on healthcare laws in recent years, and new legislation could have a material effect on the business and operations of some of our portfolio companies.

 

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Our investments in the consumer products and services sector are subject to various risks including cyclical risks associated with the overall economy.

General risks of companies in the consumer products and services sector include cyclicality of revenues and earnings, economic recession, currency fluctuations, changing consumer tastes, extensive competition, product liability litigation and increased government regulation. Generally, spending on consumer products and services is affected by the health of consumers. Companies in the consumer products and services sectors are subject to government regulation affecting the permissibility of using various food additives and production methods, which regulations could affect company profitability. A weak economy and its effect on consumer spending would adversely affect companies in the consumer products and services sector.

Our investments in the financial services sector are subject to various risks including volatility and extensive government regulation.

These risks include the effects of changes in interest rates on the profitability of financial services companies, the rate of corporate and consumer debt defaults, price competition, governmental limitations on a company’s loans, other financial commitments, product lines and other operations and recent ongoing changes in the financial services industry (including consolidations, development of new products and changes to the industry’s regulatory framework). The deterioration of the credit markets starting in late 2007 generally has caused an adverse impact in a broad range of markets, including U.S. and international credit and interbank money markets generally, thereby affecting a wide range of financial institutions and markets. In particular, events in the financial sector in late 2008 resulted, and may continue to result, in an unusually high degree of volatility in the financial markets, both domestic and foreign. This situation has created instability in the financial markets and caused certain financial services companies to incur large losses. Insurance companies have additional risks, such as heavy price competition, claims activity and marketing competition, and can be particularly sensitive to specific events such as man-made and natural disasters (including weather catastrophes), climate change, terrorism, mortality risks and morbidity rates.

Our investments in technology companies are subject to many risks, including volatility, intense competition, shortened product life cycles, litigation risk and periodic downturn.

We have invested and will continue investing in technology companies, many of which may have narrow product lines and small market shares, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as to general economic downturns. The revenues, income (or losses), and valuations of technology-related companies can and often do fluctuate suddenly and dramatically. In addition, technology related markets are generally characterized by abrupt business cycles and intense competition, where the leading companies in any particular category may hold a highly concentrated percentage of the overall market share.

Therefore, our portfolio companies may face considerably more risk of loss than do companies in other industry sectors. Because of rapid technological change, the selling prices of products and services provided by technology-related companies have historically decreased over their productive lives. As a result, the selling prices of products and services offered by technology related companies may decrease over time, which could adversely affect their operating results, their ability to meet obligations under their debt securities and the value of their equity securities. This could, in turn, materially adversely affect the value of the technology-related companies in our portfolio.

Effective on March 3, 2021 (unless we receive earlier stockholder approval), our asset coverage requirement will reduce from 200% to 150%, which may increase the risk of investing with us.

On March 3, 2020, our Board, including a “required majority” of our board of directors, approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act, as amended by the SBCAA. As a result, effective on March 3, 2021 (unless we receive earlier stockholder approval), our asset coverage requirement applicable to senior securities will be reduced from 200% to 150% (i.e., the revised regulatory leverage limitation permits BDCs to double the amount of borrowings, such that we would be able to borrow up to two dollars for every dollar we have in assets less all liabilities and indebtedness not represented by senior securities issued by us), and the risks associated with an investment in us may increase.

We may be unable to realize the benefits anticipated by the Alcentra Acquisition, including estimated cost savings and synergies, or it may take longer than anticipated to achieve such benefits.

The realization of certain benefits anticipated as a result of the Alcentra Acquisition will depend in part on the integration of Alcentra Capital’s investment portfolio with our investment portfolio and the integration of Alcentra Capital’s business with our business. There can be no assurance that Alcentra Capital’s and our businesses can be operated profitably or integrated successfully into our operations in a timely fashion, or at all. The dedication of management resources to such integration may detract attention from our day-to-day business, and there can be no assurance that there will not be substantial costs associated with the transition process or there will not be other material adverse effects as a result of these integration efforts. Such effects, including, but not limited to, incurring unexpected costs or delays in connection with such integration and failure of Alcentra Capital’s investment portfolio to perform as expected, could have a material adverse effect on our financial results.

 

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We also expect to achieve certain cost savings and synergies from the Alcentra Acquisition when the two companies have fully integrated their portfolios. It is possible that our estimates of the potential cost savings and synergies could turn out to be incorrect. If the estimates turn out to be incorrect or we cannot integrate Alcentra Captial’s investment portfolio and business, the anticipated cost savings and synergies may not be fully realized, or realized at all, or may take longer to realize than expected.

The Alcentra Acquisition may trigger certain “change of control” provisions and other restrictions in certain of our and Alcentra Capital’s contracts and the failure to obtain any required consents or waivers could adversely impact us.

Certain of our agreements, certain agreements of Alcentra Capital and certain agreements or our and their controlled affiliates will or may require the consent of one or more counterparties in connection with the Alcentra Acquisition. The failure to obtain any such consent may permit such counter-parties to terminate, or otherwise increase their rights or our or Alcentra Capital’s obligations under, any such agreement because the Alcentra Acquisition may violate an anti-assignment, change of control or similar provision. If this happens, we may have to seek to replace that agreement with a new agreement or seek a waiver or amendment to such agreement. We cannot assure you that we will be able to replace, amend or obtain a waiver under any such agreement on comparable terms or at all.

If any such agreement is material, the failure to obtain consents, amendments or waivers under, or to replace on similar terms or at all, any of these agreements could adversely affect our financial performance or results of operations, including preventing us from operating a material part of Alcentra Capital’s business.

In addition, the Alcentra Acquisition may violate, conflict with, result in a breach of any provision of or the loss of any benefit under, constitute a default (or an event that, with or without notice or lapse of time or both, would constitute a default) under, or result in the termination, cancellation, acceleration or other change of any right or obligation (including any payment obligation) under our or Alcentra Capital’s agreements. Any such violation, conflict, breach, loss, default or other effect could, either individually or in the aggregate, have a material adverse effect on our financial condition, results of operations, assets or business following the Alcentra Acquisition.

Risks Relating to Our Common Stock

Our shares of Common Stock have traded at a discount from net asset value and may do so again, which could limit our ability to raise additional equity capital.

Shares of closed-end investment companies frequently trade at a market price that is less than the net asset value that is attributable to those shares. This characteristic of closed-end investment companies is separate and distinct from the risk that our net asset value per share may decline. It is not possible to accurately predict whether any shares of our common stock will trade at, above, or below net asset value. In the recent past, the stocks of BDCs as an industry, including at times shares of our common stock, have traded below net asset value and during much of 2009 the stocks of BDCs as an industry traded at near historic lows as a result of concerns over liquidity, leverage restrictions and distribution requirements. See “Item 1a. Risk Factors-Risks Relating to Our Business and Structure- Global capital markets could enter a period of severe disruption and instability. These conditions have historically affected and could again materially and adversely affect debt and equity capital markets in the United States and around the world and our business.” When our common stock is trading below its net asset value per share, we will generally not be able to issue additional shares of our common stock at its market price without first obtaining approval for such issuance from our stockholders and our independent directors.

The market price of our Common Stock may fluctuate significantly.

The market price and liquidity of the market for our Common Stock may be significantly affected by numerous factors, some of which will beyond our control and may not be directly related to our operating performance. These factors include:

 

   

significant volatility in the market price and trading volume of securities of publicly traded RICs, BDCs or other companies in our sector, which are not necessarily related to the operating performance of these companies;

 

   

price and volume fluctuations in the overall stock market from time to time;

 

   

the inclusion or exclusion of our Common Stock from certain indices;

 

   

changes in law, regulatory policies or tax guidelines, or interpretations thereof, particularly with respect to RICs or BDCs;

 

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loss of RIC status;

 

   

changes in earnings or variations in operating results;

 

   

changes in the value of our portfolio of investments;

 

   

announcements with respect to significant transactions;

 

   

any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;

 

   

departure of key personnel of ours or the Advisor;

 

   

operating performance of companies comparable to us;

 

   

short-selling pressure with respect to shares of our Common Stock or BDCs generally;

 

   

general economic trends and other external factors; and

 

   

loss of a major funding source.

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Because of the potential volatility in the price of our Common Stock, we may become the target of securities litigation in the future. If we were to become involved in securities litigation, it could result in substantial costs, divert management’s attention and resources from the business and adversely affect the business.

Sales of shares of our Common Stock may cause the market price of our Common Stock to fall.

As of March 3, 2020, there were approximately 28.4 million shares of our common stock issued and outstanding, of which approximately 5.2 million are freely tradable. As described below under “—The Charter imposes certain restrictions on transfer of the our Common Stock held by our stockholders prior to the consummation of the Alcentra Acquisition in addition to those otherwise imposed by applicable law or by contract,” the shares of our Common Stock issued to holders of such shares pursuant to the Reincorporation (as defined below) are subject to transfer restrictions in our Articles of Amendment and Restatement (our “Charter”) for a period ending 365 days following the date our Common Stock was listed on NASDAQ, the effect of which will be that 1/3 of such shares will not be transferable until 180 days following the date our Common Stock was listed on NASDAQ, another 1/3 will not be transferable until 270 days following the date our Common Stock was listed on NASDAQ, and the remaining 1/3 will not be transferable until 365 days following the date our Common Stock was listed on NASDAQ without prior written consent of the Board, with all such transfers remaining subject to applicable securities laws (including applicable volume restrictions with respect to affiliate sales).

Sales of a substantial number of shares of our Common Stock held by our stockholders in the public market could occur at any time after the expiration of such periods of transfer restrictions under the Charter. These sales, or the market perception that the holders of a large number of shares intend to sell shares, could reduce the market price of our Common Stock.

Our stockholders will experience dilution in their ownership percentage if they opt out of our dividend reinvestment plan.

We have adopted a dividend reinvestment plan, pursuant to which we will reinvest all cash distributions authorized by the Board on behalf of stockholders who do not elect to receive their distributions in cash. As a result, if the Board authorizes and we declare a cash distribution, then stockholders who have not opted out of the dividend reinvestment plan will have their cash distributions automatically reinvested in additional shares of Common Stock, rather than receiving the cash distribution. See “Item 1 - Business - Dividend Reinvestment Plan” for a description of the dividend reinvestment plan. Following the listing of our Common Stock on NASDAQ, the number of shares to be issued to a plan participant will be determined by dividing the total dollar amount of the distribution payable to such stockholder by the market price per share of our Common Stock at the close of regular trading on NASDAQ on the date of such distribution. The market price per share of our Common Stock on a particular date will be the closing price for such shares on NASDAQ on such date, or, if no sale is reported for such date, at the average of their reported bid and asked prices. However, if the market price per share exceeds the most recently computed net asset value per share, we will issue shares at the greater of (i) the most recently computed net asset value per share and (ii) 95% of the current market price per share (or such lesser discount to the current market price per share that still exceeds the most recently computed net asset value per share). Accordingly, participants in the dividend reinvestment plan may receive a greater number shares of our Common Stock than the number of shares associated with the market price of our Common Stock, resulting in dilution for other stockholders. Stockholders that opt out of the dividend reinvestment plan will experience dilution in their ownership percentage of our Common Stock over time.

 

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Provisions of the Maryland General Corporation Law and of the Charter and the Bylaws could deter takeover attempts and have an adverse effect on the price of our Common Stock.

Certain provisions of the Maryland General Corporation Law (the “MGCL”) may discourage, delay or make more difficult a change in control of the Company, including (i) the Maryland Business Combination Act (the “Business Combination Act”), which, subject to any applicable requirements of the 1940 Act and certain other limitations, will prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns, directly or indirectly, 10% or more of the voting power of our outstanding shares of voting stock or an affiliate or associate of us who, at any time within the two-year period prior to the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the voting power of our then outstanding shares of stock) or an affiliate thereof for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter will impose special appraisal rights and supermajority voting requirements on these combinations and (ii) the Maryland Control Share Acquisition Act (the “Control Share Acquisition Act”), which, subject to any applicable requirements of the 1940 Act, will provide that our “control shares” (defined as shares which, when aggregated with other shares controlled by the stockholder (except solely by virtue of a revocable proxy), entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares. The Board has adopted a resolution exempting from the Business Combination Act any business combination between us and any other person, provided that the business combination is first approved by the Board, including a majority of the independent directors, and the Bylaws exempt from the Control Share Acquisition Act acquisitions of our stock by any person. However, if the resolution exempting business combinations is repealed or the Board or independent directors do not approve a business combination or we amend the Bylaws to repeal the exemption from the Control Share Acquisition Act, subject to any applicable requirements of the 1940 Act, the Business Combination Act or Control Share Acquisition Act, as the case may be, may discourage third parties from trying to acquire control of us and may increase the difficulty of consummating such an offer.

We are also subject to other measures that may make it difficult for a third party to obtain control of us, including provisions of the Charter that (i) classify the Board into three classes serving staggered three-year terms and require that any vacancies be filled by a majority of directors remaining in office, (ii) require a two-thirds vote and cause for director removal, (iii) authorize the Board to classify any unissued shares of stock and reclassify any previously classified but unissued shares of stock into other classes or series of stock, including preferred stock, and to cause the issuance of additional shares of our Common Stock and (iv) authorize the Board to amend the Charter, without stockholder approval, to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have the authority to issue. These provisions, as well as other provisions in the Charter and the Bylaws, may delay, defer or prevent a transaction or a change in control that might otherwise be in the best interests of our stockholders.

The Charter imposes certain restrictions on transfer of the our Common Stock held by our stockholders prior to the consummation of the Alcentra Acquisition in addition to those otherwise imposed by applicable law or by contract.

The Charter provides that during the period beginning with the date we reincorporated from the State of Delaware to the State of Maryland (“the “Reincorporation”) and ending 365 days after the date our Common Stock was listed on NASDAQ (the “Listing”), any transfer (whether by sale, gift, merger, operation of law or otherwise), exchange, assignment, pledge, hypothecation or other disposition or encumbrance of any shares of our Common Stock acquired by a stockholder attendant to the Reincorporation is prohibited, and therefore not effective, until 180 days after the date of the Listing for one third of the shares of our Common Stock acquired by a stockholder in the Reincorporation, 270 days after the date of the Listing for another one-third of the shares of our Common Stock acquired by a stockholder in the Reincorporation and 365 days after the date of the Listing for the final one-third of the shares of our Common Stock acquired by a stockholder in the Reincorporation, unless the Board provides prior written consent permitting an earlier effective date and the transfer, exchange, assignment, pledge, hypothecation or other disposition or encumbrance is made in accordance with applicable securities and other laws. The Board may impose certain conditions in connection with granting its consent to an earlier effective date and any such consent shall be granted in the sole discretion of the Board. Any purported transfer, exchange, assignment, pledge, hypothecation or other disposition or encumbrance of any shares of our Common Stock effected on an earlier effective date in violation of the Charter will have no force or effect, and we will not register or permit registration of (and will direct our transfer agent not to register or permit registration of) any such purported transfer, exchange, assignment, pledge, hypothecation or other disposition or encumbrance on our books and records until the applicable effective date.

Such transfer restrictions are applicable only to shares received by our stockholders in the Reincorporation, and not to any other shares of our Common Stock, including the shares issued to Alcentra Capital stockholders in connection with the Alcentra Acquisition and are in addition to any transfer restrictions applicable by law or any applicable agreements between the stockholder and us.

 

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Our Charter designates the Circuit Court for Baltimore City, Maryland as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.

Our Charter provides that, unless we consent in writing to the selection of an alternative forum, the Circuit Court for Baltimore City, Maryland, or, if that Court does not have jurisdiction, the United States District Court for the District of Maryland, Baltimore Division, will be the sole and exclusive forum for: (i) any derivative action or proceeding brought on our behalf; (ii) any Internal Corporate Claim, as such term is defined in Section 1-101(p) of the MGCL, including, without limitation, (a) any action asserting a claim of breach of any duty owed by any of our directors or officers or other employees to us or to our stockholders or (b) any action asserting a claim against us or any of our directors or officers or other employees arising pursuant to any provision of the MGCL or the Charter or the Bylaws; or (iii) any action asserting a claim against us or any of our directors or officers or other employees that is governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring or holding any interest in shares of our Common Stock will be deemed to have notice of and to have consented and waived any objection to this exclusive forum provision of the Charter, as the same may be amended from time to time. The Charter includes this provision so that we can respond to litigation more efficiently, reduce the costs associated with our responses to such litigation, particularly litigation that might otherwise be brought in multiple forums, and make it less likely that plaintiffs’ attorneys will be able to employ such litigation to coerce us into otherwise unjustified settlements. However, this exclusive forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that such stockholder believes is favorable for disputes with us or our directors, officers or other employees, if any, and may discourage lawsuits against us and our directors, officers or other employees, if any. We believe the risk of a court declining to enforce this exclusive forum provision is remote, as the General Assembly of Maryland has specifically amended the MGCL to authorize the adoption of such provision. However, if a court were to find such provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings notwithstanding that the MGCL expressly provides that the charter or bylaws of a Maryland corporation may require that any Internal Corporate Claim be brought only in courts sitting in one or more specified jurisdictions, we may incur additional costs that it does not currently anticipate associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition and results of operations.

We will incur significant costs as a result of our listing on NASDAQ.

Companies with outstanding, registered securities listed on a national securities exchange incur legal, accounting and other expenses, including costs associated with the periodic reporting requirements applicable to a company whose securities are registered under the Exchange Act, as well as additional corporate governance requirements, including NASDAQ requirements and requirements under the Sarbanes-Oxley Act. Accordingly, while we previously filed annual, quarterly and current reports with respect to our business and financial condition under the Exchange Act, we will incur significant additional costs as a result of the listing of our Common Stock on NASDAQ. These requirements may place a strain on our systems and resources. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal controls, significant resources and management oversight will be required. We will be implementing additional procedures, processes, policies and practices for the purpose of addressing the standards and requirements applicable to listed public companies. These activities may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. We expect to incur significant additional annual expenses related to these steps and, among other things, directors’ and officers’ liability insurance, director fees, reporting requirements of the SEC, transfer agent fees, additional administrative expenses payable to the Administrator to compensate it for hiring additional accounting, legal and administrative personnel, increased auditing and legal fees and similar expenses.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2.

PROPERTIES

We maintain our principal executive office at 11100 Santa Monica Boulevard, Suite 2000, Los Angeles, California 90025. We do not own any real estate.

 

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ITEM 3.

LEGAL PROCEEDINGS

We are party to certain lawsuits in the normal course of business, including proceedings relating to the enforcement of our rights under loans to or other contracts with our portfolio companies. In addition, Alcentra Capital was involved in various legal proceedings that we assumed in connection with the Alcentra Acquisition. Furthermore, third parties may try to seek to impose liability on us in connection with our activities or the activities of our portfolio companies. While the outcome of any such legal proceedings cannot at this time be predicted with certainty, we do not expect that these legal proceedings will materially affect our business, financial condition or results of operations.

On or about December 23, 2019, stockholders of Alcentra Capital filed two virtually identical stockholder class action complaints purportedly on behalf of holders of the common stock of Alcentra Capital against the members of Alcentra Capital’s board of directors and certain former Alcentra Capital officers, in the Circuit Court for Baltimore City, Maryland alleging that the defendants breached their fiduciary duties to the public stockholders of Alcentra Capital by commencing a sales process allegedly in response to certain actions by Stilwell Value Partners VII, Stilwell Activist Fund, Stilwell Activist Investments, and Stilwell Associates, and by omitting allegedly material information concerning the transaction, the resignation of certain directors of Alcentra, and the financial analysis and fairness opinion of Houlihan Lokey from the joint proxy statement filed with the SEC on December 11, 2019 as part of the registration statement relating to the Alcentra Acquisition. The complaints seek to recover compensatory damages for all losses resulting from the alleged breaches of fiduciary duty. We assumed indemnification responsibilities owed by Alcentra to its former directors and officers with respect to this proceeding in connection with the Alcentra Acquisition. We believe that these claims are without merit.

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

 

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our Common Stock is traded on NASDAQ under the symbol “CCAP.” Prior to the listing of the Common Stock on NASDAQ on February 3, 2020, our Common Stock was offered and sold in transactions exempt from registration under the Securities Act under Section 4(a)(2) and Regulation D, as well as under Regulation S under the Securities Act. As of December 31, 2019, there was no established public trading market for our Common Stock.

Holders

As of December 31, 2019, there were 174 holders of record of our common stock.

Distribution Policy

To the extent that we have taxable income available, we distribute quarterly dividends to our stockholders. The amount of our dividends, if any, are determined by our Board of Directors. Dividends and distributions are recorded on the record date. The amount to be paid out as a dividend is determined by the Board each quarter and is generally based upon the earnings estimated by management. Distributions will generally be paid from net investment income. Net realized capital gains, if any, are distributed at least annually, although we may decide to retain such capital gains for investment. If we do not generate sufficient net investment income during a year, all or part of a distribution may constitute a return of capital. The specific tax characteristics of our dividends and other distributions will be reported to stockholders after the end of each calendar year. Any dividends to our stockholders will be declared out of assets legally available for distribution.

We have elected to be treated as a BDC under the 1940 Act. We have also elected to be treated as a RIC under the Internal Revenue Code. So long as we maintain our status as a RIC, we will generally not pay corporate-level U.S. federal income or excise taxes on any ordinary income or capital gains that we distribute at least annually to our stockholders as dividends. As a result, any tax liability related to income earned and distributed by us represents obligations of our stockholders and will not be reflected in our consolidated financial statements.

In order for us not to be subject to federal excise taxes, we must distribute annually an amount at least equal to the sum of (i) 98% of our ordinary income (taking into account certain deferrals and elections), (ii) 98.2% of our net capital gains from the current year and (iii) any undistributed ordinary income and net capital gains from preceding years. At our discretion, we may carry forward taxable income in excess of calendar year dividends and pay a 4% excise tax on this income. If we choose to do so, this generally would increase expenses and reduce the amount available to be distributed to stockholders. We will accrue excise tax on estimated undistributed taxable income as required.

We intend to make distributions in cash unless a stockholder elects to receive dividends and/or long-term capital gains distributions in additional shares of common stock. We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and, if we issue senior securities, we will be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings.

 

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The following tables summarize our dividends declared and payable for the years ended December 31, 2019, 2018, 2017, 2016 and the period from February 5, 2015 to December 31, 2015(1):

 

Date Declared

  

Record

Date

  

Payment

Date

   Per Share
Amount
     Total
Amount
 

November 8, 2019

   December 30, 2019    January 17, 2020    $       0.41      $ 8,553,549  

September 27, 2019

   September 27, 2019    October 18, 2019    $ 0.41      $ 8,015,361  

June 28, 2019

   June 28, 2019    July 18, 2019    $ 0.41      $ 6,660,776  

March 29, 2019

   March 29, 2019    April 12, 2019    $ 0.41      $ 6,028,462  

December 31, 2018

   December 31, 2018    January 15, 2019    $ 0.40      $ 5,343,316  

September 27, 2018

   September 28, 2018    October 12, 2018    $ 0.38      $ 4,464,639  

June 19, 2018

   June 20, 2018    July 13, 2018    $ 0.37      $ 3,876,874  

March 29, 2018

   March 30, 2018    April 13, 2018    $ 0.32      $ 3,035,614  

December 28, 2017 

   December 29, 2017    January 12, 2018    $ 0.31      $ 2,707,232  

September 28, 2017

   September 29, 2017    October 13, 2017    $       0.30      $ 2,470,579  

June 29, 2017

   June 30, 2017    July 14, 2017    $ 0.29      $ 2,169,823  

March 30, 2017

   March 31, 2017    April 13, 2017    $ 0.28      $ 1,994,047  

December 29, 2016

   December 30, 2016    January 13, 2017    $ 0.27      $ 1,750,000  

December 12, 2016

   December 13, 2016    December 19, 2016    $ 0.11      $ 650,000  

September 29, 2016

   September 30, 2016    October 14, 2016    $ 0.26      $ 1,543,640  

June 29, 2016

   June 30, 2016    July 15, 2016    $ 0.22      $ 1,164,992  

March 30, 2016

   March 31, 2016    April 15, 2016    $ 0.24      $ 1,130,001  

December 29, 2015

   December 30, 2015    January 15, 2016    $ 0.23      $ 924,998  

September 29, 2015

   September 30, 2015    October 15, 2015    $ 0.04      $ 151,009  

 

(1) 

We were formed on February 5, 2015 and commenced operations on June 26, 2015.

Dividend Reinvestment Plan

We have adopted a dividend reinvestment plan that will provide for reinvestment of our dividends and other distributions on behalf of our stockholders, unless a stockholder elects to receive cash. As a result, if our Board authorizes, and we declare, a cash dividend or other distribution, then stockholders who are participating in the dividend reinvestment plan, will have their cash dividends and distributions automatically reinvested in additional shares of Common Stock, rather than receiving cash dividends and distributions.

Prior to February 3, 2020, which is the date of our listing on NASDAQ, only stockholders who “opted in” to the dividend reinvestment plan had their cash dividends and distributions automatically reinvested in additional shares of Common Stock. After February 3, 2020, stockholders who do not “opt out” of the dividend reinvestment plan will have their cash dividends and distributions automatically reinvested in additional shares of our common stock. The elections of stockholders that made an election prior to February 3, 2020 remain effective.

Recent Sales of Unregistered Securities and Use of Proceeds

Except as previously reported us on our Current Reports on Form 8-K, we did not sell any securities during the period covered by this Form 10-K that were not registered under the Securities Act.

 

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ITEM 6.

SELECTED FINANCIAL DATA

The tables below set forth our selected consolidated historical financial data for the periods indicated. The selected consolidated historical financial data for the years ended December 31, 2019, December 31, 2018, December 31, 2017 and December 31, 2016, and for the period from February 5, 2015, or Inception, to December 31, 2015 have been derived from our audited consolidated financial statements, which are included in “Consolidated Financial Statements and Supplementary Data” in Part II, Item 8 of this Form 10-K.

The selected consolidated financial information and other data presented below should be read in conjunction with the information contained in Part II, Item 7 of this Form 10-KManagement’s Discussion and Analysis of Financial Condition and Results of Operations,” the audited consolidated financial statements and the notes thereto included in Part II, Item 8 of this Form 10-K,Consolidated Financial Statements and Supplementary Data”.

 

     For the years ended     For the period from
February 5, 2015
(Inception) to
 
     December 31, 2019     December 31, 2018     December 31, 2017     December 31, 2016     December 31, 2015 (1)  

Consolidated Statements of Operations Data

          

Income

          

Total investment income

   $ 53,476,763     $ 33,295,124     $ 22,291,677     $ 13,887,777     $ 3,302,668  

Expenses

          

Net expenses and income and excise taxes

     21,793,956       15,567,285       12,384,112       7,479,618       2,400,667  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income (loss)

   $ 31,682,807     $ 17,727,839     $ 9,907,565     $ 6,408,159     $ 902,001  

Net realized gain (loss) on investments—non-controlled/non-affiliated (2)

     (7,145,749     (545,881     (345,718     (83,952     (73,241

Net change in unrealized appreciation (depreciation) on investments—non-controlled/non-affiliated (2)

     3,846,085       (8,997,011     (289,512     5,444,486       (2,983,802

Net change in unrealized appreciation (depreciation) on investments—controlled/affiliated

     441,720       —         —         —         —    

Net change in unrealized appreciation (depreciation) on foreign currency forward contracts

     674,920       17,406       —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gains (losses) on investments

     (2,183,024     (9,525,486     (635,230     5,360,534       (3,057,043
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Benefit/(Provision) for taxes on realized gain on investments

     (67,321     —         —         —         —    

Benefit/(Provision) for taxes on unrealized appreciation (depreciation) on investments

     (153,939     (87,779     (217,149     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Benefit/(Provision) benefit for taxes on realized and unrealized gain/loss on investments    

     (221,260     (87,779     (217,149     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net asset resulting from operations

   $ 29,278,523     $ 8,114,574     $ 9,055,186     $ 11,768,693     $ (2,155,042
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Common Share Data

          

Net asset value

   $ 19.50     $ 19.43     $ 20.10     $ 20.08     $ 19.13  

Earnings Per Share (3)

          

Net investment income after tax

     1.83       1.65       1.31       1.23       0.55  

Net realized gain (loss) on investments net of taxes

     (0.42     (0.05     (0.04     (0.01     (0.05

Net change in unrealized appreciation (depreciation) on investments net of taxes

     0.24       (0.84     (0.07     1.05       (1.82

Net change in unrealized appreciation (depreciation) on foreign currency forward contracts

     0.04       0.00       —         —         —    

Net increase (decrease) in net assets resulting from operations (basic and diluted)

     1.69       0.76       1.20       2.27       (1.32

Per share distributions declared (4)

     1.64       1.47       1.18       1.10       0.27  

From net investment income

     1.64       1.47       1.18       1.10       0.27  

From capital gains

     —         —         —         —         —    

From return of capital

     —         —         —         —         —    

Dollar amount of distributions declared

     29,258,148       16,720,443       9,341,681       6,238,633       1,076,007  

From net investment income

     29,258,148       16,720,443       9,341,681       6,238,633       1,076,007  

From capital gains

     —         —         —         —         —    

From return of capital

     —         —         —         —         —    

 

(1)

We were formed on February 5, 2015 and commenced operations on June 26, 2015.

(2)

Includes foreign exchange translation activity.

(3)

Earnings per share data is divided by the weighted average shares outstanding for the applicable periods.

(4)

The per share data for distributions per share reflects the actual amount of distributions declared per share for the applicable periods.

 

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     As of  
     December 31, 2019     December 31, 2018     December 31, 2017     December 31, 2016     December 31, 2015 (1)  

Consolidated Statements of Assets and Liabilities Data

          

Investments—at fair value

   $ 726,531,160     $ 493,341,724     $ 319,126,672     $ 217,920,952     $ 138,068,497  

Cash, cash equivalents and foreign

      currency

     13,427,027       10,368,823       9,270,912       5,119,325       4,767,556  

Total assets

     747,174,648       505,419,430       329,817,175       225,564,977       143,539,305  

Debt (2)

     325,441,436       237,403,185       151,703,970       94,650,509       54,710,850  

Total liabilities

     340,257,846       245,840,590       157,017,186       97,508,949       65,953,067  

Total net assets

     406,916,802       259,578,840       172,799,989       128,056,028       77,586,238  

Other Data:

          

Number of portfolio companies at year end

     98       86       80       95       102  

Average funded investments in portfolio companies (at fair value)

   $ 7,413,583     $ 5,736,532     $ 3,989,083     $ 2,293,905     $ 1,278,412  

Total return based on net asset value (3)

     8.8     4.1     6.0     10.7     (3.0 )% 

Weighted average yield of debt investments at amortized cost (4)

     8.4     9.0     8.3     7.5     7.1

 

(1)

We were formed on February 5, 2015 and commenced operations on June 26, 2015.

(2)

Excludes deferred financing costs.

(3)

Total return based on net asset value is calculated as the change in net asset value per share during the period plus declared dividends per share, divided by the beginning net asset value per share.

(4)

Weighted average yield on debt investments at fair value is computed as (a) the annual stated interest rate or yield earned plus additional interest, if any, as a result of arrangements between us and other lenders in any syndication plus the net annual amortization of original issue discount and market discount earned on accruing debt investments, divided by (b) total debt investments at fair value. Weighted average yield on debt investments at amortized cost is computed as (a) the annual stated interest rate or yield earned plus additional interest, if any, as a result of arrangements between us and other lenders in any syndication plus the net annual amortization of original issue discount and market discount earned on accruing debt investments, divided by (b) total debt investments at amortized cost. Yield is inclusive of a return on other income producing investments in GACP II for the years ended December 31, 2019 and 2018 and the Senior Loan Fund for the year ended December 31, 2019.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis should be read in conjunction with ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in “ITEM 1A. RISK FACTORS.” Actual results may differ materially from those contained in any forward-looking statements.

OVERVIEW

We are a specialty finance company focused on lending to middle-market companies and were incorporated under the laws of the State of Delaware on February 5, 2015 (“Inception”). On January 30, 2020, we changed our state of incorporation from the State of Delaware to the State of Maryland. We have elected to be treated as a BDC under the 1940 Act. In addition, we have elected to be treated for U.S. federal income tax purposes as a RIC under Subchapter M of the Code. As such, we are required to comply with various regulatory requirements, such as the requirement to invest at least 70% of our assets in “qualifying assets,” source of income limitations, asset diversification requirements, and the requirement to distribute annually at least 90% of our taxable income and tax-exempt interest.

We are managed by our Advisor, Crescent Cap Advisors, LLC (and formerly, CBDC Advisors, LLC), an investment adviser that is registered with the SEC under the 1940 Act. Our Administrator, CCAP Administration LLC (and formerly, CBDC Administration, LLC) provides the administrative services necessary for us to operate. Company management consists of investment and administrative professionals from the Advisor and Administrator along with our Board. The Advisor directs and executes our investment operations and capital raising activities subject to oversight from the Board, which sets our broad policies. The Board has delegated investment management of our investment assets to the Advisor. The Board consists of six directors, four of whom are independent.

Our primary investment objective is to maximize the total return to our stockholders in the form of current income and capital appreciation through debt and related equity investments. We seek to achieve our investment objectives by investing primarily in secured debt (including senior secured first lien, unitranche and senior secured second-lien debt) and unsecured debt (including senior unsecured, mezzanine and subordinated debt), as well as related equity securities of private U.S. middle-market companies. We may purchase interests in loans or make debt investments, either (i) directly from our target companies as primary market or private credit investments (i.e., private credit transactions), or (ii) primary or secondary market bank loan or high yield transactions in the broadly syndicated “over-the-counter” market (i.e., broadly syndicated loans and bonds). Although our focus is to invest in less liquid private credit transactions, broadly syndicated loans and bonds are generally more liquid than and complement our private credit transactions.

A “first lien” loan is typically senior on a lien basis to other liabilities in the issuer’s capital structure and has the benefit of a first-priority security interest in assets of the issuer. The security interest ranks above the security interest of any second-lien lenders in those assets.

“Unitranche” loans are first lien loans that may extend deeper in a company’s capital structure than traditional first lien debt and may provide for a waterfall of cash flow priority among different lenders in the unitranche loan. In certain instances, we may find another lender to provide the “first out” portion of such loan and retain the “last out” portion of such loan, in which case, the “first out” portion of the loan would generally receive priority with respect to payment of principal, interest and any other amounts due thereunder over the “last out” portion that we would continue to hold. In exchange for the greater risk of loss, the “last out” portion earns a higher interest rate.

“Second lien” investments are loans with a second priority lien on the assets of the portfolio company. We obtain security interests in the assets of the portfolio company that serve as collateral in support of the repayment of such loans. This collateral serves as collateral in support of the repayment of these loans.

The term “mezzanine” refers to an investment in a company that, among other factors, includes debt that generally ranks senior to a borrower’s equity securities and junior in right of payment to such borrower’s other indebtedness. We may make multiple investments in the same portfolio company.

From Inception through June 25, 2015, we devoted substantially all of our efforts to establishing the business and raising capital commitments from private investors. On June 26, 2015, we entered into subscription agreements with several investors, including Crescent Capital Group LP and its affiliates (“CCG LP”), providing for the private placement of our common stock. We commenced investment operations on June 26, 2015.

 

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Alcentra Acquisition

On August 12, 2019, we entered into the Merger Agreement to acquire Alcentra Capital, in a cash and stock transaction. The board of directors of both companies each unanimously approved the Alcentra Acquisition and on January 29, 2020, Alcentra Capital’s stockholders approved the merger and our stockholders approved the issuance of shares of our common stock to Alcentra Capital’s stockholders. See “Recent Developments,” for more information on the Alcentra Acquisition.

Unaudited Pro Forma Condensed Statement of Assets and Liabilities

See “Recent Developments” below for a summary of the consideration received by Alcentra Capital stockholders in conjunction with the consummation of the Alcentra Acquisition. The following unaudited pro forma condensed consolidated financial information and explanatory notes illustrate the effect of the Alcentra Acquisition on our financial position and results of operations based upon our and Alcentra Capital’s respective historical financial positions and results of operations under the acquisition method of accounting with us treated as the acquirer. The unaudited pro forma condensed consolidated financial information has been derived from and should be read in conjunction with (i) our historical consolidated financial statements and the related notes, which are included elsewhere in this Annual Report and (ii) the historical consolidated financial statements and the related notes of Alcentra Capital, which are included in our joint proxy statement/prospectus, as amended, with the SEC on December 11, 2019.

In accordance with GAAP, the acquired assets and assumed liabilities of Alcentra Capital will be recorded by us at their estimated fair values as of the effective time. The unaudited pro forma condensed consolidated financial information of us and Alcentra Capital reflects the unaudited pro forma condensed consolidated balance sheet as of December 31, 2019. The unaudited pro forma condensed consolidated balance sheet as of December 31, 2019 assumes the Alcentra Acquisition had been completed on December 31, 2019.

The unaudited pro forma condensed consolidated financial information is presented for illustrative purposes only and does not necessarily indicate the results of operations or the combined financial position that would have resulted had the Alcentra Acquisition been completed at the beginning of the applicable period presented, nor the impact of potential expense efficiencies of the Alcentra Acquisition, certain potential asset dispositions and other factors. In addition, as explained in more detail in the accompanying notes to the unaudited pro forma condensed consolidated financial information, the allocation of the pro forma purchase price reflected in the unaudited pro forma condensed consolidated financial information involves estimates, is subject to adjustment and may vary significantly from the actual purchase price allocation that will be recorded upon completion of the Alcentra Acquisition. Additionally, the unaudited pro forma condensed consolidated financial data does not include any estimated net increase (decrease) in stockholders’ equity resulting from operations or other asset sales and repayments that are not already reflected that may have occurred between December 31, 2019 and the completion of the Alcentra Acquisition.

Pro Forma Condensed Consolidated Statements of Assets and Liabilities

As of December 31, 2019

(in millions, except per share data)

 

     Actual
Crescent
Capital BDC
     Actual
Alcentra
Capital
     Pro Forma
Adjustments
    Footnote
Reference
    Pro Forma
Combined
 

Assets:

            

Investments at fair value

   $ 726.5      $ 206.6      $ (9.8     (A   $ 923.3  

Cash and cash equivalents

     13.4        3.9        32.0       (B     49.3  

Other assets

     7.3        7.0        (8.6     (A     5.7  
  

 

 

    

 

 

    

 

 

     

 

 

 

Total Assets

     747.2        217.5        13.6         978.3  

Liabilities:

            

Debt

   $ 325.4      $ 73.8      $ 6.4       (B   $ 405.6  

Other liabilities

     14.9        3.3        3.7       (A     21.9  
  

 

 

    

 

 

    

 

 

     

 

 

 

Total Liabilities

   $ 340.3      $ 77.1      $ 10.1       $ 427.5  

Net assets

   $ 406.9      $ 140.4      $ 3.5       (C   $ 550.8  
  

 

 

    

 

 

    

 

 

     

 

 

 

Total Liabilities and Net Assets

   $ 747.2      $ 217.5      $ 13.6       $ 978.3  
  

 

 

    

 

 

    

 

 

     

 

 

 

Total Shares Outstanding

     20,862,314        12,875,566        5,203,016       (C     28,360,479  
           2,295,149       (D  

Net Asset Value per Share

   $ 19.50      $ 10.90          $ 19.42  
  

 

 

    

 

 

        

 

 

 

Basis of Pro Forma Presentation

The unaudited pro forma condensed consolidated financial information related to the Alcentra Acquisition is included as of December 31, 2019. On August 12, 2019, we and Alcentra Capital entered into the Merger Agreement (as subsequently amended on September 27, 2019). For the purposes of the pro forma condensed consolidated financial information, in exchange for approximately 12.9 million shares of Alcentra Capital common stock, Alcentra Capital’s stockholders received approximately (i) $19.3 million in cash, or $1.50 per share, from us, less $10.3 million, or $0.80 per share, spillover dividend paid by Alcentra Capital before consummation of the merger; (ii) 5.2 million shares of our Common Stock; and (iii) $21.6 million in cash, or $1.68 per share, from the Advisor.

 

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The merger of Alcentra Capital with and into us is expected to be accounted for as an asset acquisition in accordance with the asset acquisition method of accounting as detailed in ASC 805-50, Business Combinations—Related Issues, with the fair value of total consideration paid in conjunction with the merger being allocated to the assets acquired and liabilities assumed based on their relative fair values as of the date of the merger. To the extent that the fair value of the net assets acquired (as calculated using our valuation procedures) exceeds the fair value of the merger consideration paid by us, amounts paid by the Advisor pursuant to the transaction support agreement with the Advisor may be included in total consideration, up to approximately $21.6 million. Any such amounts will be recorded as deemed contributions from the Advisor as of the acquisition date. Based on the preliminary purchase price allocation calculated as of January 31, 2020, the estimated fair value of the net assets acquired approximates the estimated fair value of the merger consideration paid by us.

The final allocation of the purchase price will be determined after completion of a final analysis to determine (i) the fair value of total consideration to be paid in conjunction with the mergers; and (ii) the fair values of Alcentra Capital’s acquired assets and assumed liabilities as of the acquisition date. Accordingly, the final purchase accounting adjustments may differ materially from the pro forma adjustments presented in this document.

Under the 1940 Act and the American Institute of Certified Public Accountants’ Audit and Accounting Guide for Investment Companies, we are precluded from consolidating any entity other than another investment company or an operating company which provides substantially all of its services and benefits to us. Our statement of assets and liabilities include our accounts and the accounts of all of our consolidated subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates: The preparation of the unaudited pro forma condensed consolidated statement of assets and liabilities requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the statement of assets and liabilities. Actual results could differ from those estimates. Many of the amounts have been rounded, and all amounts are in millions, except share and per share amounts.

Investment Valuation: Investments for which market quotations are readily available are typically valued at those market quotations. To validate market quotations, we utilize a number of factors to determine if the quotations are representative of fair value, including the source and number of the quotations.

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 the Board, based on, among other things, the input of the Advisor, the audit committee of the Board (the “Audit Committee”) and, with certain de minimis exceptions, independent third-party valuation firms engaged at the direction of the Board.

The Board oversees and supervises a multi-step valuation process, which includes, among other procedures, the following:

 

   

The valuation process begins with each investment being initially valued by the investment professionals responsible for the portfolio investment in conjunction with the portfolio management team.

 

   

The Advisor’s management reviews the preliminary valuations with the investment professionals. Agreed upon valuation recommendations are presented to the Audit Committee.

 

   

The Audit Committee reviews the valuations presented and recommends values for each investment to the Board.

 

   

The Board reviews the recommended valuations and determines the fair value of each investment; valuations that are not based on readily available market quotations are valued in good faith based on, among other things, the input of the Advisor, the Audit Committee and, where applicable, other third parties.

 

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We apply Financial Accounting Standards Board ASC 820, Fair Value Measurement (ASC 820), as amended, which establishes a framework for measuring fair value in accordance with GAAP and required disclosures of fair value measurements. ASC 820 determines fair value to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between market participants on the measurement date. Market participants are defined as buyers and sellers in the principal or most advantageous market (which may be a hypothetical market) that are independent, knowledgeable, and willing and able to transact. In accordance with ASC 820, we consider our principal market to be the market that has the greatest volume and level of activity. ASC 820 specifies a fair value hierarchy that prioritizes and ranks the level of observability of inputs used in the determination of fair value. In accordance with ASC 820, these levels are summarized below:

Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access.

Level 2—Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

In addition to using the above inputs in investment valuations, we apply the valuation policy approved by the Board that is consistent with ASC 820. Consistent with the valuation policy, we evaluate the source of inputs, including any markets in which our investments are trading (or any markets in which securities with similar attributes are trading), in determining fair value. When a security is valued based on prices provided by reputable dealers or pricing services (that is, broker quotes), we subject those prices to various criteria in making the determination as to whether a particular investment would qualify for classification as a Level 2 or Level 3 investment. For example, we review pricing methodologies provided by dealers or pricing services in order to determine if observable market information is being used, versus unobservable inputs. Some additional factors considered include the number of prices obtained as well as an assessment as to their quality.

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 fluctuate from period to period. Additionally, the fair value of such investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that may ultimately be realized. Further, such investments are generally less liquid than publicly traded securities and may be subject to contractual and other restrictions on resale. If we were required to liquidate a portfolio investment in a forced or liquidation sale, it could realize amounts that are different from the amounts presented and such differences could be material.

Income Taxes: We have elected to be treated for U.S. federal income tax purposes, and intend to qualify annually, as a RIC under Subchapter M of the Code. To qualify for and maintain qualification as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements, as well as distribute to its stockholders, for each tax year, at least 90% of our “investment company taxable income,” which is generally our net ordinary income plus the excess, if any, of realized net short-term capital gains over realized net long-term capital losses, determined without regard to any deduction for distributions paid. As a RIC, we will not have to pay corporate-level U.S. federal income taxes on any income that it distributes to its stockholders. We intend to make distributions in an amount sufficient to qualify for and maintain our RIC tax status each tax year and to not pay any U.S. federal income taxes on income so distributed. We are also subject to nondeductible federal excise taxes if we do not distribute in respect of each calendar year an amount at least equal to the sum of 98% of net ordinary income, 98.2% of any capital gain net income, if any, and any recognized and undistributed income from prior years for which we paid no U.S. federal income taxes.

Transaction Costs: We and Alcentra Capital have each incurred direct transaction costs resulting from the Alcentra Acquisition. Alcentra Capital expensed its transaction costs as incurred. We, as the acquirer in an asset acquisition, should include transaction costs as a component of consideration transferred and allocate such consideration to the acquired assets and liabilities on a relative fair value basis. Since including transaction costs in total consideration would result in assigning an amount greater than fair value to Alcentra Capital’s financial instruments and other “non-qualifying” assets, such costs have been shown as a reduction in net assets for purposes of the pro forma statement of assets and liabilities.

We are expecting to incur approximately $5.2 million in estimated transaction costs (net of $1.4 million of transaction support received from the Advisor). We expect to incur additional $0.7 million in incremental insurance costs, which is presented as other liabilities on the proforma Statement of Assets and Liabilities. These estimated costs are presented as pro forma adjustments to cash on the pro forma balance sheet, representing unpaid transaction costs as of the date of Alcentra Acquisition.

Preliminary Purchase Price Accounting Allocations

The unaudited pro forma condensed consolidated financial information includes the unaudited pro forma condensed consolidated balance sheet as of December 31, 2019 assuming the Alcentra Acquisition had been completed on December 31, 2019.

The unaudited pro forma condensed consolidated financial information reflects the issuance of approximately 5.2 million shares of Common Stock pursuant to the Merger Agreement.

 

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The Alcentra Acquisition will be accounted for using the asset acquisition method of accounting. Accordingly, the merger consideration paid by us in connection with the Alcentra Acquisition will be allocated to the acquired assets and assumed liabilities of Alcentra Capital at their relative fair values estimated by us as of the effective date. The excess fair value of the net assets acquired over the fair value of the merger consideration paid by us will be allocated against the assets acquired and liabilities assumed of Alcentra Capital by us. Accordingly, the pro forma purchase price has been allocated to the assets acquired and the liabilities assumed based on our estimate of relative fair values as summarized in the following table:

 

     Alcentra
Capital
December 31,
2019
     Pro Forma
Adjustments
     Footnote
Reference
     Pro Forma  

Common stock issued by Crescent Capital BDC

            $ 101.5  

Cash consideration paid by Crescent Capital BDC

              19.3  

Less: Alcentra spillover dividend

              (10.3
           

 

 

 

Total purchase price from Crescent Capital BDC (l)

            $ 110.5  
           

 

 

 

Assets acquired:

           

Investments, at fair value

   $ 206.6      $ (9.8      (A    $ 196.8  

Cash and cash equivalents

     3.9        (3.9      (B      —    

Other assets

     7.0        (5.6      (A      1.4  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets acquired

   $ 217.5      $ (19.3       $ 198.2  

Debt

   $ 73.8      $ 6.4        (B    $ 80.2  

Other liabilities assumed

     3.3        0.7        (A      4.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net assets acquired

   $ 140.4      $ (25.7      (A    $ 114.0  

 

(1)

Excludes $21.6 million in cash from the Advisor, paid to Alcentra Capital’s stockholders.

Preliminary Pro Forma Adjustments

(A) Represents the fair value of the consideration paid by us allocated to the assets acquired and liabilities assumed based on their relative fair values as of the date of acquisition, under the application of the asset acquisition method of accounting. An adjustment of $8.6 million to Other assets relates to the allocation of the purchase price against Alcentra Capital’s recorded deferred tax asset $4.3 million and deferred financing cost of $1.3 million and recognition of proforma deferred merger expense of $5.2 million, inclusive of additional $2.2 million expense incurred subsequent to December 31, 2019. An adjustment of $9.8 million to investments is based upon our estimates of fair value determined using the valuation methodology summarized in Note 1. An adjustment of $3.7 million to other liabilities relates to $3.0 million of additional expenses incurred in connection with the merger and an incremental $0.7 million of merger expenses incurred by Alcentra Capital subsequent to December 31, 2019.

(B) The pro forma adjustment to cash reflects $44.9 million capital contribution from our investors, net of a $10.3 million spillover dividend paid by Alcentra Capital, the net purchase price paid in connection by us in connection with the Alcentra Acquisition of $9.0 million and additional liquidity of $6.4 million funded via a draw on Alcentra Capital’s revolving credit facility.

(C) The pro forma adjustment reflects an increase in net assets of $3.5 million in connection with the consummation of the Alcentra Acquisition. The increase in net assets is comprised of the following: (i) total consideration from us of $110.5 million is comprised of cash consideration of $19.3 million less $10.3 million Alcentra Capital spillover dividend, estimated stock consideration of $101.5 million based on our December 31, 2019 net asset value and 5.2 million of newly issued CCAP shares in connection with a conversion of the Alcentra shares at a ratio of 0.4041 per share, less (ii) net assets acquired of $114.0 million, which is comprised of gross net assets of $140.4 million less adjustments discussed in (A) related to fair value adjustments, the spillover dividend payment and adjustments to other assets and liabilities, net of liquidity needs.

(D) The pro forma adjustment reflects issuance of 2.3 million shares in connection with our final $44.9 million capital call and dividend reinvestment plan issuance, which both occurred subsequent to December 31, 2019 but prior to the January 31, 2020 closing of the Alcentra Acquisition.

 

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KEY COMPONENTS OF OPERATIONS

Investments

We expect our investment activity to vary substantially from period to period depending on many factors, the general economic environment, the amount of capital we have available to us, the level of merger and acquisition activity for middle-market companies, including the amount of debt and equity capital available to such companies and the competitive environment for the type of investments we make. In addition, as part of our risk strategy on investments, we may reduce certain levels of investments through partial sales or syndication to additional investors.

We must not invest in any assets other than “qualifying assets” specified in the 1940 Act, unless, at the time the investments are made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in “eligible portfolio companies.” Pursuant to rules adopted by the SEC, “eligible portfolio companies” include certain companies that do not have any securities listed on a national securities exchange and public companies whose securities are listed on a national securities exchange but whose market capitalization is less than $250 million.

The Investment Advisor

Our investment activities are managed by the Advisor, which will be responsible for originating prospective investments, conducting research and due diligence investigations on potential investments, analyzing investment opportunities, negotiating and structuring our investments and monitoring our investments and portfolio companies on an ongoing basis. The Advisor has entered into a Resource Sharing Agreement (the “Resource Sharing Agreement”) with Crescent Capital Group LP (“CCG LP”), pursuant to which CCG LP will provide the Advisor with experienced investment professionals (including the members of the Advisor’s investment committee) and access to the resources of CCG LP so as to enable the Advisor to fulfill its obligations under the Prior Investment Advisory Agreement. Through the Resource Sharing Agreement, the Advisor intends to capitalize on the deal origination, credit underwriting, due diligence, investment structuring, execution, portfolio management and monitoring experience of CCG LP’s investment professionals.

In connection with the 2018 Annual Meeting of Stockholders, we received stockholder approval to extend the period during which capital may be called from stockholders (the “Commitment Period”). The Commitment Period was extended to the earlier of (i) that date of an initial public offering of our Common Stock that results in an unaffiliated public float of at least the lower of (i) $75 million and (ii) 15% of the aggregate capital commitments received by us prior to the date of such initial public offering (a “Qualified IPO”) and (ii) June 30, 2020. In exchange for the Commitment Period extension, the Advisor agreed to waive its rights under the Investment Advisory Agreement to the Income Incentive Fee for the period from April 1, 2018 through February 3, 2020, which is the date of our listing on the NASDAQ stock exchange.

Revenues

We generate revenue primarily in the form of interest income on debt investments and, to a lesser extent, capital gains and distributions, if any, on equity securities that we may acquire in portfolio companies. Certain investments may have contractual PIK interest or dividends. PIK represents accrued interest or accumulated dividends that are added to the loan principal of the investment on the respective interest or dividend payment dates rather than being paid in cash and generally becomes due at maturity or upon being called by the issuer. PIK is recorded as interest or dividend income, as applicable.

Dividend income from preferred equity securities is recorded on an accrual basis to the extent that such amounts are payable by the portfolio company and are expected to be collected. Dividend income from common equity securities is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly-traded portfolio companies.

In addition, we may receive fees for services provided to portfolio companies by the Advisor under the Prior Investment Advisory Agreement. The services that the Advisor provides vary by investment, but generally include syndication, structuring or diligence fees, and fees for providing managerial assistance to our portfolio companies. We also generate revenue in the form of commitment or origination fees. Loan origination fees, original issue discount and market discount or premium are capitalized, and we accrete or amortize such amounts into income over the life of the loan. Fees for providing managerial assistance to our portfolio companies are generally non-recurring and are recognized as revenue when services are provided. In certain instances where we are invited to participate as a co-lender in a transaction and do not provide significant services in connection with the investment, all or a portion of any loan fees received by us in such situations will be deferred and amortized over the investment’s life using the effective yield method.

 

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Expenses

Our primary operating expenses include the payment of Management fees and Incentive fees to the Advisor under the Investment Advisory Agreement, our allocable portion of overhead expenses under the administration agreement with our Administrator (the “Initial Administration Agreement”), operating costs associated with our sub-administration, custodian and transfer agent agreements with State Street Bank and Trust Company (the “Sub-Administration Agreements”) and other operating costs described below. The Management and Incentive fees compensate the Adviser for its work in identifying, evaluating, negotiating, closing and monitoring our investments. We bear all other out-of-pocket costs and expenses of our operations and transactions, including:

 

   

allocated organization costs from the Advisor incurred prior to the Commencement of Operations up to a maximum of $1.5 million;

 

   

the cost of calculating our net asset value, including the cost of any third-party valuation services;

 

   

fidelity bond, directors’ and officers’ liability insurance and other insurance premiums;

 

   

direct costs, such as printing, mailing, long distance telephone and staff;

 

   

fees and expenses associated with independent audits and outside legal costs;

 

   

independent directors’ fees and expenses;

 

   

administration fees and expenses, if any, payable under the Initial Administration Agreement (including payments based upon our allocable portion of the Administrator’s overhead in performing its obligations under the Initial Administration Agreement, rent and the allocable portion of the cost of certain professional services provided to us, including but not limited to, our Chief Compliance Officer, Chief Financial Officer and their respective staffs);

 

   

U.S. federal, state and local taxes;

 

   

the cost of effecting sales and repurchases of shares of our common stock and other securities;

 

   

fees payable to third parties relating to making investments, including out-of-pocket fees and expenses associated with performing due diligence and reviews of prospective investments;

 

   

out-of-pocket fees and expenses associated with marketing efforts;

 

   

federal and state registration fees and any stock exchange listing fees;

 

   

brokerage commissions;

 

   

costs associated with our reporting and compliance obligations under the 1940 Act and other applicable U.S. federal and state securities laws;

 

   

debt service and other costs of borrowings or other financing arrangements; and

 

   

all other expenses reasonably incurred by us in connection with making investments and administering our business.

We have agreed to repay the Advisor for initial organization costs and equity offering costs incurred prior to the Commencement of Operations up to a maximum of $1.5 million on a pro rata basis over the first $350 million of invested capital not to exceed 3 years from the initial capital commitment. The Advisor had agreed to extend the reimbursement period for the initial organization costs and equity offering costs to June 30, 2019. The Advisor is responsible for organization and private equity offerings costs in excess of $1.5 million.

We expect our general and administrative expenses to be relatively stable or decline as a percentage of total assets during periods of asset growth and to increase during periods of asset declines. Incentive Fees and costs relating to future offerings of securities would be incremental.

Leverage

Our financing facilities allow us to borrow money and lever our investment portfolio, subject to the limitations of the 1940 Act, with the objective of increasing our yield. This is known as “leverage” and could increase or decrease returns to our stockholders. The use of leverage involves significant risks. As a BDC, with certain limited exceptions, we will only be permitted to borrow amounts such that our asset coverage ratio, as defined in the 1940 Act, equals at least 2 to 1 after such borrowing. Short-term credits necessary for the settlement of securities transactions and arrangements with respect to securities lending will not be considered borrowings for these purposes. The amount of leverage that we employ will depend on our Advisor’s and our Board’s assessment of market conditions and other factors at the time of any proposed borrowing.

 

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The SBCAA, which was signed into law on March 23, 2018, among other things, amended Section 61(a) of the 1940 Act to add a new Section 61(a)(2) that reduces the asset coverage requirement applicable to a BDC from 200% to 150% so long as the BDC meets certain disclosure requirements and obtains certain approvals. The reduced asset coverage requirement would permit a BDC to have a ratio of total consolidated assets to outstanding indebtedness of 2:1 as compared to a maximum of 1:1 under the 200% asset coverage requirement. On March 3, 2020, the Board, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of the Board, approved the application of the modified asset coverage requirement set forth in Section 61(a)(2) of the 1940 Act, as amended by the SBCAA. As a result, effective on March 3, 2021 (unless we receive earlier stockholder approval), our asset coverage requirement applicable to senior securities will be reduced from 200% to 150%.

PORTFOLIO INVESTMENT ACTIVITY

We seek to create a broad and varied portfolio that generally includes senior secured first lien, unitranche, senior secured second lien and subordinated loans and minority equity securities of U.S. middle market companies. The size of our individual investments will vary proportionately with the size of our capital base. We generally invest in securities that have been rated below investment grade by independent rating agencies or that would be rated below investment grade if they were rated. These securities have speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. In addition, many of our debt investments have floating interest rates that reset on a periodic basis and typically do not fully pay down principal prior to maturity.

As of December 31, 2019 and 2018, our portfolio at fair value was comprised of the following:

 

     December 31, 2019     December 31, 2018  

($ in millions)

Investment Type

   Fair Value      Percentage     Fair Value      Percentage  

Senior Secured First Lien

   $ 351.3        48.3   $ 294.4        59.7

Unitranche First Lien

     218.3        30.1       68.1        13.8  

Unitranche First Lien – Last Out

     16.2        2.2       16.8        3.4  

Senior Secured Second Lien

     58.9        8.1       75.8        15.3  

Unsecured Debt

     7.4        1.0       7.2        1.5  

Preferred Stock

     4.8        0.7       2.3        0.5  

Common Stock and Other (1)

     69.6        9.6       28.7      5.8  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 726.5        100.0   $ 493.3        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)

Includes investments in CBDC Senior Loan Fund, LLC and GACP II LP.

The following table shows the asset mix of investments made at cost, inclusive of revolver and delayed draw fundings, during the years ended December 31, 2019, 2018, and 2017:

 

     Year Ended
December 31, 2019
    Year Ended
December 31, 2018
    Year Ended
December 31, 2017
 

($ in millions)

Investment Type

   Cost      Percentage     Cost      Percentage     Cost      Percentage  

Senior Secured First Lien

   $ 140.7        37.2   $ 174.3        59.9   $ 96.6        62.6

Unitranche First Lien

     166.9        44.1       62.4        21.4       5.7        3.7  

Unitranche First Lien – Last Out

     16.0        4.2       7.4        2.5       8.8        5.7  

Senior Secured Second Lien

     4.4        1.2       21.2        7.3       36.5        23.7  

Unsecured Debt

     —          —         1.5        0.5       0.6        0.4  

Preferred Stock

     1.5        0.4       —          —         1.9        1.2  

Common Stock and Other (1)

     48.8        12.9       24.4        8.4       4.1        2.7  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 378.3        100.0   $ 291.2        100.0   $ 154.2        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)

Includes investments in CBDC Senior Loan Fund, LLC and GACP II LP.

For the year ended December 31, 2019, we had principal repayments of $110.0 million and sales of securities in fourteen portfolio companies aggregating approximately $35.8 million. For the year ended December 31, 2019, we had a portfolio increase of $228.4 million based on amortized cost.

 

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For the year ended December 31, 2018, we had principal repayments of $105.9 million and sales of securities in five portfolio companies aggregating approximately $3.8 million. For the year ended December 31, 2018, we had a portfolio increase of $183.5 million based on amortized cost.

The following table presents certain selected information regarding our investment portfolio as of December 31, 2019 and December 31, 2018:

 

     December 31, 2019     December 31, 2018  

Weighted average yield of debt and other income producing securities (at cost) (1)

     8.4     9.0

Percentage of debt bearing a floating rate (at fair value)

     97.9     95.2

Percentage of debt bearing a fixed rate (at fair value)

     2.1     4.8

Number of portfolio companies

     98       86  

 

(1)

Yield is inclusive of a return on other income producing investments in GACP II for the years ended December 31, 2019 and 2018 and the Senior Loan Fund for the year ended December 31, 2019.

The following table shows the amortized cost of our performing and non-accrual debt and income producing debt securities as of December 31, 2019 and 2018.

 

     December 31, 2019     December 31, 2018  

($ in millions)

   Amortized Cost      Percentage     Amortized Cost      Percentage  

Performing

   $ 645.4        98.1   $ 488.1        97.5

Non-accrual

     12.6        1.9       12.6        2.5  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total income producing debt securities

   $ 658.0        100.0   $ 500.7        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Loans are generally placed on non-accrual status when there is reasonable doubt that principal or interest will be collected in full. Non-accrual loans are restored to accrual status when past due principal and interest is paid current and, in management’s judgment, are likely to remain current. Management may determine to not place a loan on non-accrual status if the loan has sufficient collateral value and is in the process of collection.

As of December 31, 2019, we had one portfolio company with three investment positions on non-accrual status, which represented 1.9% and 1.0% of the total debt investments at cost and fair value, respectively. As of December 31, 2018, we had one portfolio company with two investment positions on non-accrual status, which represented 2.5% and 1.4% of total debt investments at cost and fair value, respectively. The remaining debt investments were performing and current on their interest payments as of December 31, 2019 and December 31, 2018.

The Advisor monitors our portfolio companies on an ongoing basis. The Advisor monitors the financial trends of each portfolio company to determine if it is meeting its business plans and to assess the appropriate course of action for each company. The Advisor has a number of methods of evaluating and monitoring the performance and fair value of our investments, which may include the following:

 

 

assessment of success of the portfolio company in adhering to its business plan and compliance with covenants;

 

 

review of monthly and quarterly financial statements and financial projections for portfolio companies.

 

 

contact with portfolio company management and, if appropriate, the financial or strategic sponsor, to discuss financial position, requirements and accomplishments;

 

 

comparisons to other companies in the industry; and

 

 

possible attendance at, and participation in, board meetings.

As part of the monitoring process, the Advisor regularly assesses the risk profile of each of our investments and, on a quarterly basis, grades each investment on a risk scale of 1 to 5. Risk assessment is not standardized in our industry and our risk assessment may not be comparable to ones used by our competitors. Our assessment is based on the following categories:

 

1

Involves the least amount of risk in our portfolio. The investment/borrower is performing above expectations since investment, and the trends and risk factors are generally favorable, which may include the financial performance of the borrower or a potential exit.

 

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2

Involves an acceptable level of risk that is similar to the risk at the time of investment. The investment/borrower is generally performing as expected, and the risk factors are neutral to favorable.

 

3

Involves an investment/borrower performing below expectations and indicates that the investment’s risk has increased somewhat since investment. The borrower’s loan payments are generally not past due and more likely than not the borrower will remain in compliance with debt covenants. An investment rating of 3 requires closer monitoring.

 

4

Involves an investment/borrower performing materially below expectations and indicates that the loan’s risk has increased materially since investment. In addition to the borrower being generally out of compliance with debt covenants, loan payments may be past due (but generally not more than 180 days past due). Placing loans on non-accrual status should be considered for investments rated 4.

 

5

Involves an investment/borrower performing substantially below expectations and indicates that the loan’s risk has substantially increased since investment. Most or all of the debt covenants are out of compliance and payments are substantially delinquent. Loans rated 5 are not anticipated to be repaid in full and the fair market value of the loan should be reduced to the anticipated recovery amount. Loans with an investment rating of 5 should be placed on non-accrual status.

The following table shows the distribution of our investments on the 1 to 5 investment performance rating scale at fair value as of December 31, 2019 and December 31, 2018. Investment performance ratings are accurate only as of those dates and may change due to subsequent developments relating to a portfolio company’s business or financial condition, market conditions or developments, and other factors.

 

     December 31, 2019     December 31, 2018  

Investment Performance Rating

   Investments at
Fair Value
($ in millions)
     Percentage of
Total Portfolio
    Investments at
Fair Value
($ in millions)
     Percentage of
Total Portfolio
 

1

   $ 19.1        2.6   $ 4.4        0.9

2

     653.1        89.9       441.1        89.4  

3

     47.8        6.6       40.9        8.3  

4

     6.5        0.9       6.9        1.4  

5

     —          —         —          —    
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 726.5        100.0   $ 493.3        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

RESULTS OF OPERATIONS

Operating results for the years ended December 31, 2019, 2018, and 2017 were as follows:

 

     For the years ended  
     December 31, 2019      December 31, 2018      December 31, 2017  

($ in millions)

        

Total investment income

   $ 53.5      $ 33.3      $ 22.3  

Less: Total net expenses

     21.7        15.4        12.4  
  

 

 

    

 

 

    

 

 

 

Net investment income before taxes

     31.8        17.9        9.9  

Income and excise taxes

     0.1        0.2        0.0  
  

 

 

    

 

 

    

 

 

 

Net investment income after taxes

     31.7        17.7        9.9  

Net realized gain (loss) on investments (1)

     (7.2      (0.5      (0.3

Net unrealized appreciation (depreciation) on investments (1)

     4.3        (9.0      (0.3

Net unrealized appreciation (depreciation) on foreign currency forward contracts

     0.7        0.0         
  

 

 

    

 

 

    

 

 

 

Net realized and unrealized gains (losses) on investments

   $ (2.2    $ (9.5 )    $ (0.6
  

 

 

    

 

 

    

 

 

 

Provision for taxes on realized gain on investments

     (0.1              

Benefit/(Provision) for taxes on unrealized appreciation (depreciation) on investments

     (0.1      (0.1      (0.2
  

 

 

    

 

 

    

 

 

 

(Provision) benefit for taxes on realized and unrealized gain (loss) on investments

     (0.2      (0.1      (0.2
  

 

 

    

 

 

    

 

 

 

Net increase in net assets resulting from operations

   $ 29.3      $ 8.1      $ 9.1  
  

 

 

    

 

 

    

 

 

 

 

(1)

Includes foreign currency transactions and translation.

 

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Investment Income

 

                                                                                            
     For the years ended  
     December 31, 2019      December 31, 2018      December 31, 2017  

($ in millions)

        

Interest from investments

   $ 47.7      $ 32.1      $ 22.0  

Dividend income

     5.0        0.6        —    

Other investment income

     0.8        0.6        0.3  
  

 

 

    

 

 

    

 

 

 

Total investment income

   $ 53.5      $ 33.3      $ 22.3  
  

 

 

    

 

 

    

 

 

 

Interest from investments, which includes amortization of upfront fees, increased from $32.1 million for the year ended December 31, 2018 to $47.7 million for the year ended December 31, 2019, due to an increase in the size of our portfolio. Included in interest from investments for the years ended December 31, 2019 and December 31, 2018 are $1.4 million and $1.0 million in accelerated accretion of OID, respectively.

Dividend income increased from $0.6 million for the year ended December 31, 2018 to $5.0 million for the year ended December 31, 2019 due to our investments in GACP II and the Senior Loan Fund, along with dividend payments as it relates to equity co-investments. Other investment income which includes prepayment fees, amortization of loan administration fees earned as the administration agent, and other miscellaneous fee income, remained relatively unchanged.

Expenses

 

                                                                                            
     For the years ended  
     December 31, 2019      December 31, 2018      December 31, 2017  

($ in millions)

        

Interest and debt financing costs

   $ 13.4      $ 8.4      $ 5.3  

Management fees

     9.2        6.0        4.3  

Income incentive fees

     4.7        2.7        1.6  

Other general and administrative expenses

     2.2        1.8        1.6  

Professional fees

     1.0        0.8        0.7  

Directors’ fees

     0.3        0.3        0.3  

Organization expenses

     0.1        0.2        0.1  
  

 

 

    

 

 

    

 

 

 

Total expenses

   $ 30.9        20.2        13.9  

Management fee waiver

     (4.5      (2.6      (1.5

Incentive fee waiver

     (4.7      (2.2       
  

 

 

    

 

 

    

 

 

 

Net expenses

   $ 21.7      $ 15.4      $ 12.4  

Income and excise taxes

     0.1        0.1        0.0  
  

 

 

    

 

 

    

 

 

 

Total

   $ 21.8      $ 15.5      $ 12.4  
  

 

 

    

 

 

    

 

 

 

Interest and Credit Facility Expenses

Interest and debt financing costs include interest, amortization of deferred financing costs, upfront commitment fees and unused fees on the Revolving Credit Facility II, SPV Asset Facility, and Corporate Revolving Facility. We first drew on the SPV Asset Facility in April 2016, the Revolving Credit Facility II in June 2017 (the facility was terminated in August 2019), and the Corporate Revolving Facility in August 2019. Interest and debt financing costs increased from $8.4 million for the year ended December 31, 2018 to $13.4 million for the year ended December 31, 2019. This increase was primarily due to an increase in the weighted average debt outstanding from $182.3 million for the year ended December 31, 2018 to $275.9 million for the year ended December 31, 2019 and an increase in the average interest rate (excluding deferred upfront financing costs and unused fees) on the weighted average debt outstanding from 4.1% for the year ended December 31, 2018 to 4.4% for the year ended December 31, 2019.

 

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Management fees

Management fees are calculated and payable quarterly in arrears at an annual rate of 1.5% of our gross assets, including assets acquired through the incurrence of debt but excluding any cash and cash equivalents. The Advisor, however, has agreed to waive its right to receive management fees in excess of the sum of (i) 0.25% of the aggregate committed but undrawn capital and (ii) 0.75% of the aggregate gross assets excluding cash and cash equivalents (including capital drawn to pay our expenses) during any period prior to a Qualified IPO.

Additionally, under the terms of the Transaction Support Agreement, among other things, we agreed to enter into an amendment to our Investment Advisory Agreement to (i) permanently reduce the management fee from 1.50% to 1.25% and (ii) waive a portion of the base management fee from February 1, 2020 through July 31, 2021 such that the base management fee shall be charged at an annual rate of 0.75% of our gross assets for such time period. These amendments contemplated by the Transaction Support Agreement went into effect with the completion of the Alcentra Acquisition, which closed on January 31, 2020.

Management fees, net of waived management fees, increased from $3.4 million for the year ended December 31, 2018 to $4.7 million for the year ended December 31, 2019 due to the increase in total assets, which increased from an average of $409.4 million for the year ended December 31, 2018 to an average of $478.7 million for the year ended December 31, 2019. Waived management fees for the years ended December 31, 2019 and December 31, 2018 were approximately $4.5 million and $2.6 million, respectively. The Advisor is not permitted to recoup waived amounts at any time.

Income incentive fees

The income incentive fee, is calculated and payable quarterly in arrears and (a) equals 100% of the excess of the pre-incentive fee net investment income (as defined below) for the immediately preceding calendar quarter, over a preferred return of 1.5% per quarter (6% annualized) (the “Hurdle”), and a catch-up feature until the Advisor has received, (i) prior to a Qualified IPO, 15%, or (ii) after a Qualified IPO, 17.5%, of the pre-incentive fee net investment income for the current quarter up to, (i) prior to a Qualified IPO, 1.7647%, or (ii) after a Qualified IPO, 1.8182% (the “Catch-up”), and (b)(i) prior to a Qualified IPO, 15% or (ii) after a Qualified IPO, 17.5%, of all remaining pre-incentive fee net investment income above the “Catch-up.”

“Pre-Incentive Fee Net Investment Income” means interest income, dividend income and any other income (including any other fees such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive from portfolio companies, but excluding fees for providing managerial assistance) accrued during the calendar quarter, minus operating expenses for the calendar quarter (including the base management fee, taxes, any expenses payable under the Investment Advisory Agreement and the Initial Administration Agreement and any interest expense, but excluding the Incentive fee). Pre-Incentive Fee Net Investment Income includes accrued income that we have not yet received in cash, such as debt instruments with PIK interest, preferred stock with PIK dividends and zero coupon securities.

Net income incentive fees were $0.5 million and zero for the years ended December 31, 2018 and December 31, 2019, respectively. The decrease was due to us receiving stockholder approval to extend the end of the Commitment Period to February 3, 2020, which is the date of our listing on the NASDAQ stock exchange, which in exchange, the Advisor agreed to waive its right under the Investment Advisory Agreement to the income incentive fee.

Under the terms of the Transaction Support Agreement that went into effect on January 31, 2020, among other things, the Advisor agreed to (i) increase the incentive fee hurdle from 6% to 7% annualized and (ii) waive the income based portion of the incentive fee from February 1, 2020 through July 31, 2021.

Professional Fees and Other General and Administrative Expenses

Professional fees generally include expenses from independent auditors, tax advisors, legal counsel and third party valuation agents. Other general and administrative expenses generally include expenses from the Sub-Administration Agreements, insurance premiums, overhead and staffing costs allocated from the Administrator and other miscellaneous general and administrative costs associated with our operations and investment activity. Professional fees increased from $0.8 million for the year ended December 31, 2018 to $1.0 million for the year ended December 31, 2019, while other general and administrative expenses increased from $1.8 million for the year ended December 31, 2018 to $2.2 million for the year ended December 31, 2019. The net increase in expenses was due to an increase in costs associated with servicing a growing investment portfolio.

 

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Organization expenses

We agreed to repay the Advisor for the organization costs and offering costs (not to exceed $1.5 million) on a pro rata basis over the first $350 million of capital contributed to us. The Advisor is responsible for organization costs and offering costs in excess of $1.5 million. At the 2018 Annual Meeting of Stockholders, we received stockholder approval to extend the period during which capital may be called from stockholders (the “Commitment Period”). The Commitment Period was extended to the date of the merger, which occurred on January 31, 2020. With the approval of the Commitment Period extension, the Advisor agreed to extend the reimbursement period for the initial organization costs and offering costs to June 30, 2019.

For the year ended December 31, 2019, we called $146.0 million and the Advisor allocated $0.1 million of organization costs to us, which was included in the Consolidated Statements of Operations. For the year ended December 31, 2019, the Advisor also allocated $0.2 million of equity offering costs to us that were recorded as an offset to Paid-in capital in excess of par value on the Consolidated Statement of Assets and Liabilities.

For the year ended December 31, 2018, we called $95.0 million and the Advisor allocated $0.2 million of organization costs to us, which was included in the Consolidated Statements of Operations. For the year ended December 31, 2018, the Advisor also allocated $0.2 million of equity offering costs to us that were recorded as an offset to Paid-in capital in excess of par value on the Consolidated Statement of Assets and Liabilities.

Since Inception, the Advisor allocated $0.6 million of organization costs and $0.8 million of equity offering costs to us.

Income Tax Expense, Including Excise Tax

We have elected to be treated as a RIC under the Code and operate in a manner so as to qualify for the tax treatment applicable to RICs. To qualify as a RIC, we must generally (among other requirements) timely distribute to our stockholders at least 90% of our investment company taxable income, as defined by the Code, for each year. In order to maintain our RIC status, we intend to make the requisite distributions to our stockholders which will generally relieve us from corporate-level income taxes.

In order to not to be subject to federal excise taxes, we must distribute annually an amount at least equal to the sum of (i) 98% of our ordinary income (taking into account certain deferrals and elections), (ii) 98.2% of our net capital gains from the current year and (iii) any undistributed ordinary income and net capital gains from preceding years. Depending on the level of taxable income earned in a tax year, we may choose to carry forward such taxable income in excess of current year dividend distributions into the next tax year and pay a 4% excise tax on such income, as required. If we determine that our estimated current year taxable income will be in excess of estimated dividend distributions for the current year from such income, we accrue excise tax on estimated excess taxable income as such taxable income is earned. For the years ended December 31, 2019 and December 31, 2018 we expensed an excise tax of $0.1 million and $0.1 million, respectively, of which $0.1 million and $0.1 million remained payable at the end of each year, respectively.

 

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Table of Contents

Net Realized and Unrealized Gains and Losses

We value our portfolio investments quarterly and any changes in fair value are recorded as unrealized appreciation (depreciation) on investments. For the years ended December 31, 2019, December 31, 2018 and December 31, 2017, net realized gains (losses) and net unrealized appreciation (depreciation) on our investment portfolio were comprised of the following:

 

     For the years ended  
     December 31, 2019      December 31, 2018      December 31, 2017  
($ in millions)                     

Realized losses on investments

   $ (8.5    $ (0.5    $ (0.4

Realized gains on investments

     1.4        0.0        0.1  

Realized gains on foreign currency transactions

     0.5        (0.0      0.0  

Realized losses on foreign currency transactions

     (0.6      (0.0      (0.0
  

 

 

    

 

 

    

 

 

 

Net realized gains (losses)

   $ (7.2    $ (0.5    $ (0.3
  

 

 

    

 

 

    

 

 

 

Change in unrealized depreciation on non-controlled and non-affiliated investments

   $ (2.1    $ (11.4    $ (3.0

Change in unrealized appreciation on non-controlled and non-affiliated investments

     5.4        2.3        2.6  

Change in unrealized depreciation on foreign currency translation

     (0.8      0.3        0.1  

Change in unrealized appreciation on foreign currency translation

     1.4        (0.2      0.0  

Change in unrealized depreciation on controlled and affiliated investments

                    

Change in unrealized appreciation on controlled and affiliated investments

     0.4                

Change in unrealized appreciation on foreign currency forwards

     0.8        0.0       

Change in unrealized depreciation on foreign currency forwards

     (0.1              
  

 

 

    

 

 

    

 

 

 

Net unrealized appreciation (depreciation)

   $ 5.0      $ (9.0    $ (0.3
  

 

 

    

 

 

    

 

 

 

Hedging

We may, but are not required to, enter into interest rate, foreign exchange or other derivative agreements to hedge interest rate, currency, credit or other risks. Generally, we do not intend to enter into any such derivative agreements for speculative purposes. Any derivative agreements entered into for speculative purposes are not expected to be material to our business or results of operations. These hedging activities, which are in compliance with applicable legal and regulatory requirements, may include the use of various instruments, including futures, options and forward contracts. We bear the costs incurred in connection with entering into, administering and settling any such derivative contracts. There can be no assurance any hedging strategy we employ will be successful.

During the years ended December 31, 2019 and December 31, 2018, our average U.S. Dollar notional exposure to foreign currency forward contracts were $23.3 million and $7.9 million, respectively.

For the years ended December 31, 2018 and 2017

The comparison of the fiscal years ended December 31, 2018 and 2017 can be found in our annual report on Form 10-K for the fiscal year ended December 31, 2018 located within Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, which is incorporated by reference herein.

 

65


Table of Contents

Senior Loan Fund

The Senior Loan Fund, an unconsolidated limited liability company, was formed on September 26, 2018 and commenced operations in February 2019. We invest together with Masterland Enterprise Holdings Ltd. (“Masterland”) through the Senior Loan Fund. Masterland is a wholly owned subsidiary of China Orient Asset Management (International) Holding Limited (HK). The Senior Loan Fund’s principal purpose is to make investments, either directly or indirectly through its wholly owned subsidiary, CBDC Senior Loan Sub LLC. We and Masterland have each subscribed to fund $40 million. Except under certain circumstances, contributions to the Senior Loan Fund cannot be redeemed. The Senior Loan Fund is managed by a four member board of managers, on which we and Masterland have equal representation. Investment decisions generally must be unanimously approved by a quorum of the board of managers. Since we do not have a controlling financial interest in the Senior Loan Fund, we do not consolidate our non-controlling interest in the Senior Loan Fund. The Senior Loan Fund is an investment company and measured using the net asset value per share as a practical expedient for fair value.

As of December 31, 2019, we and Masterland had each subscribed to fund and contributed the following to the Senior Loan Fund:

 

($ in millions)    December 31, 2019  

Member

   Subscribed
to fund
     Contributed      Unfunded
Commitment
 

Company

   $ 40.0      $ 34.0      $ 6.0  

Masterland

     40.0        34.0        6.0  
  

 

 

    

 

 

    

 

 

 

Total

   $ 80.0      $ 68.0      $ 12.0  

The Senior Loan Fund is capitalized pro rata with LLC equity interest as transactions are completed. The Senior Loan Fund has a revolving credit facility with Royal Bank of Canada (the “RBC Facility”), which permitted up to $300.0 million of borrowings as of December 31, 2019. Borrowings under the RBC Facility are secured by all assets of CBDC Senior Loan Sub LLC.

As of December 31, 2019, the Senior Loan Fund had total investments in senior secured debt at fair value of $275.1 million.

Below is a summary of the Senior Loan Fund’s portfolio, followed by a listing of the individual loans in the Senior Loan Fund’s portfolio as of December 31, 2019:

 

($ in millions)    As of
December 31,
2019
 

Total senior secured debt(1)

   $ 275.6  

Weighted average current interest rate on senior secured debt(2)

     4.9

Number of borrowers in the Senior Loan Fund’s portfolio

     169  

Largest loan to a single borrower

   $ 3.5  

 

(1) 

At par amount, including unfunded commitments.

(2) 

Computed as (a) the annual stated interest rate on accruing senior secured debt, divided by (b) total senior secured debt at par amount, excluding fully unfunded commitments.

 

66


Table of Contents

CBDC SENIOR LOAN FUND LLC

Consolidated Schedule of Investments

December 31, 2019

 

Company/Security/Country ***

 

Investment Type

 

Spread
Above
Index *

  Interest
Rate
    Maturity/
Dissolution
Date
    Principal
Amount, Par
Value or Shares
    Cost     Percentage
of Net
Assets **
    Fair
Value ****
 

Investments

               

United States

               

Debt Investments

               

Aerospace & Defense

             

Dynasty Acquisition Co., Inc.

 

Senior Secured First Lien

 

L + 400(1)

    5.94     04/2026     $ 486,543     $ 488,854       0.7   $ 490,533  

TransDigm, Inc.

 

Senior Secured First Lien

 

L + 250(2)

    4.30     06/2023       742,443       735,543       1.1       746,078  

TransDigm, Inc.

 

Senior Secured First Lien

 

L + 250(2)

    4.30     08/2024       248,731       247,288       0.3       249,871  

TransDigm, Inc.

 

Senior Secured First Lien

 

L + 250(2)

    4.30     05/2025       1,984,224       1,962,435       2.9       1,992,795  
         

 

 

   

 

 

   

 

 

   

 

 

 
            3,461,941       3,434,120       5.0       3,479,277  
         

 

 

   

 

 

   

 

 

   

 

 

 

Air Transport

             

American Airlines, Inc.

 

Senior Secured First Lien

 

L + 175(2)

    3.54     06/2025       3,500,000       3,444,190       5.1       3,510,938  
         

 

 

   

 

 

   

 

 

   

 

 

 

Automotive

             

Mister Car Wash Holdings, Inc.

 

Senior Secured First Lien

 

L + 350(1)

    5.41     05/2026       1,428,864       1,428,374       2.1       1,437,202  

Mister Car Wash Holdings, Inc.(3)

 

Senior Secured First Lien

 

L + 350(1)

    3.50     05/2026       —         48       —         419  

OEConnection LLC

 

Senior Secured First Lien

 

L + 400(2)

    5.80     09/2026       1,093,364       1,088,142       1.6       1,100,197  

OEConnection LLC(4) (5)

 

Senior Secured First Lien

        09/2026       —         (493     —         649  

Wand NewCo 3, Inc.

 

Senior Secured First Lien

 

L + 350(2)

    5.30     02/2026       1,492,500       1,498,336       2.2       1,506,962  
         

 

 

   

 

 

   

 

 

   

 

 

 
            4,014,728       4,014,407       5.9       4,045,429  
         

 

 

   

 

 

   

 

 

   

 

 

 

Building & Development

             

Cushman & Wakefield U.S. Borrower, LLC

 

Senior Secured First Lien

 

L + 325(2)

    5.05     08/2025       2,976,137       2,980,640       4.4       2,984,039  

Forest City Enterprises, L.P.

 

Senior Secured First Lien

 

L + 350(2)

    5.30     12/2025       1,792,908       1,795,830       2.6       1,805,234  

Realogy Group LLC

 

Senior Secured First Lien

 

L + 225(2)

    4.05     02/2025       2,989,780       2,928,174       4.3       2,969,226  
         

 

 

   

 

 

   

 

 

   

 

 

 
            7,758,825       7,704,644       11.3       7,758,499  
         

 

 

   

 

 

   

 

 

   

 

 

 

Business Equipment & Services

             

Almonde, Inc.

 

Senior Secured First Lien

 

L + 350(6)

    5.70     06/2024       2,479,969       2,457,522       3.6       2,467,916  

AqGen Ascensus, Inc.

 

Senior Secured First Lien

 

L + 400(1)

    5.94     12/2022       749,543       750,343       1.1       753,058  

AVSC Holding Corp.

 

Senior Secured First Lien

 

L + 325(1)

    5.23     03/2025       741,796       725,391       1.1       740,869  

AVSC Holding Corp.

 

Senior Secured First Lien

 

L + 450(1)

    6.49     10/2026       750,000       742,621       1.1       750,937  

Belfor Holdings, Inc.

 

Senior Secured First Lien

 

L + 400(2)

    5.69     04/2026       636,800       636,800       0.9       640,780  

Brand Energy & Infrastructure Services, Inc.

 

Senior Secured First Lien

 

L + 425(1)

    6.29     06/2024       1,238,553       1,215,203       1.8       1,237,005  

Creative Artists Agency, LLC

 

Senior Secured First Lien

 

L + 375(2)

    5.55     11/2026       816,000       813,647       1.2       824,034  

EAB Global, Inc.

 

Senior Secured First Lien

 

L + 375(1)

    5.74     11/2024       1,488,636       1,483,036       2.2       1,493,288  

IG Investment Holdings, LLC

 

Senior Secured First Lien

 

L + 400(2)

    5.80     05/2025       2,449,609       2,445,086       3.6       2,468,900  

IRI Holdings, Inc.

 

Senior Secured First Lien

 

L + 450(2)

    6.30     12/2025       2,326,753       2,316,120       3.3       2,287,977  

Jane Street Group, LLC

 

Senior Secured First Lien

 

L + 300(2)

    4.80     08/2022       1,761,638       1,759,004       2.6       1,764,941  

MA FinanceCo., LLC

 

Senior Secured First Lien

 

L + 250(2)

    4.30     06/2024       225,712       223,401       0.3       226,441  

Netsmart, Inc.

 

Senior Secured First Lien

 

L + 375(2)

    5.55     04/2023       1,567,914       1,562,896       2.3       1,564,974  

Prime Security Services Borrower, LLC    

 

Senior Secured First Lien

 

L + 325(2)

    4.94     09/2026       2,493,801       2,488,035       3.6       2,504,562  

 

67


Table of Contents

CBDC SENIOR LOAN FUND LLC

Consolidated Schedule of Investments

December 31, 2019

 

Company/Security/Country ***

 

Investment Type

 

Spread
Above
Index *

  Interest
Rate
    Maturity/
Dissolution
Date
    Principal
Amount, Par
Value or Shares
    Cost     Percentage
of Net
Assets **
    Fair
Value ****
 

Seattle Spinco, Inc.

 

Senior Secured First Lien

 

L + 250(2)

    4.30     06/2024     $ 1,524,288     $ 1,508,702       2.2   $ 1,529,212  

Sotera Health Holdings, LLC

 

Senior Secured First Lien

 

L + 450(1)

    6.29     12/2026       1,250,000       1,237,556       1.8       1,256,644  

Spin Holdco, Inc.

 

Senior Secured First Lien

 

L + 325(1)

    5.25     11/2022       1,985,366       1,967,912       2.9       1,973,315  

TruGreen Limited Partnership

 

Senior Secured First Lien

 

L + 375(2)

    5.55     03/2026       1,411,632       1,413,518       2.1       1,429,277  

USIC Holdings, Inc.

 

Senior Secured First Lien

 

L + 325(2)

    5.05     12/2023       1,486,115       1,474,450       2.1       1,483,336  
         

 

 

   

 

 

   

 

 

   

 

 

 
            27,384,125       27,221,243       39.8       27,397,466  
         

 

 

   

 

 

   

 

 

   

 

 

 

Cable & Satellite Television

             

Charter Communications Operating, LLC

 

Senior Secured First Lien

 

L + 175(2)

    3.55     04/2025       2,342,361       2,341,584       3.4       2,361,393  

CSC Holdings, LLC

 

Senior Secured First Lien

 

L + 225(2)

    3.99     01/2026       242,481       239,679       0.4       243,148  

CSC Holdings, LLC

 

Senior Secured First Lien

 

L + 250(2)

    4.24     04/2027       2,639,925       2,639,924       3.9       2,655,869  

Virgin Media Bristol LLC

 

Senior Secured First Lien

 

L + 250(2)

    4.24     01/2028       2,000,000       1,993,033       2.9       2,015,130  
         

 

 

   

 

 

   

 

 

   

 

 

 
            7,224,767       7,214,220       10.6       7,275,540  
         

 

 

   

 

 

   

 

 

   

 

 

 

Chemicals & Plastics

             

H.B. Fuller Company

 

Senior Secured First Lien

 

L + 200(2)

    3.76     10/2024       2,395,077       2,380,931       3.5       2,406,178  

Ineos US Finance LLC

 

Senior Secured First Lien

 

L + 200(2)

    3.80     04/2024       2,973,456       2,951,814       4.3       2,979,537  

Messer Industries GmbH

 

Senior Secured First Lien

 

L + 250(1)

    4.44     03/2026       2,237,810       2,221,207       3.2       2,252,882  

PMHC II, Inc.

 

Senior Secured First Lien

 

L + 350(1)

    5.44     03/2025       747,437       737,031       1.0       670,824  

PQ Corporation

 

Senior Secured First Lien

 

L + 250(1)

    4.43     02/2025       818,574       817,612       1.2       824,419  

Univar, Inc.

 

Senior Secured First Lien

 

L + 225(2)

    4.05     07/2024       1,500,000       1,498,324       2.2       1,508,063  
         

 

 

   

 

 

   

 

 

   

 

 

 
            10,672,354       10,606,919       15.4       10,641,903  
         

 

 

   

 

 

   

 

 

   

 

 

 

Consumer Services

             

Pre-Paid Legal Services, Inc.

 

Senior Secured First Lien

 

L + 325(2)

    5.05     05/2025       1,499,935       1,489,358       2.2       1,509,309  
         

 

 

   

 

 

   

 

 

   

 

 

 

Containers & Glass Products

             

Anchor Packaging, Inc.

 

Senior Secured First Lien

 

L + 400(2)

    5.80     07/2026       824,191       821,734       1.2       823,161  

Anchor Packaging, Inc.(4) (7)

 

Senior Secured First Lien

        07/2026       —         105       —         (226

Berlin Packaging LLC

 

Senior Secured First Lien

 

L + 300(2)

    4.70     11/2025       1,487,415       1,466,829       2.1       1,480,506  

Berry Global, Inc.

 

Senior Secured First Lien

 

L + 250(1)

    4.22     07/2026       2,985,000       2,977,964       4.4       2,997,239  

BWAY Holding Company

 

Senior Secured First Lien

 

L + 325(1)

    5.23     04/2024       1,491,084       1,454,802       2.2       1,488,758  

Consolidated Container Company LLC

 

Senior Secured First Lien

 

L + 275(2)

    4.55     05/2024       1,488,608       1,482,526       2.2       1,495,120  

Plaze, Inc.

 

Senior Secured First Lien

 

L + 350(2)

    5.19     08/2026       1,681,000       1,672,975       2.4       1,684,152  

Pro Mach Group, Inc.

 

Senior Secured First Lien

 

L + 275(2)

    4.54     03/2025       1,737,371       1,704,775       2.5       1,725,973  

Reynolds Group Holdings, Inc.

 

Senior Secured First Lien

 

L + 275(2)

    4.55     02/2023       2,976,982       2,959,993       4.3       2,990,021  

Sabert Corporation

 

Senior Secured First Lien

 

L + 450(1)

    6.25     12/2026       1,250,000       1,237,548       1.8       1,263,025  
         

 

 

   

 

 

   

 

 

   

 

 

 
            15,921,651       15,779,251       23.1       15,947,729  
         

 

 

   

 

 

   

 

 

   

 

 

 

Diversified Insurance

             

Acrisure, LLC

 

Senior Secured First Lien

 

L + 425(1)

    6.19     11/2023       2,727,795       2,731,522       4.0       2,739,729  
         

 

 

   

 

 

   

 

 

   

 

 

 

Drugs

             

Albany Molecular Research, Inc.    

 

Senior Secured First Lien

 

L + 325(2)

    5.05     08/2024       1,487,313       1,478,834       2.2       1,483,602  

Amneal Pharmaceuticals LLC

 

Senior Secured First Lien

 

L + 350(2)

    5.31     05/2025     $ 3,226,688     $ 3,202,713       4.2   $ 2,916,926  
         

 

 

   

 

 

   

 

 

   

 

 

 
            4,714,001       4,681,547       6.4       4,400,528  
         

 

 

   

 

 

   

 

 

   

 

 

 

 

68


Table of Contents

CBDC SENIOR LOAN FUND LLC

Consolidated Schedule of Investments

December 31, 2019

 

Company/Security/Country ***

 

Investment Type

 

Spread
Above
Index *

  Interest
Rate
    Maturity/
Dissolution
Date
    Principal
Amount, Par
Value or Shares
    Cost     Percentage
of Net
Assets **
    Fair
Value ****
 

Electronics/Electrical

             

Blackhawk Network Holdings, Inc.

 

Senior Secured First Lien

 

L + 300(2)

    4.80     06/2025       1,984,887       1,977,617       2.9       1,988,608  

CommScope, Inc.

 

Senior Secured First Lien

 

L + 325(2)

    5.05     04/2026       1,995,000       1,996,569       2.9       2,009,963  

Compuware Corporation

 

Senior Secured First Lien

 

L + 400(2)

    5.80     08/2025       1,986,618       1,993,420       2.9       2,002,342  

DCert Buyer, Inc.

 

Senior Secured First Lien

 

L + 400(2)

    5.80     10/2026       2,250,000       2,243,272       3.3       2,261,250  

Dell International LLC

 

Senior Secured First Lien

 

L + 200(2)

    3.80     09/2025       1,444,256       1,441,483       2.1       1,456,178  

ON Semiconductor Corporation

 

Senior Secured First Lien

 

L + 200(2)

    3.80     09/2026       770,070       768,202       1.1       776,473  

Sabre GLBL, Inc.

 

Senior Secured First Lien

 

L + 200(2)

    3.80     02/2024       1,490,154       1,488,253       2.2       1,500,608  

SS&C Technologies, Inc.

 

Senior Secured First Lien

 

L + 225(2)

    4.05     04/2025       1,270,539       1,272,755       1.8       1,280,919  

Verifone Systems, Inc.

 

Senior Secured First Lien

 

L + 400(1)

    5.90     08/2025       2,499,799       2,468,884       3.6       2,473,014  

Western Digital Corporation

 

Senior Secured First Lien

 

L + 175(1)

    3.45     04/2023       1,783,075       1,770,570       2.6       1,795,699  

WEX, Inc.

 

Senior Secured First Lien

 

L + 225(2)

    4.05     05/2026       2,992,462       2,990,752       4.4       3,015,849  
         

 

 

   

 

 

   

 

 

   

 

 

 
            20,466,860       20,411,777       29.8       20,560,903  
         

 

 

   

 

 

   

 

 

   

 

 

 

Financial Intermediaries

             

Apollo Commercial Real Estate Finance, Inc

 

Senior Secured First Lien

 

L + 275(2)

    4.49     05/2026       1,741,226       1,737,118       2.5       1,749,932  

Avolon TLB Borrower 1 (US) LLC

 

Senior Secured First Lien

 

L + 175(2)

    3.51     01/2025       3,000,000       2,997,792       4.4       3,022,500  

Citadel Securities LP

 

Senior Secured First Lien

 

L + 350(2)

    5.30     02/2026       1,532,570       1,530,778       2.2       1,541,198  

Edelman Financial Center, LLC

 

Senior Secured First Lien

 

L + 325(2)

    5.04     07/2025       743,741       744,623       1.1       749,241  

FinCo I LLC

 

Senior Secured First Lien

 

L + 200(2)

    3.80     12/2022       1,500,000       1,497,899       2.2       1,510,320  

Focus Financial Partners, LLC

 

Senior Secured First Lien

 

L + 250(2)

    4.30     07/2024       994,950       994,142       1.4       1,003,123  

Jefferies Finance LLC

 

Senior Secured First Lien

 

L + 375(2)

    5.50     06/2026       1,502,446       1,504,417       2.2       1,500,883  

Kestra Advisor Services Holdings A, Inc.

 

Senior Secured First Lien

 

L + 425(2)

    6.20     06/2026       782,028       774,739       1.1       782,028  

RPI Finance Trust

 

Senior Secured First Lien

 

L + 200(2)

    3.80     03/2023       2,911,090       2,908,668       4.3       2,938,847  

Sedgwick Claims Management Services, Inc.

 

Senior Secured First Lien

 

L + 325(2)

    5.05     12/2025       2,250,784       2,232,004       3.3       2,255,005  

Starwood Property Trust, Inc.

 

Senior Secured First Lien

 

L + 250(2)

    4.30     07/2026       754,110       754,101       1.1       760,241  

VFH Parent LLC

 

Senior Secured First Lien

 

L + 350(2)

    5.20     03/2026       1,705,046       1,708,127       2.5       1,713,785  

Victory Capital Holdings, Inc.

 

Senior Secured First Lien

 

L + 325(1)

    5.35     07/2026       861,485       860,458       1.3       868,618  
         

 

 

   

 

 

   

 

 

   

 

 

 
            20,279,476       20,244,866       29.6       20,395,721  
         

 

 

   

 

 

   

 

 

   

 

 

 

Food products

             

Dole Food Company, Inc.

 

Senior Secured First Lien

 

L + 275(2)

    4.51     04/2024       1,965,643       1,955,878       2.9       1,966,164  

Hearthside Food Solutions, LLC

 

Senior Secured First Lien

 

L + 369(2)

    5.49     05/2025       1,739,282       1,710,419       2.5       1,727,107  
         

 

 

   

 

 

   

 

 

   

 

 

 
            3,704,925       3,666,297       5.4       3,693,271  
         

 

 

   

 

 

   

 

 

   

 

 

 

 

69


Table of Contents

CBDC SENIOR LOAN FUND LLC

Consolidated Schedule of Investments

December 31, 2019

 

Company/Security/Country ***

 

Investment Type

 

Spread
Above
Index *

  Interest
Rate
    Maturity/
Dissolution
Date
    Principal
Amount, Par
Value or Shares
    Cost     Percentage
of Net
Assets **
    Fair
Value ****
 

Food Service

             

Aramark Services, Inc.(8)    

 

Senior Secured First Lien

        01/2027       627,000       626,216       0.9       631,116  

IRB Holding Corp

 

Senior Secured First Lien

 

L + 325(1)

    5.22     02/2025     $ 2,233,583     $ 2,228,957       3.3   $ 2,250,804  

Whatabrands LLC

 

Senior Secured First Lien

 

L + 325(2)

    4.94     08/2026       734,160       734,558       1.1       739,273  
         

 

 

   

 

 

   

 

 

   

 

 

 
            3,594,743       3,589,731       5.3       3,621,193  
         

 

 

   

 

 

   

 

 

   

 

 

 

Food/Drug Retailers

             

BJ’s Wholesale Club, Inc.

 

Senior Secured First Lien

 

L + 275(2)

    4.49     02/2024       1,440,019       1,443,837       2.1       1,451,720  
         

 

 

   

 

 

   

 

 

   

 

 

 

Health Care

             

ADMI Corp.

 

Senior Secured First Lien

 

L + 275(2)

    4.55     04/2025       997,468       986,526       1.5       1,000,590  

Athenahealth, Inc.

 

Senior Secured First Lien

 

L + 450(1)

    6.40     02/2026       1,488,750       1,477,468       2.2       1,498,672  

ATI Holdings Acquisition, Inc.

 

Senior Secured First Lien

 

L + 350(2)

    5.30     05/2023       1,732,687       1,710,470       2.5       1,729,083  

Avantor, Inc.

 

Senior Secured First Lien

 

L + 300(2)

    4.80     11/2024       308,063       309,131       0.5       311,271  

Comet Acquisition, Inc.

 

Senior Secured First Lien

 

L + 350(1)

    5.41     10/2025       1,488,722       1,487,583       2.1       1,467,627  

Da Vinci Purchaser Corp.(8)

 

Senior Secured First Lien

        12/2026       1,216,000       1,205,168       1.8       1,219,040  

DaVita, Inc.

 

Senior Secured First Lien

 

L + 225(2)

    4.05     08/2026       1,426,425       1,422,985       2.1       1,439,413  

Emerald TopCo Inc.

 

Senior Secured First Lien

 

L + 350(2)

    5.30     07/2026       1,734,653       1,732,053       2.5       1,746,856  

Envision Healthcare Corporation

 

Senior Secured First Lien

 

L + 375(2)

    5.55     10/2025       1,486,861       1,426,936       1.8       1,275,600  

Gentiva Health Services, Inc.

 

Senior Secured First Lien

 

L + 375(2)

    5.56     07/2025       2,203,892       2,206,495       3.2       2,218,360  

HCA, Inc.

 

Senior Secured First Lien

 

L + 175(2)

    3.55     03/2025       741,219       742,037       1.1       746,363  

Heartland Dental, LLC

 

Senior Secured First Lien

 

L + 375(2)

    5.55     04/2025       1,208,268       1,188,775       1.7       1,205,748  

Heartland Dental, LLC(4) (9)

 

Senior Secured First Lien

        04/2025       —         (433     —         (57

IQVIA, Inc.

 

Senior Secured First Lien

 

L + 175(1)

    3.69     06/2025       1,486,171       1,482,754       2.2       1,495,928  

Parexel International Corporation(8)

 

Senior Secured First Lien

        09/2024       997,169       982,212       1.4       980,965  

RegionalCare Hospital Partners Holdings, Inc.

 

Senior Secured First Lien

 

L + 450(2)

    6.30     11/2025       494,375       492,700       0.7       499,010  

Surgery Center Holdings, Inc.

 

Senior Secured First Lien

 

L + 325(2)

    5.05     09/2024