UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | |
⌧ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2021 | |
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: 814-00939
MSC Income Fund, Inc.
(Exact name of registrant as specified in its charter)
Maryland | 45-3999996 |
1300 Post Oak Boulevard, 8th Floor | 77056 |
(713) 350-6000
(Registrant’s telephone number including area code)
n/a
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
| Trading Symbol |
| Name of Each Exchange on Which |
None | | N/A | | N/A |
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ◻ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth 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 ◻ |
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 Exchange Act). Yes ◻ No ⌧
The number of shares outstanding of the issuer’s common stock as of November 12, 2021 was 79,826,954.
MSC Income Fund, Inc.
(dollars in thousands, except shares and per share amounts)
| | September 30, | | December 31, | ||
|
| 2021 |
| 2020 | ||
| | (unaudited) | | | | |
ASSETS |
| | |
| |
|
Investments at fair value: |
| | |
| |
|
Control investments (cost: $18,223 and $18,152 as of September 30, 2021 and December 31, 2020, respectively) | | $ | 34,471 | | $ | 33,831 |
Affiliate investments (cost: $194,908 and $143,740 as of September 30, 2021 and December 31, 2020, respectively) | |
| 218,875 | |
| 157,690 |
Non‑Control/Non‑Affiliate investments (cost: $783,920 and $678,764 as of September 30, 2021 and December 31, 2020, respectively) | |
| 748,934 | |
| 634,001 |
Total investments (cost: $997,051 and $840,656 as of September 30, 2021 and December 31, 2020, respectively) | |
| 1,002,280 | |
| 825,522 |
Cash and cash equivalents | |
| 21,442 | |
| 8,586 |
Restricted cash | | | — | | | 40,480 |
Dividends and interest receivable | |
| 10,728 | |
| 8,303 |
Receivable for securities sold | | | 563 | | | — |
Deferred financing costs (net of accumulated amortization of $960 and $4,443 as of September 30, 2021 and December 31, 2020, respectively) | |
| 4,321 | |
| 2,691 |
Prepaids and other assets | | | 1,462 | | | 2,439 |
Total assets | | $ | 1,040,796 | | $ | 888,021 |
LIABILITIES | |
| | |
| |
Credit facilities | | $ | 353,688 | | $ | 301,816 |
Unsecured term debt | |
| 60,000 |
|
| — |
Accounts payable and other liabilities | |
| 2,712 |
|
| 2,093 |
Interest payable | |
| 3,441 | |
| 286 |
Dividend payable | |
| 11,964 | |
| — |
Management fees payable | | | 4,473 | | | 4,202 |
Payable for securities purchased | | | 1,169 | | | — |
Total liabilities | |
| 437,447 | |
| 308,397 |
Commitments and contingencies (Note I) | |
| | |
| |
NET ASSETS | |
| | |
| |
Common stock, $0.001 par value per share (150,000,000 shares authorized, 79,756,378 and 79,608,304 issued and outstanding at September 30, 2021 and December 31, 2020, respectively) | |
| 80 | |
| 80 |
Additional paid‑in capital | |
| 683,194 | |
| 682,028 |
Total undistributed (overdistributed) earnings | |
| (79,925) | |
| (102,484) |
Total net assets | |
| 603,349 | |
| 579,624 |
Total liabilities and net assets | | $ | 1,040,796 | | $ | 888,021 |
NET ASSET VALUE PER SHARE | | $ | 7.56 | | $ | 7.28 |
The accompanying notes are an integral part of these consolidated financial statements
1
MSC Income Fund, Inc.
Consolidated Statements of Operations
(dollars in thousands, except shares and per share amounts)
(unaudited)
| | Three Months Ended | | Nine Months Ended | | ||||||||
|
| September 30, | | September 30, |
| ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | | ||||
INVESTMENT INCOME: |
| |
|
| |
|
| |
|
| |
|
|
Interest, fee and dividend income: |
| | | | | |
| |
|
| |
|
|
Control investments | | $ | 845 | | $ | 780 | | $ | 2,188 | | $ | 1,876 | |
Affiliate investments | |
| 5,365 | | | 3,676 | |
| 13,461 | |
| 11,129 | |
Non‑Control/Non‑Affiliate investments | |
| 16,544 | | | 15,063 | |
| 49,873 | |
| 52,761 | |
Total investment income | |
| 22,754 | | | 19,519 | |
| 65,522 | |
| 65,766 | |
EXPENSES: | |
| | | | | |
| | |
| | |
Interest | |
| 3,759 | | | 4,000 | |
| 10,223 | |
| 13,503 | |
Base management fees | |
| 4,473 | | | 4,701 | |
| 12,534 | |
| 14,325 | |
Internal administrative service expenses | | | 1,152 | | | 959 | | | 3,247 | | | 2,495 | |
Offering costs | | | 55 | | | 28 | | | 110 | | | 205 | |
Professional fees | | | 490 | | | 226 | | | 1,298 | | | 1,726 | |
Insurance | | | 114 | | | 103 | | | 343 | | | 310 | |
Board of director fees | | | 97 | | | 86 | | | 295 | | | 309 | |
General and administrative | | | 644 | | | 388 | | | 1,411 | | | 863 | |
Total expenses before fee and expense waivers | | | 10,784 | | | 10,491 | | | 29,461 | | | 33,736 | |
Waiver of internal administrative services expenses | |
| (1,152) | | | (959) | |
| (3,247) | |
| (2,495) | |
Total expenses, net of fee and expense waivers | |
| 9,632 | | | 9,532 | |
| 26,214 | |
| 31,241 | |
NET INVESTMENT INCOME | |
| 13,122 | | | 9,987 | |
| 39,308 | |
| 34,525 | |
NET REALIZED GAIN (LOSS): | |
| | | | | |
| | |
| | |
Affiliate investments | |
| (203) | | | — | |
| (2,673) | |
| (4,054) | |
Non‑Control/Non‑Affiliate investments | |
| (3,473) | | | (17,868) | |
| (1,176) | |
| (31,507) | |
Realized loss on extinguishment of debt | | | — | | | — | | | (2,091) | | | — | |
Total net realized gain (loss) | |
| (3,676) | | | (17,868) | |
| (5,940) | |
| (35,561) | |
NET UNREALIZED APPRECIATION (DEPRECIATION): | |
| | | | | |
| | |
| | |
Control investments | |
| 572 | | | 300 | |
| 569 | |
| (881) | |
Affiliate investments | |
| 3,987 | | | 4,157 | |
| 10,017 | |
| 2,617 | |
Non‑Control/Non‑Affiliate investments | |
| 2,784 | | | 43,467 | |
| 9,777 | |
| (24,753) | |
Total net unrealized appreciation (depreciation) | |
| 7,343 | | | 47,924 | |
| 20,363 | |
| (23,017) | |
INCOME TAXES: | |
| | | | | |
| | |
| | |
Federal and state income, excise and other taxes | |
| 453 | | | 97 | |
| 1,283 | |
| 192 | |
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | | $ | 16,336 | | $ | 39,946 | | $ | 52,448 | | $ | (24,245) | |
NET INVESTMENT INCOME PER SHARE—BASIC AND DILUTED | | $ | 0.16 | | $ | 0.12 | | $ | 0.49 | | $ | 0.43 | |
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS PER | | $ | 0.20 | | $ | 0.50 | | $ | 0.66 | | $ | (0.31) | |
WEIGHTED-AVERAGE SHARES | |
| 79,908,827 | | | 79,608,304 | |
| 79,831,292 | |
| 79,079,204 | |
The accompanying notes are an integral part of these consolidated financial statements
2
MSC Income Fund, Inc.
Consolidated Statements of Changes in Net Assets
(dollars in thousands, except shares)
(unaudited)
| | | | | | | | | | Total | | | | |
| | Common Stock | | Additional | | Undistributed | | | | |||||
| | Number of | | Par | | Paid‑In | | (Overdistributed) | | Total Net | ||||
|
| Shares |
| Value |
| Capital |
| Earnings |
| Asset Value | ||||
Balances at December 31, 2019 |
| 78,463,377 | | $ | 78 | | $ | 675,554 | | $ | (66,327) | | $ | 609,305 |
Dividend reinvestment |
| 751,240 | | | 1 | | | 5,898 | | | — | | | 5,899 |
Common stock repurchased |
| (791,488) | | | (1) | | | (6,093) | | | — | | | (6,094) |
Net decrease resulting from operations |
| — | | | — | | | — | | | (85,816) | | | (85,816) |
Dividends to stockholders |
| — | | | — | | | — | | | (13,730) | | | (13,730) |
Balances at March 31, 2020 |
| 78,423,129 | | $ | 78 | | $ | 675,359 | | $ | (165,873) | | $ | 509,564 |
Dividend reinvestment |
| 894,499 | | | 1 | | | 5,875 | | | — | | | 5,876 |
Net increase resulting from operations |
| — | | | — | | | — | | | 21,625 | | | 21,625 |
Dividends to stockholders |
| — | | | — | | | — | | | (13,790) | | | (13,790) |
Balances at June 30, 2020 |
| 79,317,628 | | $ | 79 | | $ | 681,234 | | $ | (158,038) | | $ | 523,275 |
Dividend reinvestment | | 290,676 | | | 1 | | | 1,919 | | | — | | | 1,920 |
Net increase resulting from operations | | — | | | — | | | — | | | 39,946 | | | 39,946 |
Dividends to stockholders | | — | | | — | | | — | | | — | | | — |
Balances at September 30, 2020 | | 79,608,304 | | $ | 80 | | $ | 683,153 | | $ | (118,092) | | $ | 565,141 |
| | | | | | | | | | | | | | |
Balances at December 31, 2020 |
| 79,608,304 | | $ | 80 | | $ | 682,028 | | $ | (102,484) | | $ | 579,624 |
Net increase resulting from operations | | — | | | — | | | — | | | 12,657 | | | 12,657 |
Dividends to stockholders | | — | | | — | | | — | | | (7,961) | | | (7,961) |
Balances at March 31, 2021 | | 79,608,304 | | $ | 80 | | $ | 682,028 | | $ | (97,788) | | $ | 584,320 |
Offering of common stock | | 67,114 | | | — | | | 500 | | | — | | | 500 |
Dividend reinvestment | | 424,455 | | | — | | | 3,162 | | | — | | | 3,162 |
Common stock repurchased | | (383,512) | | | — | | | (2,861) | | | — | | | (2,861) |
Net increase resulting from operations | | — | | | — | | | — | | | 23,455 | | | 23,455 |
Dividends to stockholders | | — | | | — | | | — | | | (9,964) | | | (9,964) |
Balances at June 30, 2021 | | 79,716,361 | | $ | 80 | | $ | 682,829 | | $ | (84,297) | | $ | 598,612 |
Dividend reinvestment | | 478,309 | | | 1 | | | 3,682 | | | — | | | 3,683 |
Common stock repurchased | | (438,292) | | | (1) | | | (3,317) | | | — | | | (3,318) |
Net increase resulting from operations | | — | | | — | | | — | | | 16,336 | | | 16,336 |
Dividends to stockholders | | — | | | — | | | — | | | (11,964) | | | (11,964) |
Balances at September 30, 2021 | | 79,756,378 | | $ | 80 | | $ | 683,194 | | $ | (79,925) | | $ | 603,349 |
The accompanying notes are an integral part of these consolidated financial statements
3
MSC Income Fund, Inc.
Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
| | Nine Months Ended | ||||
| | September 30, | ||||
| | 2021 | | 2020 | ||
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
Net increase (decrease) in net assets resulting from operations | | $ | 52,448 | | $ | (24,245) |
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities: | | | | | | |
Investments in portfolio companies | | | (334,947) | | | (72,635) |
Proceeds from sales and repayments of debt investments in portfolio companies | | | 182,367 | | | 147,792 |
Net unrealized (appreciation) depreciation | | | (20,363) | | | 23,017 |
Net realized loss on the sale of portfolio investments | | | 3,986 | | | 35,561 |
Realized loss on extinguishment of debt | | | 2,091 | | | — |
Amortization of deferred financing costs | | | 886 | | | 1,078 |
Amortization of deferred offering costs | | | 110 | | | 205 |
Accretion of unearned income | | | (3,425) | | | (4,230) |
Payment-in-kind interest | | | (4,376) | | | (3,230) |
Changes in other assets and liabilities: | | | | | | |
Dividends and interest receivable | | | (2,425) | | | 171 |
Receivable for investments sold | | | (563) | | | — |
Prepaid and other assets | | | 977 | | | 1,560 |
Payable for investments purchased | | | 1,169 | | | — |
Management fees payable | | | 272 | | | (690) |
Interest payable | | | 3,155 | | | — |
Accounts payable and other liabilities | | | 619 | | | 380 |
Net cash provided by (used in) operating activities | | | (118,019) | | | 104,734 |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | |
Proceeds from offering of common stock | | | 500 | | | — |
Redemption of common stock | | | (6,179) | | | (6,094) |
Payment of offering costs | | | (110) | | | (205) |
Dividends paid | | | (11,081) | | | (18,494) |
Repayments on Credit Facilities payable | | | (340,816) | | | (149,198) |
Proceeds from Credit Facilities payable | | | 392,688 | | | 79,327 |
Proceeds from unsecured term debt | | | 60,000 | | | — |
Payment of deferred financing costs | | | (4,607) | | | (623) |
Net cash provided by (used in) financing activities | | | 90,395 | | | (95,287) |
Net increase (decrease) in cash, cash equivalents and restricted cash | | | (27,624) | | | 9,447 |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD | | | 49,066 | | | 21,846 |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD | | $ | 21,442 | | $ | 31,293 |
| | | | | | |
Supplemental cash flow disclosures: | | | | | | |
Interest paid | | $ | 6,183 | | $ | 12,294 |
Taxes paid | | $ | 1,328 | | $ | 795 |
Non-cash financing activities: | | | | | | |
Dividends declared and unpaid | | $ | 11,964 | | $ | — |
Value of shares issued pursuant to the dividend reinvestment plan | | $ | 6,845 | | $ | 13,695 |
The accompanying notes are an integral part of these consolidated financial statements
4
MSC Income Fund, Inc.
Consolidated Schedule of Investments
September 30, 2021
(dollars in thousands)
(unaudited)
Portfolio Company (1) (20) | | Investment Date (22) | Business Description | Type of Investment (2) (3) (15) | | Shares/Units | Rate | Maturity Date | Principal (4) | Cost (4) | Fair Value (18) | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Control Investments (5) | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Copper Trail Fund Investments | (12) (13) | July 17, 2017 | Investment Partnership | | | | | | | | | | | |
| | | | LP Interests (CTMH, LP) | (24) | 38.8% | | | | | $ | 835 | $ | 710 |
| | | | | | | | | | | | | | |
GRT Rubber Technologies LLC | | December 19, 2014 | Manufacturer of Engineered Rubber Products | | | | | | | | | | | |
| | | | Secured Debt | | | 7.10% (L+7.00%) | 12/31/2023 | | 8,262 | | 8,250 | | 8,250 |
| | | | Member Units | (8) | 2,896 | | | | | | 6,435 | | 22,120 |
| | | | | | | | | | | | 14,685 | | 30,370 |
Harris Preston Fund Investments | (12) (13) | October 1, 2017 | Investment Partnership | | | | | | | | | | | |
| | | | LP Interests (2717 MH, L.P.) | (24) | 49.3% | | | | | | 2,703 | | 3,391 |
| | | | | | | | | | | | | | |
Subtotal Control Investments (5.7% of net assets at fair value) | | | | | | | | | | | $ | 18,223 | $ | 34,471 |
Affiliate Investments (6) | | | | | | | | | | | | | | |
AFG Capital Group, LLC | | November 7, 2014 | Provider of Rent-to-Own Financing Solutions and Services | | | | | | | | | | | |
| | | | Secured Debt | | | 10.00% | 5/25/2022 | | 58 | | 58 | | 58 |
| | | | Preferred Member Units | (8) | 46 | | | | | | 300 | | 1,850 |
| | | | | | | | | | | | 358 | | 1,908 |
Analytical Systems Keco Holdings, LLC | | August 16, 2019 | Manufacturer of Liquid and Gas Analyzers | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 12.00% (L+10.00%, Floor 2.00%) | 8/16/2024 | | 1,254 | | 1,191 | | 1,191 |
| | | | Preferred Member Units | | 800 | | | | | | 800 | | - |
| | | | Preferred Member Units | | 607 | | | | | | 607 | | 1,200 |
| | | | Warrants | (27) | 105 | | 8/16/2029 | | | | 79 | | - |
| | | | | | | | | | | | 2,677 | | 2,391 |
ATX Networks Corp. | (11) | June 30, 2015 | Provider of Radio Frequency Management Equipment | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 8.50% (L+7.50%, Floor 1.00%) | 9/1/2026 | | 7,698 | | 7,121 | | 7,121 |
| | | | Unsecured Debt | (19) | | 10.00% PIK | 9/1/2028 | | 3,082 | | 1,973 | | 1,973 |
| | | | Common Stock | | 585 | | | | | | - | | - |
| | | | | | | | | | | | 9,094 | | 9,094 |
Barfly Ventures, LLC | (10) | August 31, 2015 | Casual Restaurant Group | | | | | | | | | | | |
| | | | Member Units | | 12 | | | | | | 528 | | 643 |
| | | | | | | | | | | | | | |
Brewer Crane Holdings, LLC | | January 9, 2018 | Provider of Crane Rental and Operating Services | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 11.00% (L+10.00%, Floor 1.00%) | 1/9/2023 | | 2,046 | | 2,033 | | 2,033 |
5
MSC Income Fund, Inc.
Consolidated Schedule of Investments (Continued)
September 30, 2021
(dollars in thousands)
(unaudited)
Portfolio Company (1) (20) | | Investment Date (22) | Business Description | Type of Investment (2) (3) (15) | | Shares/Units | Rate | Maturity Date | Principal (4) | Cost (4) | Fair Value (18) | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | Preferred Member Units | (8) | 737 | | | | | | 1,070 | | 1,070 |
| | | | | | | | | | | | 3,103 | | 3,103 |
Centre Technologies Holdings, LLC | | January 4, 2019 | Provider of IT Hardware Services and Software Solutions | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 12.00% (L+10.00%, Floor 2.00%) | 1/4/2024 | | 2,392 | | 2,367 | | 2,367 |
| | | | Preferred Member Units | | 3,174 | | | | | | 1,460 | | 1,460 |
| | | | | | | | | | | | 3,827 | | 3,827 |
Chamberlin Holding LLC | | February 26, 2018 | Roofing and Waterproofing Specialty Contractor | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 9.00% (L+8.00%, Floor 1.00%) | 2/26/2023 | | 4,454 | | 4,396 | | 4,454 |
| | | | Member Units | (8) | 1,087 | | | | | | 2,860 | | 6,030 |
| | | | Member Units | (8) (23) | 261,786 | | | | | | 330 | | 358 |
| | | | | | | | | | | | 7,586 | | 10,842 |
Charps, LLC | | February 3, 2017 | Pipeline Maintenance and Construction | | | | | | | | | | | |
| | | | Preferred Member Units | (8) | 400 | | | | | | 100 | | 3,560 |
| | | | | | | | | | | | | | |
Clad-Rex Steel, LLC | | December 20, 2016 | Specialty Manufacturer of Vinyl-Clad Metal | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 10.50% (L+9.50%, Floor 1.00%) | 1/15/2024 | | 2,620 | | 2,617 | | 2,617 |
| | | | Member Units | (8) | 179 | | | | | | 1,820 | | 2,560 |
| | | | Secured Debt | | | 10.00% | 12/20/2036 | | 272 | | 270 | | 270 |
| | | | Member Units | (23) | 200 | | | | | | 53 | | 133 |
| | | | | | | | | | | | 4,760 | | 5,580 |
Cody Pools, Inc. | | March 6, 2020 | Designer of Residential and Commercial Pools | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 12.25% (L+10.50%, Floor 1.75%) | 3/6/2025 | | 4,512 | | 4,432 | | 4,509 |
| | | | Preferred Member Units | (8) | 147 | | | | | | 2,079 | | 7,600 |
| | | | | | | | | | | | 6,511 | | 12,109 |
Colonial Electric Company LLC | | March 31, 2021 | Provider of Electrical Contracting Services | | | | | | | | | | | |
| | | | Secured Debt | | | 12.00% | 3/31/2026 | | 6,221 | | 6,077 | | 6,077 |
| | | | Preferred Member Units | | 4,320 | | | | | | 1,920 | | 2,110 |
| | | | | | | | | | | | 7,997 | | 8,187 |
Datacom, LLC | | May 30, 2014 | Technology and Telecommunications Provider | | | | | | | | | | | |
| | | | Secured Debt | | | 5.00% | 12/31/2025 | | 991 | | 901 | | 901 |
| | | | Preferred Member Units | | 1,000 | | | | | | 290 | | 290 |
| | | | | | | | | | | | 1,191 | | 1,191 |
6
MSC Income Fund, Inc.
Consolidated Schedule of Investments (Continued)
September 30, 2021
(dollars in thousands)
(unaudited)
Portfolio Company (1) (20) | | Investment Date (22) | Business Description | Type of Investment (2) (3) (15) | | Shares/Units | Rate | Maturity Date | Principal (4) | Cost (4) | Fair Value (18) | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Digital Products Holdings LLC | | April 1, 2018 | Designer and Distributor of Consumer Electronics | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 11.00% (L+10.00%, Floor 1.00%) | 4/1/2023 | | 4,296 | | 4,262 | | 4,262 |
| | | | Preferred Member Units | (8) | 964 | | | | | | 2,375 | | 2,459 |
| | | | | | | | | | | | 6,637 | | 6,721 |
Direct Marketing Solutions, Inc. | | February 13, 2018 | Provider of Omni-Channel Direct Marketing Services | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 12.00% (L+11.00%, Floor 1.00%) | 2/13/2023 | | 3,714 | | 3,677 | | 3,677 |
| | | | Preferred Stock | (8) | 2,100 | | | | | | 2,100 | | 4,290 |
| | | | | | | | | | | | 5,777 | | 7,967 |
Freeport Financial Funds | (12) (13) | June 13, 2013 | Investment Partnership | | | | | | | | | | | |
| | | | LP Interests (Freeport First Lien Loan Fund III LP) | (8) (24) | 6.0% | | | | | | 7,629 | | 7,231 |
| | | | | | | | | | | | | | |
Gamber-Johnson Holdings, LLC | | June 24, 2016 | Manufacturer of Ruggedized Computer Mounting Systems | | | | | | | | | | | |
| | | | Secured Debt | (9) (17) | | 9.00% (L+7.00%, Floor 2.00%) | 6/24/2021 | | 5,160 | | 5,160 | | 5,160 |
| | | | Member Units | (8) | 2,261 | | | | | | 4,423 | | 13,840 |
| | | | | | | | | | | | 9,583 | | 19,000 |
GFG Group, LLC. | | July 31, 2015 | Grower and Distributor of a Variety of Plants and Products to Other Wholesalers, Retailers and Garden Centers | | | | | | | | | | | |
| | | | Secured Debt | | | 12.00% | 3/31/2026 | | 3,136 | | 3,049 | | 3,049 |
| | | | Preferred Member Units | (8) | 56 | | | | | | 1,225 | | 1,750 |
| | | | | | | | | | | | 4,274 | | 4,799 |
Gulf Publishing Holdings, LLC | | April 29, 2016 | Energy Industry Focused Media and Publishing | | | | | | | | | | | |
| | | | Secured Debt | (9) (17) (19) | | 10.50% (5.25% Cash, 5.25% PIK) (L+9.50%, Floor 1.00%) | 9/30/2020 | | 64 | | 64 | | 64 |
| | | | Secured Debt | (17) (19) | | 12.50% (6.25% Cash, 6.25% PIK) | 4/29/2021 | | 3,391 | | 3,391 | | 2,616 |
| | | | Member Units | | 920 | | | | | | 920 | | - |
| | | | | | | | | | | | 4,375 | | 2,680 |
Harris Preston Fund Investments | (12) (13) | August 9, 2017 | Investment Partnership | | | | | | | | | | | |
| | | | LP Interests (HPEP 3, L.P.) | (24) | 8.2% | | | | | | 3,193 | | 4,183 |
| | | | | | | | | | | | | | |
7
MSC Income Fund, Inc.
Consolidated Schedule of Investments (Continued)
September 30, 2021
(dollars in thousands)
(unaudited)
Portfolio Company (1) (20) | | Investment Date (22) | Business Description | Type of Investment (2) (3) (15) | | Shares/Units | Rate | Maturity Date | Principal (4) | Cost (4) | Fair Value (18) | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Hawk Ridge Systems, LLC | (13) | December 2, 2016 | Value-Added Reseller of Engineering Design and Manufacturing Solutions | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.00% (L+6.00%, Floor 1.00%) | 12/2/2023 | | 646 | | 646 | | 646 |
| | | | Secured Debt | | | 9.00% | 12/2/2023 | | 3,350 | | 3,347 | | 3,350 |
| | | | Preferred Member Units | (8) | 56 | | | | | | 713 | | 3,290 |
| | | | Preferred Member Units | (23) | 56 | | | | | | 38 | | 170 |
| | | | | | | | | | | | 4,744 | | 7,456 |
J&J Services, Inc. | | October 31, 2019 | Provider of Dumpster and Portable Toilet Rental Services | | | | | | | | | | | |
| | | | Secured Debt | | | 11.50% | 10/31/2024 | | 2,700 | | 2,665 | | 2,700 |
| | | | Preferred Stock | | 703 | | | | | | 1,771 | | 3,850 |
| | | | | | | | | | | | 4,436 | | 6,550 |
Kickhaefer Manufacturing Company, LLC | | October 31, 2018 | Precision Metal Parts Manufacturing | | | | | | | | | | | |
| | | | Secured Debt | | | 11.50% | 10/31/2023 | | 5,104 | | 5,032 | | 5,032 |
| | | | Member Units | | 145 | | | | | | 3,060 | | 3,060 |
| | | | Secured Debt | | | 9.00% | 10/31/2048 | | 982 | | 972 | | 972 |
| | | | Member Units | (8) (23) | 200 | | | | | | 248 | | 302 |
| | | | | | | | | | | | 9,312 | | 9,366 |
Market Force Information, LLC | | July 28, 2017 | Provider of Customer Experience Management Services | | | | | | | | | | | |
| | | | Secured Debt | (14) (19) | | 12.00% PIK | 7/28/2023 | | 6,520 | | 6,463 | | 2,790 |
| | | | Member Units | | 185,980 | | | | | | 4,160 | | - |
| | | | | | | | | | | | 10,623 | | 2,790 |
MH Corbin Holding LLC | | August 31, 2015 | Manufacturer and Distributor of Traffic Safety Products | | | | | | | | | | | |
| | | | Secured Debt | | | 13.00% | 3/31/2022 | | 2,083 | | 2,078 | | 1,502 |
| | | | Preferred Member Units | | 16,500 | | | | | | 1,100 | | - |
| | | | Preferred Member Units | | 1,000 | | | | | | 1,500 | | - |
| | | | | | | | | | | | 4,678 | | 1,502 |
Mystic Logistics Holdings, LLC | | August 18, 2014 | Logistics and Distribution Services Provider for Large Volume Mailers | | | | | | | | | | | |
| | | | Secured Debt | | | 12.00% | 1/17/2022 | | 1,677 | | 1,677 | | 1,677 |
| | | | Common Stock | (8) | 1,468 | | | | | | 680 | | 1,792 |
| | | | | | | | | | | | 2,357 | | 3,469 |
NexRev LLC | | February 28, 2018 | Provider of Energy Efficiency Products & Services | | | | | | | | | | | |
| | | | Secured Debt | | | 11.00% | 2/28/2023 | | 4,111 | | 4,082 | | 3,687 |
| | | | Preferred Member Units | (8) | 21,600,000 | | | | | | 1,720 | | 820 |
| | | | | | | | | | | | 5,802 | | 4,507 |
8
MSC Income Fund, Inc.
Consolidated Schedule of Investments (Continued)
September 30, 2021
(dollars in thousands)
(unaudited)
Portfolio Company (1) (20) | | Investment Date (22) | Business Description | Type of Investment (2) (3) (15) | | Shares/Units | Rate | Maturity Date | Principal (4) | Cost (4) | Fair Value (18) | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
NuStep, LLC | | January 31, 2017 | Designer, Manufacturer and Distributor of Fitness Equipment | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.50% (L+6.50%, Floor 1.00%) | 1/31/2025 | | 400 | | 400 | | 400 |
| | | | Secured Debt | | | 10.50% | 1/31/2025 | | 4,310 | | 4,303 | | 4,310 |
| | | | Preferred Member Units | | 102 | | | | | | 2,550 | | 3,380 |
| | | | | | | | | | | | 7,253 | | 8,090 |
Oneliance, LLC | | August 6, 2021 | Construction Cleaning Company | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 12.00% (L+11.00%, Floor 1.00%) | 8/6/2026 | | 1,400 | | 1,373 | | 1,373 |
| | | | Preferred Stock | | 264 | | | | | | 264 | | 264 |
| | | | | | | | | | | | 1,637 | | 1,637 |
Orttech Holdings, LLC | | July 30, 2021 | Distributor of Industrial Clutches, Brakes and Other Components | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 12.00% (L+11.00%, Floor 1.00%) | 7/31/2026 | | 6,094 | | 5,972 | | 5,972 |
| | | | Preferred Stock | (23) | 2,900 | | | | | | 2,900 | | 2,900 |
| | | | | | | | | | | | 8,872 | | 8,872 |
SI East, LLC | | August 31, 2018 | Rigid Industrial Packaging Manufacturing | | | | | | | | | | | |
| | | | Secured Debt | | | 10.25% | 8/31/2023 | | 21,200 | | 21,134 | | 21,200 |
| | | | Preferred Member Units | (8) | 52 | | | | | | 406 | | 3,470 |
| | | | | | | | | | | | 21,540 | | 24,670 |
Sonic Systems International, LLC | (10) | August 20, 2021 | Nuclear Power Staffing Services | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 8.50% (L+7.50%, Floor 1.00%) | 8/20/2026 | | 14,000 | | 13,725 | | 13,725 |
| | | | Common Stock | | 9,191 | | | | | | 1,250 | | 1,250 |
| | | | | | | | | | | | 14,975 | | 14,975 |
Tedder Industries, LLC | | August 31, 2018 | Manufacturer of Firearm Holsters and Accessories | | | | | | | | | | | |
| | | | Secured Debt | | | 12.00% | 8/31/2022 | | 4,200 | | 4,147 | | 4,147 |
| | | | Preferred Member Units | | 120 | | | | | | 2,034 | | 2,034 |
| | | | | | | | | | | | 6,181 | | 6,181 |
Trantech Radiator Topco, LLC | | May 31, 2019 | Transformer Cooling Products and Services | | | | | | | | | | | |
| | | | Secured Debt | | | 12.00% | 5/31/2024 | | 2,180 | | 2,134 | | 2,134 |
| | | | Common Stock | (8) | 154 | | | | | | 1,164 | | 1,660 |
| | | | | | | | | | | | 3,298 | | 3,794 |
Subtotal Affiliate Investments (36.3% of net assets at fair value) | | | | | | | | | | | $ | 194,908 | $ | 218,875 |
9
MSC Income Fund, Inc.
Consolidated Schedule of Investments (Continued)
September 30, 2021
(dollars in thousands)
(unaudited)
Portfolio Company (1) (20) | | Investment Date (22) | Business Description | Type of Investment (2) (3) (15) | | Shares/Units | Rate | Maturity Date | Principal (4) | Cost (4) | Fair Value (18) | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Non-Control/Non-Affiliate Investments (7) | | | | | | | | | | | | | | |
AAC Holdings, Inc. | (11) | June 30, 2017 | Substance Abuse Treatment Service Provider | | | | | | | | | | | |
| | | | Secured Debt | (19) | | 18.00% (10.00% Cash, 8.00% PIK) | 6/25/2025 | | 3,563 | | 3,253 | | 3,461 |
| | | | Common Stock | | 593,927 | | | | | | 3,148 | | 2,110 |
| | | | Warrants | (29) | 197,717 | | 12/11/2025 | | | | - | | 703 |
| | | | | | | | | | | | 6,401 | | 6,274 |
Adams Publishing Group, LLC | (10) | November 19, 2015 | Local Newspaper Operator | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 8.75% (L+7.00%, Floor 1.75%) | 7/3/2023 | | 4,920 | | 4,842 | | 4,885 |
| | | | | | | | | | | | | | |
ADS Tactical, Inc. | (11) | March 7, 2017 | Value-Added Logistics and Supply Chain Provider to the Defense Industry | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 6.75% (L+5.75%, Floor 1.00%) | 3/19/2026 | | 18,750 | | 18,397 | | 18,867 |
| | | | | | | | | | | | | | |
American Nuts, LLC | (10) | April 10, 2018 | Roaster, Mixer and Packager of Bulk Nuts and Seeds | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 9.00% (L+8.00%, Floor 1.00%) | 4/10/2025 | | 12,044 | | 11,898 | | 12,044 |
| | | | | | | | | | | | | | |
American Teleconferencing Services, Ltd. | (11) | May 19, 2016 | Provider of Audio Conferencing and Video Collaboration Solutions | | | | | | | | | | | |
| | | | Secured Debt | (9) (17) | | 7.50% (L+6.50%, Floor 1.00%) | 9/9/2021 | | 2,425 | | 2,375 | | 926 |
| | | | Secured Debt | (9) (14) (17) | | 7.50% (L+6.50%, Floor 1.00%) | 9/9/2021 | | 11,693 | | 11,451 | | 4,465 |
| | | | | | | | | | | | 13,826 | | 5,391 |
Arcus Hunting LLC | (10) | January 6, 2015 | Manufacturer of Bowhunting and Archery Products and Accessories | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 11.00% (L+10.00%, Floor 1.00%) | 3/31/2022 | | 6,801 | | 6,781 | | 6,798 |
| | | | | | | | | | | | | | |
ASC Ortho Management Company, LLC | (10) | August 31, 2018 | Provider of Orthopedic Services | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 9.00% (L+8.00%, Floor 1.00%) | 8/31/2023 | | 5,117 | | 5,077 | | 5,111 |
| | | | Secured Debt | (19) | | 13.75% PIK | 12/1/2023 | | 2,265 | | 2,238 | | 2,265 |
| | | | | | | | | | | | 7,315 | | 7,376 |
BBB Tank Services, LLC | | April 8, 2016 | Maintenance, Repair and Construction Services to the Above-Ground Storage Tank Market | | | | | | | | | | | |
| | | | Unsecured Debt | (9) (17) | | 12.00% (L+11.00%, Floor 1.00%) | 4/8/2021 | | 1,200 | | 1,200 | | 935 |
| | | | Preferred Stock (non-voting) | (8) (14) (19) | | 15.00% PIK | | | | | 41 | | - |
| | | | Member Units | | 200,000 | | | | | | 200 | | - |
10
MSC Income Fund, Inc.
Consolidated Schedule of Investments (Continued)
September 30, 2021
(dollars in thousands)
(unaudited)
Portfolio Company (1) (20) | | Investment Date (22) | Business Description | Type of Investment (2) (3) (15) | | Shares/Units | Rate | Maturity Date | Principal (4) | Cost (4) | Fair Value (18) | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | 1,441 | | 935 |
Berry Aviation, Inc. | (10) | July 6, 2018 | Charter Airline Services | | | | | | | | | | | |
| | | | Secured Debt | (19) | | 12.00% (10.50% Cash, 1.50% PIK) | 1/6/2024 | | 4,671 | | 4,637 | | 4,671 |
| | | | Preferred Member Units | (8) (19) (23) | 122,416 | 16.00% PIK | | | | | 162 | | 162 |
| | | | Preferred Member Units | (14) (19) (23) | 1,548,387 | 8.00% PIK | | | | | 1,671 | | 1,963 |
| | | | | | | | | | | | 6,470 | | 6,796 |
BigName Commerce, LLC | (10) | May 11, 2017 | Provider of Envelopes and Complimentary Stationery Products | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 8.25% (L+7.25%, Floor 1.00%) | 5/11/2022 | | 1,891 | | 1,888 | | 1,891 |
| | | | | | | | | | | | | | |
Binswanger Enterprises, LLC | (10) | March 10, 2017 | Glass Repair and Installation Service Provider | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 9.00% (L+8.00%, Floor 1.00%) | 3/10/2023 | | 12,387 | | 12,330 | | 12,387 |
| | | | Member Units | | 1,050,000 | | | | | | 1,050 | | 730 |
| | | | | | | | | | | | 13,380 | | 13,117 |
Bluestem Brands, Inc. | (11) | December 19, 2013 | Multi-Channel Retailer of General Merchandise | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 10.00% (L+8.50%, Floor 1.50%) | 8/28/2025 | | 5,745 | | 5,745 | | 5,721 |
| | | | Common Stock | (8) | 700,446 | | | | | | - | | 1,310 |
| | | | | | | | | | | | 5,745 | | 7,031 |
Boccella Precast Products LLC | | June 30, 2017 | Manufacturer of Precast Hollow Core Concrete | | | | | | | | | | | |
| | | | Secured Debt | | | 10.00% | 2/28/2027 | | 80 | | 80 | | 80 |
| | | | Member Units | (8) | 540,000 | | | | | | 564 | | 1,207 |
| | | | | | | | | | | | 644 | | 1,287 |
Brightwood Capital Fund Investments | (12) (13) | July 21, 2014 | Investment Partnership | | | | | | | | | | | |
| | | | LP Interests (Brightwood Capital Fund III, LP) | (8) (24) | 1.2% | | | | | | 2,495 | | 1,393 |
| | | | LP Interests (Brightwood Capital Fund IV, LP) | (8) (24) | 0.5% | | | | | | 8,737 | | 8,998 |
| | | | | | | | | | | | 11,232 | | 10,391 |
Buca C, LLC | | June 30, 2015 | Casual Restaurant Group | | | | | | | | | | | |
| | | | Secured Debt | (9) (17) | | 10.25% (L+9.25%, Floor 1.00%) | 6/30/2020 | | 13,164 | | 13,164 | | 9,705 |
| | | | Preferred Member Units | (14) (19) | 4 | 6.00% PIK | | | | | 3,040 | | - |
| | | | | | | | | | | | 16,204 | | 9,705 |
Burning Glass Intermediate Holding Company, Inc. | (10) | June 14, 2021 | Provider of Skills-Based Labor Market Analytics | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 6.00% (L+5.00%, Floor 1.00%) | 6/10/2028 | | 13,423 | | 13,169 | | 13,169 |
| | | | | | | | | | | | | | |
11
MSC Income Fund, Inc.
Consolidated Schedule of Investments (Continued)
September 30, 2021
(dollars in thousands)
(unaudited)
Portfolio Company (1) (20) | | Investment Date (22) | Business Description | Type of Investment (2) (3) (15) | | Shares/Units | Rate | Maturity Date | Principal (4) | Cost (4) | Fair Value (18) | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cadence Aerospace LLC | (10) | November 14, 2017 | Aerostructure Manufacturing | | | | | | | | | | | |
| | | | Secured Debt | (9) (19) | | 9.50% (7.50% Cash, 2.00% PIK) (2.00% PIK + L+6.50%, Floor 1.00%) | 11/14/2023 | | 20,223 | | 20,109 | | 18,743 |
| | | | | | | | | | | | | | |
CAI Software LLC | | October 10, 2014 | Provider of Specialized Enterprise Resource Planning Software | | | | | | | | | | | |
| | | | Secured Debt | | | 12.50% | 12/7/2023 | | 7,709 | | 7,639 | | 7,709 |
| | | | Member Units | (8) | 16,742 | | | | | | - | | 2,670 |
| | | | | | | | | | | | 7,639 | | 10,379 |
Camin Cargo Control, Inc. | (11) | June 14, 2021 | Provider of Mission Critical Inspection, Testing and Fuel Treatment Services | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.50% (L+6.50%, Floor 1.00%) | 6/4/2026 | | 7,980 | | 7,904 | | 7,940 |
| | | | | | | | | | | | | | |
Cenveo Corporation | (11) | September 4, 2015 | Provider of Digital Marketing Agency Services | | | | | | | | | | | |
| | | | Common Stock | | 253,194 | | | | | | 4,848 | | 2,089 |
| | | | | | | | | | | | | | |
Chisholm Energy Holdings, LLC | (10) | May 15, 2019 | Oil & Gas Exploration & Production | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.75% (L+6.25%, Floor 1.50%) | 5/15/2026 | | 2,857 | | 2,815 | | 2,661 |
| | | | | | | | | | | | | | |
Clarius BIGS, LLC | (10) | September 23, 2014 | Prints & Advertising Film Financing | | | | | | | | | | | |
| | | | Secured Debt | (14) (17) (19) | | 15.00% PIK | 1/5/2015 | | 2,788 | | 2,445 | | 28 |
| | | | | | | | | | | | | | |
Classic H&G Holdings, LLC | | March 12, 2020 | Provider of Engineered Packaging Solutions | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.00% (L+6.00%, Floor 1.00%) | 3/12/2025 | | 350 | | 347 | | 347 |
| | | | Secured Debt | | | 8.00% | 3/12/2025 | | 4,819 | | 4,710 | | 4,819 |
| | | | Preferred Member Units | (8) | 39 | | | | | | 1,440 | | 3,410 |
| | | | | | | | | | | | 6,497 | | 8,576 |
Clickbooth.com, LLC | (10) | December 5, 2017 | Provider of Digital Advertising Performance Marketing Solutions | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 9.50% (L+8.50%, Floor 1.00%) | 1/31/2025 | | 7,700 | | 7,601 | | 7,700 |
| | | | | | | | | | | | | | |
Computer Data Source, LLC | (10) | August 6, 2021 | Third Party Maintenance Provider to the Data Center Ecosystem | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 8.50% (L+7.50%, Floor 1.00%) | 8/6/2026 | | 17,583 | | 17,194 | | 17,194 |
| | | | | | | | | | | | | | |
12
MSC Income Fund, Inc.
Consolidated Schedule of Investments (Continued)
September 30, 2021
(dollars in thousands)
(unaudited)
Portfolio Company (1) (20) | | Investment Date (22) | Business Description | Type of Investment (2) (3) (15) | | Shares/Units | Rate | Maturity Date | Principal (4) | Cost (4) | Fair Value (18) | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Construction Supply Investments, LLC | (10) | December 29, 2016 | Distribution Platform of Specialty Construction Materials to Professional Concrete and Masonry Contractors | | | | | | | | | | | |
| | | | Member Units | (8) | 861,618 | | | | | | 3,335 | | 10,580 |
| | | | | | | | | | | | | | |
DTE Enterprises, LLC | (10) | April 13, 2018 | Industrial Powertrain Repair and Services | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 10.00% (L+8.50%, Floor 1.50%) | 4/13/2023 | | 9,357 | | 9,288 | | 8,903 |
| | | | Class AA Preferred Member Units (non-voting) | (8) (19) | | 10.00% PIK | | | | | 1,024 | | 1,024 |
| | | | Class A Preferred Member Units | (14) (19) | 776,316 | 8.00% PIK | | | | | 776 | | 440 |
| | | | | | | | | | | | 11,088 | | 10,367 |
Dynamic Communities, LLC | (10) | July 17, 2018 | Developer of Business Events and Online Community Groups | | | | | | | | | | | |
| | | | Secured Debt | (9) (19) | | 12.50% (4.75% Cash, 7.75% PIK) (L+11.50%, Floor 1.00%) | 7/17/2023 | | 5,751 | | 5,706 | | 5,507 |
| | | | | | | | | | | | | | |
EPIC Y-Grade Services, LP | (11) | June 22, 2018 | NGL Transportation & Storage | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.00% (L+6.00%, Floor 1.00%) | 6/30/2027 | | 6,909 | | 6,829 | | 5,955 |
| | | | | | | | | | | | | | |
Flip Electronics LLC | (10) | January 4, 2021 | Distributor of Hard-to-Find and Obsolete Electronic Components | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 8.99% (L+7.99%, Floor 1.00%) | 1/2/2026 | | 6,000 | | 5,885 | | 5,961 |
| | | | | | | | | | | | | | |
Gibson Brands, Inc. | (11) | August 19, 2021 | Manufacturer of Guitars and Related Music Products | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 5.75% (L+5.00%, Floor 0.75%) | 8/11/2028 | | 2,500 | | 2,475 | | 2,475 |
| | | | | | | | | | | | | | |
GoWireless Holdings, Inc. | (11) | July 13, 2020 | Provider of Wireless Telecommunications Carrier Services | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.50% (L+6.50%, Floor 1.00%) | 12/22/2024 | | 15,252 | | 15,183 | | 15,297 |
| | | | | | | | | | | | | | |
GS Operating, LLC | (10) | February 24, 2020 | Distributor of Industrial and Specialty Parts | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 8.00% (L+6.50%, Floor 1.50%) | 2/24/2025 | | 10,968 | | 10,744 | | 10,968 |
| | | | | | | | | | | | | | |
HDC/HW Intermediate Holdings | (10) | December 21, 2018 | Managed Services and Hosting Provider | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 8.50% (L+7.50%, Floor 1.00%) | 12/21/2023 | | 1,938 | | 1,918 | | 1,717 |
| | | | | | | | | | | | | | |
13
MSC Income Fund, Inc.
Consolidated Schedule of Investments (Continued)
September 30, 2021
(dollars in thousands)
(unaudited)
Portfolio Company (1) (20) | | Investment Date (22) | Business Description | Type of Investment (2) (3) (15) | | Shares/Units | Rate | Maturity Date | Principal (4) | Cost (4) | Fair Value (18) | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
HW Temps LLC | | July 2, 2015 | Temporary Staffing Solutions | | | | | | | | | | | |
| | | | Secured Debt | | | 8.00% | 3/29/2023 | | 1,961 | | 1,959 | | 1,959 |
| | | | | | | | | | | | | | |
Hybrid Promotions, LLC | (10) | June 30, 2021 | Wholesaler of Licensed, Branded and Private Label Apparel | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 9.25% (L+8.25%, Floor 1.00%) | 6/30/2026 | | 7,875 | | 7,724 | | 7,724 |
| | | | | | | | | | | | | | |
IG Parent Corporation | (11) | July 30, 2021 | Software Engineering | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 6.75% (L+5.75%, Floor 1.00%) | 7/30/2026 | | 6,410 | | 6,289 | | 6,289 |
| | | | | | | | | | | | | | |
Implus Footcare, LLC | (10) | June 1, 2017 | Provider of Footwear and Related Accessories | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 8.75% (L+7.75%, Floor 1.00%) | 4/30/2024 | | 17,135 | | 17,121 | | 16,121 |
| | | | | | | | | | | | | | |
Independent Pet Partners Intermediate Holdings, LLC | (10) | November 20, 2018 | Omnichannel Retailer of Specialty Pet Products | | | | | | | | | | | |
| | | | Secured Debt | (19) | | 6.00% PIK | 11/20/2023 | | 10,258 | | 9,554 | | 9,554 |
| | | | Preferred Stock (non-voting) | (14) (19) | | 6.00% PIK | | | | | 2,470 | | 3,130 |
| | | | Preferred Stock (non-voting) | | | | | | | | - | | - |
| | | | Member Units | | 1,191,667 | | | | | | 1,192 | | - |
| | | | | | | | | | | | 13,216 | | 12,684 |
Industrial Services Acquisition, LLC | (10) | June 17, 2016 | Industrial Cleaning Services | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.75% (L+6.75%, Floor 1.00%) | 8/13/2026 | | 18,065 | | 17,673 | | 17,673 |
| | | | Preferred Member Units | (8) (19) (23) | 336 | 10.00% PIK | | | | | 276 | | 378 |
| | | | Preferred Member Units | (8) (19) (23) | 187 | 20.00% PIK | | | | | 184 | | 227 |
| | | | Member Units | (23) | 2,100 | | | | | | 2,100 | | 1,710 |
| | | | | | | | | | | | 20,233 | | 19,988 |
Interface Security Systems, L.L.C | (10) | August 7, 2019 | Commercial Security & Alarm Services | | | | | | | | | | | |
| | | | Secured Debt | (9) (19) | | 9.75% (8.75% Cash, 1.00% PIK) (1.00% PIK + L+7.00%, Floor 1.75%) | 8/7/2023 | | 7,316 | | 7,243 | | 6,308 |
| | | | | | | | | | | | | | |
Intermedia Holdings, Inc. | (11) | August 3, 2018 | Unified Communications as a Service | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.00% (L+6.00%, Floor 1.00%) | 7/19/2025 | | 9,923 | | 9,903 | | 9,930 |
| | | | | | | | | | | | | | |
Invincible Boat Company, LLC. | (10) | August 28, 2019 | Manufacturer of Sport Fishing Boats | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 8.00% (L+6.50%, Floor 1.50%) | 8/28/2025 | | 17,770 | | 17,615 | | 17,770 |
| | | | | | | | | | | | | | |
14
MSC Income Fund, Inc.
Consolidated Schedule of Investments (Continued)
September 30, 2021
(dollars in thousands)
(unaudited)
Portfolio Company (1) (20) | | Investment Date (22) | Business Description | Type of Investment (2) (3) (15) | | Shares/Units | Rate | Maturity Date | Principal (4) | Cost (4) | Fair Value (18) | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
INW Manufacturing, LLC | (11) | May 19, 2021 | Manufacturer of Nutrition and Wellness Products | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 6.50% (L+5.75%, Floor 0.75%) | 3/25/2027 | | 7,406 | | 7,194 | | 7,258 |
| | | | | | | | | | | | | | |
Iron-Main Investments, LLC | | August 3, 2021 | Consumer Reporting Agency Providing Employment Background Checks and Drug Testing | | | | | | | | | | | |
| | | | Secured Debt | | | 13.00% | 8/1/2026 | | 1,150 | | 1,116 | | 1,116 |
| | | | Secured Debt | | | 12.50% | 9/1/2026 | | 800 | | 776 | | 776 |
| | | | Common Stock | | 25,684 | | | | | | 257 | | 257 |
| | | | | | | | | | | | 2,149 | | 2,149 |
Isagenix International, LLC | (11) | June 21, 2018 | Direct Marketer of Health & Wellness Products | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 6.75% (L+5.75%, Floor 1.00%) | 6/14/2025 | | 5,261 | | 5,230 | | 4,406 |
| | | | | | | | | | | | | | |
Jackmont Hospitality, Inc. | (10) | May 26, 2015 | Franchisee of Casual Dining Restaurants | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.75% (L+6.75%, Floor 1.00%) | 10/14/2021 | | 7,802 | | 7,802 | | 6,386 |
| | | | | | | | | | | | | | |
Joerns Healthcare, LLC | (11) | April 3, 2013 | Manufacturer and Distributor of Health Care Equipment & Supplies | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.00% (L+6.00%, Floor 1.00%) | 8/21/2024 | | 3,336 | | 3,302 | | 3,113 |
| | | | Common Stock | | 392,514 | | | | | | 3,678 | | 710 |
| | | | | | | | | | | | 6,980 | | 3,823 |
Kemp Technologies Inc. | (10) | November 14, 2018 | Provider of Application Delivery Controllers | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.00% (L+6.00%, Floor 1.00%) | 3/29/2024 | | 7,331 | | 7,247 | | 7,331 |
| | | | | | | | | | | | | | |
Knight Energy Services LLC | (11) | December 0, 1900 | Oil and Gas Equipment & Services | | | | | | | | | | | |
| | | | Secured Debt | (19) | | 8.50% PIK | 2/9/2024 | | 941 | | 941 | | 677 |
| | | | Common Stock | | 25,692 | | | | | | 1,843 | | - |
| | | | | | | | | | | | 2,784 | | 677 |
Larchmont Resources, LLC | (11) | August 13, 2013 | Oil & Gas Exploration & Production | | | | | | | | | | | |
| | | | Secured Debt | (9) (17) | | 9.00% (L+8.00%, Floor 1.00%) | 8/9/2021 | | 3,628 | | 3,628 | | 3,446 |
| | | | Member Units | (23) | 4,806 | | | | | | 601 | | 7 |
| | | | | | | | | | | | 4,229 | | 3,453 |
Laredo Energy, LLC | (10) | January 15, 2019 | Oil & Gas Exploration & Production | | | | | | | | | | | |
| | | | Member Units | | 1,155,952 | | | | 11,560 | | 11,560 | | 9,771 |
| | | | | | | | | | | | | | |
Lightbox Holdings, L.P. | (11) | May 23, 2019 | Provider of Commercial Real Estate Software | | | | | | | | | | | |
15
MSC Income Fund, Inc.
Consolidated Schedule of Investments (Continued)
September 30, 2021
(dollars in thousands)
(unaudited)
Portfolio Company (1) (20) | | Investment Date (22) | Business Description | Type of Investment (2) (3) (15) | | Shares/Units | Rate | Maturity Date | Principal (4) | Cost (4) | Fair Value (18) | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | Secured Debt | | | 5.13% (L+5.00%) | 5/9/2026 | | 5,904 | | 5,846 | | 5,874 |
| | | | | | | | | | | | | | |
LL Management, Inc. | (10) | May 2, 2019 | Medical Transportation Service Provider | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 8.25% (L+7.25%, Floor 1.00%) | 9/25/2023 | | 14,384 | | 14,298 | | 14,384 |
| | | | | | | | | | | | | | |
LLFlex, LLC | (10) | August 16, 2021 | Provider of Metal-Based Laminates | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 10.00% (L+9.00%, Floor 1.00%) | 8/16/2026 | | 5,000 | | 4,890 | | 4,890 |
| | | | | | | | | | | | | | |
Logix Acquisition Company, LLC | (10) | June 24, 2016 | Competitive Local Exchange Carrier | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 6.75% (L+5.75%, Floor 1.00%) | 12/22/2024 | | 12,518 | | 12,469 | | 11,943 |
| | | | | | | | | | | | | | |
Lulu's Fashion Lounge, LLC | (10) | August 31, 2017 | Fast Fashion E-Commerce Retailer | | | | | | | | | | | |
| | | | Secured Debt | (9) (19) | | 10.50% (8.00% Cash, 2.50% PIK) (2.50% PIK + L+7.00%, Floor 1.00%) | 8/28/2022 | | 5,378 | | 5,334 | | 4,599 |
| | | | | | | | | | | | | | |
Lynx FBO Operating LLC | (10) | September 30, 2019 | Fixed Based Operator in the General Aviation Industry | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.25% (L+5.75%, Floor 1.50%) | 9/30/2024 | | 13,509 | | 13,312 | | 13,509 |
| | | | Member Units | | 3,704 | | | | | | 500 | | 670 |
| | | | | | | | | | | | 13,812 | | 14,179 |
Mac Lean-Fogg Company | (10) | April 22, 2019 | Manufacturer and Supplier for Auto and Power Markets | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 5.38% (L+4.75%, Floor 0.625%) | 12/22/2025 | | 7,320 | | 7,282 | | 7,320 |
| | | | Preferred Stock | (19) | | 13.75% (4.50% Cash, 9.25% PIK) | | | | | 760 | | 760 |
| | | | | | | | | | | | 8,042 | | 8,080 |
Mako Steel, LP | (10) | March 15, 2021 | Self-Storage Design & Construction | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 8.00% (L+7.25%, Floor 0.75%) | 3/13/2026 | | 19,790 | | 19,401 | | 19,642 |
| | | | | | | | | | | | | | |
MB2 Dental Solutions, LLC | (11) | January 28, 2021 | Dental Partnership Organization | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.00% (L+6.00%, Floor 1.00%) | 1/29/2027 | | 9,970 | | 9,724 | | 9,970 |
| | | | | | | | | | | | | | |
Mills Fleet Farm Group, LLC | (10) | October 24, 2018 | Omnichannel Retailer of Work, Farm and Lifestyle Merchandise | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.25% (L+6.25%, Floor 1.00%) | 10/24/2024 | | 15,781 | | 15,547 | | 15,781 |
| | | | | | | | | | | | | | |
NinjaTrader, LLC | (10) | December 18, 2019 | Operator of Futures Trading Platform | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 8.25% (L+6.75%, Floor 1.50%) | 12/18/2024 | | 16,875 | | 16,581 | | 16,835 |
16
MSC Income Fund, Inc.
Consolidated Schedule of Investments (Continued)
September 30, 2021
(dollars in thousands)
(unaudited)
Portfolio Company (1) (20) | | Investment Date (22) | Business Description | Type of Investment (2) (3) (15) | | Shares/Units | Rate | Maturity Date | Principal (4) | Cost (4) | Fair Value (18) | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | | | |
NNE Partners, LLC | (10) | March 2, 2017 | Oil & Gas Exploration & Production | | | | | | | | | | | |
| | | | Secured Debt | (19) | | 9.38% (4.88% Cash, 4.50% PIK) (4.50% PIK + L+4.75%) | 12/31/2023 | | 21,364 | | 21,342 | | 19,610 |
| | | | | | | | | | | | | | |
NTM Acquisition Corp. | (11) | July 12, 2016 | Provider of B2B Travel Information Content | | | | | | | | | | | |
| | | | Secured Debt | (9) (19) | | 8.25% (7.25% Cash, 1.00% PIK) (1.00%PIK + L+6.25%, Floor 1.00%) | 6/7/2024 | | 4,280 | | 4,273 | | 4,238 |
| | | | | | | | | | | | | | |
NWN Corporation | (10) | May 7, 2021 | Value Added Reseller and Provider of Managed Services to a Diverse Set of Industries | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.50% (L+6.50%, Floor 1.00%) | 5/7/2026 | | 21,403 | | 20,904 | | 20,904 |
| | | | | | | | | | | | | | |
RA Outdoors LLC | (10) | April 8, 2021 | Software Solutions Provider for Outdoor Activity Management | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.75% (L+6.75%, Floor 1.00%) | 4/8/2026 | | 18,765 | | 18,582 | | 18,582 |
| | | | | | | | | | | | | | |
Research Now Group, Inc. and Survey Sampling International, LLC | (11) | December 31, 2017 | Provider of Outsourced Online Surveying | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 6.50% (L+5.50%, Floor 1.00%) | 12/20/2024 | | 9,923 | | 9,923 | | 9,831 |
| | | | | | | | | | | | | | |
RM Bidder, LLC | (10) | November 12, 2015 | Scripted and Unscripted TV and Digital Programming Provider | | | | | | | | | | | |
| | | | Member Units | | 1,854 | | | | 31 | | 31 | | 20 |
| | | | Warrants | (28) | | | 10/20/2025 | | | | 284 | | - |
| | | | | | | | | | | | 315 | | 20 |
Roof Opco, LLC | (10) | August 27, 2021 | Residential Re-Roofing/Repair | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.00% (L+6.00%, Floor 1.00%) | 8/27/2026 | | 3,500 | | 3,336 | | 3,336 |
| | | | | | | | | | | | | | |
Rug Doctor, LLC. | (10) | July 16, 2021 | Carpet Cleaning Products and Machinery | | | | | | | | | | | |
| | | | Secured Debt | (9) (19) | | 7.25% (6.25% Cash, 1.00% PIK) (1.00% PIK + L+5.25%, Floor 1.00%) | 5/16/2022 | | 10,720 | | 10,558 | | 10,558 |
| | | | | | | | | | | | | | |
Salient Partners L.P. | (11) | June 25, 2015 | Provider of Asset Management Services | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.00% (L+6.00%, Floor 1.00%) | 10/30/2022 | | 7,501 | | 7,542 | | 5,312 |
| | | | | | | | | | | | | | |
Savers, Inc. | (11) | May 14, 2021 | For-Profit Thrift Retailer | | | | | | | | | | | |
17
MSC Income Fund, Inc.
Consolidated Schedule of Investments (Continued)
September 30, 2021
(dollars in thousands)
(unaudited)
Portfolio Company (1) (20) | | Investment Date (22) | Business Description | Type of Investment (2) (3) (15) | | Shares/Units | Rate | Maturity Date | Principal (4) | Cost (4) | Fair Value (18) | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | Secured Debt | (9) | | 6.50% (L+5.75%, Floor 0.75%) | 4/26/2028 | | 12,900 | | 12,777 | | 13,061 |
| | | | | | | | | | | | | | |
Signal Peak CLO 7, Ltd. (Mariner) | (12) (13) | May 8, 2019 | Structured Finance | | | | | | | | | | | |
| | | | Subordinated Structured Notes | (16) | | 12.00% | 4/30/2032 | | 25,935 | | 21,224 | | 18,243 |
| | | | | | | | | | | | | | |
Slick Innovations, LLC | | September 13, 2018 | Text Message Marketing Platform | | | | | | | | | | | |
| | | | Secured Debt | | | 13.00% | 9/13/2023 | | 1,330 | | 1,195 | | 1,330 |
| | | | Common Stock | | 17,500 | | | | | | 175 | | 380 |
| | | | Warrants | (29) | 4,521 | | 9/13/2028 | | | | 45 | | 100 |
| | | | | | | | | | | | 1,415 | | 1,810 |
Student Resource Center, LLC | (10) | June 25, 2021 | Higher Education Services | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 9.00% (L+8.00%, Floor 1.00%) | 6/25/2026 | | 12,344 | | 12,092 | | 12,092 |
| | | | | | | | | | | | | | |
Team Public Choices, LLC | (11) | October 28, 2019 | Home-Based Care Employment Service Provider | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 6.00% (L+5.00%, Floor 1.00%) | 12/18/2027 | | 4,512 | | 4,473 | | 4,512 |
| | | | | | | | | | | | | | |
Tex Tech Tennis, LLC | (10) | July 7, 2021 | Sporting Goods & Textiles | | | | | | | | | | | |
| | | | Common Stock | (23) | 1,000,000 | | | | | | 1,000 | | 1,000 |
| | | | | | | | | | | | | | |
The Affiliati Network, LLC | | August 9, 2021 | Performance Marketing Solutions | | | | | | | | | | | |
| | | | Secured Debt | | | 10.00% | 8/9/2026 | | 100 | | 95 | | 95 |
| | | | Secured Debt | | | 11.83% | 8/9/2026 | | 3,440 | | 3,364 | | 3,364 |
| | | | Preferred Stock | | 320,000 | | | | | | 1,600 | | 1,600 |
| | | | | | | | | | | | 5,059 | | 5,059 |
U.S. TelePacific Corp. | (11) | May 17, 2017 | Provider of Communications and Managed Services | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.00% (L+6.00%, Floor 1.00%) | 5/2/2023 | | 12,500 | | 12,381 | | 10,422 |
| | | | | | | | | | | | | | |
USA DeBusk LLC | (10) | October 22, 2019 | Provider of Industrial Cleaning Services | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 6.75% (L+5.75%, Floor 1.00%) | 9/8/2026 | | 20,000 | | 19,720 | | 19,835 |
| | | | | | | | | | | | | | |
Vida Capital, Inc | (11) | October 10, 2019 | Alternative Asset Manager | | | | | | | | | | | |
| | | | Secured Debt | | | 6.08% (L+6.00%) | 10/1/2026 | | 6,928 | | 6,850 | | 6,391 |
| | | | | | | | | | | | | | |
Vistar Media, Inc. | (10) | February 17, 2017 | Operator of Digital Out-of-Home Advertising Platform | | | | | | | | | | | |
| | | | Preferred Stock | | 70,207 | | | | | | 767 | | 1,430 |
| | | | | | | | | | | | | | |
Volusion, LLC | | January 26, 2015 | Provider of Online Software-as-a-Service eCommerce Solutions | | | | | | | | | | | |
| | | | Secured Debt | (17) | | 11.50% | 1/26/2020 | | 7,472 | | 7,472 | | 7,472 |
18
MSC Income Fund, Inc.
Consolidated Schedule of Investments (Continued)
September 30, 2021
(dollars in thousands)
(unaudited)
Portfolio Company (1) (20) | | Investment Date (22) | Business Description | Type of Investment (2) (3) (15) | | Shares/Units | Rate | Maturity Date | Principal (4) | Cost (4) | Fair Value (18) | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | Unsecured Convertible Debt | | | 8.00% | 11/16/2023 | | 175 | | 175 | | 175 |
| | | | Preferred Member Units | | 2,090,001 | | | | | | 6,000 | | 2,570 |
| | | | Warrants | (29) | 784,867 | | 1/26/2025 | | | | 1,104 | | - |
| | | | | | | | | | | | 14,751 | | 10,217 |
Wall Street Prep, Inc. | (10) | July 19, 2021 | Financial Training Services | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 8.00% (L+7.00%, Floor 1.00%) | 7/19/2026 | | 5,500 | | 5,384 | | 5,384 |
| | | | Common Stock | | 500,000 | | | | | | 500 | | 500 |
| | | | | | | | | | | | 5,884 | | 5,884 |
YS Garments, LLC | (11) | August 22, 2018 | Designer and Provider of Branded Activewear | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.00% (L+6.00%, Floor 1.00%) | 8/9/2024 | | 6,517 | | 6,482 | | 6,289 |
| | | | | | | | | | | | | | |
Subtotal Non-Control/Non-Affiliate Investments (124.0% of net assets at fair value) | | | | | | | | | | | $ | 783,920 | $ | 748,934 |
Total Portfolio Investments, June 30, 2021 (166.0% of net assets at fair value) | | | | | | | | | | | $ | 997,051 | $ | 1,002,280 |
| | | | | | | | | | | | | | |
Short Term Investments (28) | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
US Bank Money Market Account (29) | | | | | | | | | | | $ | 15,710 | $ | 15,710 |
| | | | | | | | | | | | | | |
Total Short Term Investments | | | | | | | | | | | $ | 15,710 | $ | 15,710 |
| | | | | | | | | | | | | | |
(1) | All investments are Lower Middle Market portfolio investments, unless otherwise noted. See Note C for a description of Lower Middle Market portfolio investments. All of the Company’s investments, unless otherwise noted, are encumbered either as security for one of the Company’s Credit Facilities. |
(2) | Debt investments are income producing, unless otherwise noted. Equity and warrants are non-income producing, unless otherwise noted. |
(3) | See Note C and Schedule 12-14 for a summary of geographic location of portfolio companies. |
(4) | Principal is net of repayments. Cost is net of repayments and accumulated unearned income. |
(5) | Control investments are defined by the 1940 Act, as investments in which more than 25% of the voting securities are owned or where the ability to nominate greater than 50% of the board representation is maintained. |
(6) | Affiliate investments are defined by the 1940 Act as investments in which between 5% and 25% (inclusive) of the voting securities are owned and the investments are not classified as Control investments. |
(7) | Non-Control/Non-Affiliate investments are defined by the 1940 Act as investments that are neither Control investments nor Affiliate investments. |
(8) | Income producing through dividends or distributions. |
(9) | Index based floating interest rate is subject to contractual minimum interest rate. A majority of the variable rate loans in the Company’s investment portfolio bear interest at a rate that may be determined by reference to either LIBOR or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), which typically resets semi-annually, quarterly, or monthly at the borrower’s option. The borrower may also elect to have multiple interest reset periods for each loan. For each such loan, the Company has provided the weighted-average annual stated interest rate in effect at September 30, 2021. As noted in this schedule, 84% of the loans (based on the par |
19
MSC Income Fund, Inc.
Consolidated Schedule of Investments (Continued)
September 30, 2021
(dollars in thousands)
(unaudited)
amount) contain LIBOR floors which range between 0.63% and 2.00%, with a weighted-average LIBOR floor of approximately 1.07%. | |
(10) | Private Loan portfolio investment. See Note C for a description of Private Loan portfolio investments. |
(11) | Middle Market portfolio investment. See Note C for a description of Middle Market portfolio investments. |
(12) | Other Portfolio investment. See Note C for a description of Other Portfolio investments. |
(13) | Investment is not a qualifying asset as defined under Section 55(a) of the 1940 Act. Qualifying assets must represent at least 70% of total assets at the time of acquisition of any additional non-qualifying assets. |
(14) | Non-accrual and non-income producing investment. |
(15) | All of the Company’s portfolio investments are generally subject to restrictions on resale as “restricted securities.” |
(16) | Our CLO equity position is entitled to recurring distributions which are generally equal to the remaining cash flow of payments made by underlying assets less contractual payments to debt holders and CLO expenses. The effective yield is estimated based upon the current projection of the amount and timing of these recurring distributions in addition to the estimated amount of terminal principal payment. We monitor the anticipated cash flows from our CLO equity position and adjust our effective yield periodically as needed on a prospective basis. The estimated yield and investment cost may ultimately not be realized. |
(17) | Maturity date is under on-going negotiations with the portfolio company and other lenders, if applicable. |
(18) | Investment fair value was determined using significant unobservable inputs, unless otherwise noted. See Note C for further discussion. |
(19) | PIK interest income and cumulative dividend income represent income not paid currently in cash. |
(20) | All portfolio company headquarters are based in the United States, unless otherwise noted. |
(21) | Portfolio company headquarters are located outside of the United States. |
(22) | Investment date represents the date of initial investment in the portfolio company. |
(23) | Shares/Units represent ownership in an underlying Real Estate or HoldCo entity. |
(24) | Investment is not unitized. Presentation is made in percent of fully diluted ownership unless otherwise indicated. |
(25) | Warrants are presented in equivalent shares with a strike price of $10.92 per share. |
(26) | Warrants are presented in equivalent units with a strike price of $14.28 per unit. |
(27) | Warrants are presented in equivalent shares/units with a strike price of $0.01 per share/unit. |
(28) | Short term investments represent an investment in a fund that invests in highly liquid investments with average original maturity dates of three months or less. These short term investments are included as Cash and cash equivalents. |
(29) | Effective yield as of September 30, 2021 was approximately 0.05% at US Bank Money Market Account |
20
MSC Income Fund
Consolidated Schedule of Investments
December 31, 2020
(dollars in thousands)
Portfolio Company (1) (20) | | Investment Date (22) | Business Description | Type of Investment (2) (3) (15) | | Shares/Units | Rate | Maturity Date | Principal (4) | Cost (4) | Fair Value (18) | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Control Investments (5) | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Copper Trail Fund Investments | (12) (13) | July 17, 2017 | Investment Partnership | | | | | | | | | | | |
| | | | LP Interests (CTMH, LP) | (24) | 38.8% | | | | | $ | 872 | $ | 747 |
| | | | | | | | | | | | | | |
GRT Rubber Technologies LLC ("GRT") | | December 19, 2014 | Manufacturer of Engineered Rubber Products | | | | | | | | | | | |
| | | | Secured Debt | | | 7.15% (L+7.00%) | 12/31/2023 | $ | 8,262 | | 8,246 | | 8,262 |
| | | | Member Units | (8) | 2,896 | | | | | | 6,435 | | 22,120 |
| | | | | | | | | | | | 14,681 | | 30,382 |
| | | | | | | | | | | | | | |
Harris Preston Fund Investments | (12) (13) | October 1, 2017 | Investment Partnership | | | | | | | | | | | |
| | | | LP Interests (2717 MH, L.P.) | (24) | 49.3% | | | | | | 2,599 | | 2,702 |
| | | | | | | | | | | | | | |
Subtotal Control Investments (5.8% of net assets at fair value) | | | | | | | | | | | $ | 18,152 | $ | 33,831 |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Affiliate Investments (6) | | | | | | | | | | | | | | |
AFG Capital Group, LLC | | November 7, 2014 | Provider of Rent-to-Own Financing Solutions and Services | | | | | | | | | | | |
| | | | Secured Debt | | | 10.00% | 5/25/2022 | | 123 | | 123 | | 123 |
| | | | Preferred Member Units | | 46 | | | | | | 300 | | 1,450 |
| | | | | | | | | | | | 423 | | 1,573 |
| | | | | | | | | | | | | | |
Analytical Systems Keco, LLC | | August 16, 2019 | Manufacturer of Liquid and Gas Analyzers | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 12.00% (L+10.00%, Floor 2.00%) | 8/16/2024 | | 1,289 | | 1,180 | | 1,180 |
| | | | Preferred Member Units | | 800 | | | | | | 800 | | 800 |
| | | | Warrants | (27) | 105 | | 8/16/2029 | | | | 79 | | - |
| | | | | | | | | | | | 2,059 | | 1,980 |
| | | | | | | | | | | | | | |
Brewer Crane Holdings, LLC | | January 9, 2018 | Provider of Crane Rental and Operating Services | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 11.00% (L+10.00%, Floor 1.00%) | 1/9/2023 | | 2,139 | | 2,119 | | 2,119 |
| | | | Preferred Member Units | (8) | 737 | | | | | | 1,070 | | 1,460 |
| | | | | | | | | | | | 3,189 | | 3,579 |
| | | | | | | | | | | | | | |
Centre Technologies Holdings, LLC | | January 4, 2019 | Provider of IT Hardware Services and Software Solutions | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 12.00% (L+10.00%, Floor 2.00%) | 1/4/2024 | | 2,907 | | 2,868 | | 2,868 |
| | | | Preferred Member Units | | 3,174 | | | | | | 1,460 | | 1,540 |
| | | | | | | | | | | | 4,328 | | 4,408 |
| | | | | | | | | | | | | | |
Chamberlin Holding LLC | | February 26, 2018 | Roofing and Waterproofing Specialty Contractor | | | | | | | | | | | |
21
MSC Income Fund
Consolidated Schedule of Investments (Continued)
December 31, 2020
(dollars in thousands)
Portfolio Company (1) (20) | | Investment Date (22) | Business Description | Type of Investment (2) (3) (15) | | Shares/Units | Rate | Maturity Date | Principal (4) | Cost (4) | Fair Value (18) | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | Secured Debt | (9) | | 9.00% (L+8.00%, Floor 1.00%) | 2/26/2023 | | 3,803 | | 3,745 | | 3,803 |
| | | | Member Units | (8) | 1,087 | | | | | | 2,860 | | 7,020 |
| | | | Member Units | (8) (23) | 1 | | | | | | 330 | | 318 |
| | | | | | | | | | | | 6,935 | | 11,141 |
| | | | | | | | | | | | | | |
Charlotte Russe, Inc | (11) | May 28, 2013 | Fast-Fashion Retailer to Young Women | | | | | | | | | | | |
| | | | Common Stock | | 14,973 | | | | | | 2,470 | | - |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Charps, LLC | | February 3, 2017 | Pipeline Maintenance and Construction | | | | | | | | | | | |
| | | | Secured Debt | | | 15.00% | 6/5/2022 | | 167 | | 167 | | 167 |
| | | | Preferred Member Units | (8) | 400 | | | | | | 100 | | 2,630 |
| | | | | | | | | | | | 267 | | 2,797 |
| | | | | | | | | | | | | | |
Clad-Rex Steel, LLC | | December 20, 2016 | Specialty Manufacturer of Vinyl-Clad Metal | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 10.50% (L+9.50%, Floor 1.00%) | 12/20/2021 | | 2,720 | | 2,706 | | 2,706 |
| | | | Member Units | (8) | 179 | | | | | | 1,820 | | 2,153 |
| | | | Secured Debt | (23) | | 10.00% | 12/20/2036 | | 278 | | 275 | | 275 |
| | | | Member Units | (23) | 200 | | | | | | 53 | | 132 |
| | | | | | | | | | | | 4,854 | | 5,266 |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Cody Pools, Inc. | | March 6, 2020 | Designer of Residential and Commercial Pools | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 12.25% (L+10.50%, Floor 1.75%) | 3/6/2025 | | 3,554 | | 3,488 | | 3,554 |
| | | | Preferred Member Units | | 147 | | | | | | 2,079 | | 3,740 |
| | | | | | | | | | | | 5,567 | | 7,294 |
| | | | | | | | | | | | | | |
Copper Trail Fund Investments | (12) (13) | July 17, 2017 | Investment Partnership | | | | | | | | | | | |
| | | | LP Interests (Copper Trail Energy Fund I, LP) | (8) (24) | 12.4% | | | | | | 2,161 | | 1,782 |
| | | | | | | | | | | | | | |
Digital Products Holdings LLC | | April 1, 2018 | Designer and Distributor of Consumer Electronics | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 11.00% (L+10.00%, Floor 1.00%) | 4/1/2023 | | 4,543 | | 4,493 | | 4,493 |
| | | | Preferred Member Units | (8) | 964 | | | | | | 2,375 | | 2,459 |
| | | | | | | | | | | | 6,868 | | 6,952 |
| | | | | | | | | | | | | | |
Direct Marketing Solutions, Inc. | | February 13, 2018 | Provider of Omni-Channel Direct Marketing Services | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 12.00% (L+11.00%, Floor 1.00%) | 2/13/2023 | | 3,772 | | 3,717 | | 3,717 |
| | | | Preferred Stock | | 2,100 | | | | | | 2,100 | | 4,840 |
| | | | | | | | | | | | 5,817 | | 8,557 |
| | | | | | | | | | | | | | |
Freeport Financial Funds | (12) (13) | July 31, 2015 | Investment Partnership | | | | | | | | | | | |
| | | | LP Interests (Freeport | (8) (24) | 6.0% | | | | | | 10,785 | | 10,321 |
22
MSC Income Fund
Consolidated Schedule of Investments (Continued)
December 31, 2020
(dollars in thousands)
Portfolio Company (1) (20) | | Investment Date (22) | Business Description | Type of Investment (2) (3) (15) | | Shares/Units | Rate | Maturity Date | Principal (4) | Cost (4) | Fair Value (18) | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
First Lien Loan Fund III LP) | ||||||||||||||
| | | | | | | | | | | | | | |
Gamber-Johnson Holdings, LLC ("GJH") | | June 24, 2016 | Manufacturer of Ruggedized Computer Mounting Systems | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 9.00% (L+7.00%, Floor 2.00%) | 6/24/2021 | | 4,960 | | 4,935 | | 4,960 |
| | | | Member Units | (8) | 9,042 | | | | | | 3,711 | | 13,120 |
| | | | | | | | | | | | 8,646 | | 18,080 |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Gulf Publishing Holdings, LLC | | April 29, 2016 | Energy Industry Focused Media and Publishing | | | | | | | | | | | |
| | | | Secured Debt | (9) (17) (19) | | 10.50% (5.25% Cash, 5.25% PIK) (L+9.50%, Floor 1.00%) | 9/30/2020 | | 63 | | 63 | | 63 |
| | | | Secured Debt | (19) | | 12.50% (6.25% Cash, 6.25% PIK) | 4/29/2021 | | 3,269 | | 3,264 | | 2,988 |
| | | | Member Units | | 920 | | | | | | 920 | | - |
| | | | | | | | | | | | 4,247 | | 3,051 |
| | | | | | | | | | | | | | |
Harris Preston Fund Investments | (12) (13) | August 9, 2017 | Investment Partnership | | | | | | | | | | | |
| | | | LP Interests (HPEP 3, L.P.) | (24) | 8.2% | | | | | | 3,071 | | 3,258 |
| | | | | | | | | | | | | | |
Hawk Ridge Systems, LLC | (13) | December 2, 2016 | Value-Added Reseller of Engineering Design and Manufacturing Solutions | | | | | | | | | | | |
| | | | Secured Debt | | | 11.00% | 12/2/2023 | | 3,350 | | 3,335 | | 3,350 |
| | | | Preferred Member Units | (8) | 56 | | | | | | 713 | | 2,008 |
| | | | Preferred Member Units | (23) | 56 | | | | | | 38 | | 105 |
| | | | | | | | | | | | 4,086 | | 5,463 |
| | | | | | | | | | | | | | |
J&J Services, Inc. | | October 31, 2019 | Provider of Dumpster and Portable Toilet Rental Services | | | | | | | | | | | |
| | | | Secured Debt | | | 11.50% | 10/31/2024 | | 3,200 | | 3,150 | | 3,200 |
| | | | Preferred Stock | | 695 | | | | | | 1,771 | | 3,170 |
| | | | | | | | | | | | 4,921 | | 6,370 |
| | | | | | | | | | | | | | |
Kickhaefer Manufacturing Company, LLC | | October 31, 2018 | Precision Metal Parts Manufacturing | | | | | | | | | | | |
| | | | Secured Debt | | | 11.50% | 10/31/2023 | | 5,604 | | 5,500 | | 5,500 |
| | | | Member Units | | 145 | | | | | | 3,060 | | 3,060 |
| | | | Secured Debt | | | 9.00% | 10/31/2048 | | 988 | | 978 | | 978 |
| | | | Member Units | (8) (23) | 200 | | | | | | 248 | | 290 |
| | | | | | | | | | | | 9,786 | | 9,828 |
| | | | | | | | | | | | | | |
Market Force Information, LLC | | July 28, 2017 | Provider of Customer Experience Management Services | | | | | | | | | | | |
| | | | Secured Debt | (14) (19) | | 12.00% PIK | 7/28/2023 | | 6,520 | | 6,463 | | 3,391 |
| | | | Member Units | | 185,980 | | | | | | 4,160 | | - |
| | | | | | | | | | | | 10,623 | | 3,391 |
| | | | | | | | | | | | | | |
23
MSC Income Fund
Consolidated Schedule of Investments (Continued)
December 31, 2020
(dollars in thousands)
Portfolio Company (1) (20) | | Investment Date (22) | Business Description | Type of Investment (2) (3) (15) | | Shares/Units | Rate | Maturity Date | Principal (4) | Cost (4) | Fair Value (18) | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
MH Corbin Holding LLC | | August 31, 2015 | Manufacturer and Distributor of Traffic Safety Products | | | | | | | | | | | |
| | | | Secured Debt | (19) | | 13.00% (10.00% Cash, 3.00% PIK) | 3/31/2022 | | 2,143 | | 2,131 | | 2,070 |
| | | | Preferred Member Units | | 16,500 | | | | | | 1,100 | | 590 |
| | | | Preferred Member Units | | 1,000 | | | | | | 1,500 | | - |
| | | | | | | | | | | | 4,731 | | 2,660 |
| | | | | | | | | | | | | | |
Mystic Logistics Holdings, LLC | | August 18, 2014 | Logistics and Distribution Services Provider for Large Volume Mailers | | | | | | | | | | | |
| | | | Secured Debt | | | 12.00% | 1/17/2022 | | 1,683 | | 1,682 | | 1,682 |
| | | | Common Stock | (8) | 1,468 | | | | | | 680 | | 2,248 |
| | | | | | | | | | | | 2,362 | | 3,930 |
| | | | | | | | | | | | | | |
NexRev LLC | | February 28, 2018 | Provider of Energy Efficiency Products & Services | | | | | | | | | | | |
| | | | Secured Debt | | | 11.00% | 2/28/2023 | | 4,274 | | 4,231 | | 4,177 |
| | | | Preferred Member Units | (8) | 21,600,000 | | | | | | 1,720 | | 370 |
| | | | | | | | | | | | 5,951 | | 4,547 |
| | | | | | | | | | | | | | |
NuStep, LLC | | January 31, 2017 | Designer, Manufacturer and Distributor of Fitness Equipment | | | | | | | | | | | |
| | | | Secured Debt | | | 12.00% | 1/31/2022 | | 4,310 | | 4,288 | | 4,288 |
| | | | Preferred Member Units | | 102 | | | | | | 2,550 | | 2,700 |
| | | | | | | | | | | | 6,838 | | 6,988 |
| | | | | | | | | | | | | | |
Project BarFly, LLC | (10) | August 31, 2015 | Casual Restaurant Group | | | | | | | | | | | |
| | | | Member Units | | 12 | | | | | | 528 | | 528 |
| | | | | | | | | | | | | | |
SI East, LLC | | August 31, 2018 | Rigid Industrial Packaging Manufacturing | | | | | | | | | | | |
| | | | Secured Debt | | | 9.50% | 8/31/2023 | | 10,988 | | 10,884 | | 10,986 |
| | | | Preferred Member Units | (8) | 52 | | | | | | 2,000 | | 3,260 |
| | | | | | | | | | | | 12,884 | | 14,246 |
| | | | | | | | | | | | | | |
Tedder Industries, LLC | | August 31, 2018 | Manufacturer of Firearm | Secured Debt | | | 12.00% | 8/31/2023 | | 4,100 | | 4,023 | | 4,025 |
| | | | Preferred Member Units | | 120 | | | | | | 2,034 | | 2,034 |
| | | | | | | | | | | | 6,057 | | 6,059 |
| | | | | | | | | | | | | | |
Trantech Radiator Topco, LLC | | May 31, 2019 | Transformer Cooling Products and Services | | | | | | | | | | | |
| | | | Secured Debt | | | 12.00% | 5/31/2024 | | 2,180 | | 2,122 | | 2,131 |
| | | | Common Stock | (8) | 154 | | | | | | 1,164 | | 1,510 |
| | | | | | | | | | | | 3,286 | | 3,641 |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Subtotal Affiliate Investments (27.2% of net assets at fair value) | | | | | | | | | | | $ | 143,740 | $ | 157,690 |
24
MSC Income Fund
Consolidated Schedule of Investments (Continued)
December 31, 2020
(dollars in thousands)
Portfolio Company (1) (20) | | Investment Date (22) | Business Description | Type of Investment (2) (3) (15) | | Shares/Units | Rate | Maturity Date | Principal (4) | Cost (4) | Fair Value (18) | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | | | |
Non-Control/Non-Affiliate Investments (7) | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
AAC Holdings, Inc. | (11) | June 30, 2017 | Substance Abuse Treatment Service Provider | | | | | | | | | | | |
| | | | Secured Debt | (19) | | 18.00% (10.00% Cash, 8.00% PIK) | 6/25/2025 | | 3,354 | | 2,998 | | 2,998 |
| | | | Common Stock | | 593,927 | | | | | | 3,148 | | 3,148 |
| | | | Warrants | (27) | 197,717 | | 12/11/2025 | | | | - | | 1,048 |
| | | | | | | | | | | | 6,146 | | 7,194 |
| | | | | | | | | | | | | | |
Adams Publishing Group, LLC | (10) | November 19, 2015 | Local Newspaper Operator | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 8.75% (L+7.00%, Floor 1.75%) | 7/3/2023 | | 5,863 | | 5,742 | | 5,813 |
| | | | | | | | | | | | | | |
ADS Tactical, Inc. | (10) | March 7, 2017 | Value-Added Logistics and Supply Chain Provider to the Defense Industry | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.00% (L+6.25%, Floor 0.75%) | 7/26/2023 | | 15,659 | | 15,700 | | 15,659 |
| | | | | | | | | | | | | | |
Aethon United BR LP | (10) | September 8, 2017 | Oil & Gas Exploration & Production | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.75% (L+6.75%, Floor 1.00%) | 9/8/2023 | | 7,000 | | 6,938 | | 6,852 |
| | | | | | | | | | | | | | |
American Nuts, LLC | (10) | April 10, 2018 | Roaster, Mixer and Packager of Bulk Nuts and Seeds | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 9.00% (L+8.00%, Floor 1.00%) | 4/10/2023 | | 12,128 | | 11,916 | | 12,109 |
American Teleconferencing Services, Ltd. | (11) | May 19, 2016 | Provider of Audio Conferencing and Video Collaboration Solutions | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.50% (L+6.50%, Floor 1.00%) | 6/8/2023 | | 14,125 | | 13,803 | | 6,568 |
| | | | | | | | | | | | | | |
American Trailer Rental Group LLC | | June 7, 2017 | Provider of Short-term Trailer and Container Rental | | | | | | | | | | | |
| | | | Member Units | (23) | 18,373 | | | | | | 2,149 | | 4,000 |
| | | | | | | | | | | | | | |
APTIM Corp. | (11) | August 17, 2018 | Engineering, Construction & Procurement | | | | | | | | | | | |
| | | | Secured Debt | | | 7.75% | 6/15/2025 | | 6,952 | | 6,356 | | 5,434 |
| | | | | | | | | | | | | | |
Arcus Hunting LLC | (10) | January 6, 2015 | Manufacturer of Bowhunting and Archery Products and Accessories | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 11.00% (L+10.00%, Floor 1.00%) | 3/31/2021 | | 5,504 | | 5,455 | | 5,504 |
| | | | | | | | | | | | | | |
ASC Ortho Management Company, LLC | (10) | August 31, 2018 | Provider of Orthopedic Services | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 8.50% (L+7.50%, Floor 1.00%) | 8/31/2023 | | 5,206 | | 5,151 | | 5,149 |
| | | | Secured Debt | (19) | | 13.25% PIK | 12/1/2023 | | 2,047 | | 2,011 | | 2,047 |
| | | | | | | | | | | | 7,162 | | 7,196 |
| | | | | | | | | | | | | | |
ATX Networks Corp. | (11) (13) (21) | June 30, 2015 | Provider of Radio Frequency | | | | | | | | | | | |
25
MSC Income Fund
Consolidated Schedule of Investments (Continued)
December 31, 2020
(dollars in thousands)
Portfolio Company (1) (20) | | Investment Date (22) | Business Description | Type of Investment (2) (3) (15) | | Shares/Units | Rate | Maturity Date | Principal (4) | Cost (4) | Fair Value (18) | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Management Equipment | ||||||||||||||
| | | | Secured Debt | (9) (19) | | 8.75% (7.25% Cash, 1.50% PIK) (1.50% PIK + L+6.25%, Floor 1.00%) | 12/31/2023 | | 13,435 | | 13,338 | | 12,293 |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
BBB Tank Services, LLC | | April 8, 2016 | Maintenance, Repair and Construction Services to the Above-Ground Storage Tank Market | | | | | | | | | | | |
| | | | Unsecured Debt | (9) | | 12.00% (L+11.00%, Floor 1.00%) | 4/8/2021 | | 1,200 | | 1,200 | | 1,177 |
| | | | Preferred Stock (non-voting) | (8) (19) | | 15.00% PIK | | | | | 38 | | 38 |
| | | | Member Units | | 200,000 | | | | | | 200 | | 70 |
| | | | | | | | | | | | 1,438 | | 1,285 |
| | | | | | | | | | | | | | |
Berry Aviation, Inc. | (10) | July 6, 2018 | Charter Airline Services | | | | | | | | | | | |
| | | | Secured Debt | (19) | | 12.00% (10.50% Cash, 1.5% PIK) | 1/6/2024 | | 4,618 | | 4,575 | | 4,618 |
| | | | Preferred Member Units | (8) (19) (23) | 122,416 | 16.00% PIK | | | | | 143 | | 143 |
| | | | Preferred Member Units | (19) (23) | 1,548,387 | 8.00% PIK | | | | | 1,548 | | 904 |
| | | | | | | | | | | | 6,266 | | 5,665 |
| | | | | | | | | | | | | | |
BigName Commerce, LLC | (10) | May 11, 2017 | Provider of Envelopes and Complimentary Stationery Products | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 8.25% (L+7.25%, Floor 1.00%) | 5/11/2022 | | 2,037 | | 2,030 | | 2,004 |
| | | | | | | | | | | | | | |
Binswanger Enterprises, LLC | (10) | March 10, 2017 | Glass Repair and Installation Service Provider | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 9.50% (L+8.50%, Floor 1.00%) | 3/9/2022 | | 12,958 | | 12,801 | | 12,958 |
| | | | Member Units | | 1,050,000 | | | | | | 1,050 | | 670 |
| | | | | | | | | | | | 13,851 | | 13,628 |
| | | | | | | | | | | | | | |
BLST Operating Company, LLC. | (11) | December 19, 2013 | Multi-Channel Retailer of General Merchandise | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 10.00% (L+8.50%, Floor 1.50%) | 8/28/2025 | | 6,304 | | 6,304 | | 6,304 |
| | | | Common Stock | | 700 | | | | | | - | | - |
| | | | | | | | | | | | 6,304 | | 6,304 |
| | | | | | | | | | | | | | |
Boccella Precast Products LLC | | June 30, 2017 | Manufacturer of Precast Hollow Core Concrete | | | | | | | | | | | |
| | | | Member Units | (8) | 564,000 | | | | | | 564 | | 1,510 |
| | | | | | | | | | | | | | |
Brightwood Capital Fund Investments | (12) (13) | July 21, 2014 | Investment Partnership | | | | | | | | | | | |
| | | | LP Interests (Brightwood Capital Fund III, LP) | (8) (24) | 1.2% | | | | | | 3,695 | | 2,867 |
| | | | LP Interests (Brightwood Capital Fund IV, LP) | (8) (24) | 0.5% | | | | | | 10,037 | | 9,490 |
26
MSC Income Fund
Consolidated Schedule of Investments (Continued)
December 31, 2020
(dollars in thousands)
Portfolio Company (1) (20) | | Investment Date (22) | Business Description | Type of Investment (2) (3) (15) | | Shares/Units | Rate | Maturity Date | Principal (4) | Cost (4) | Fair Value (18) | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | 13,732 | | 12,357 |
| | | | | | | | | | | | | | |
Buca C, LLC | | June 30, 2015 | Casual Restaurant Group | | | | | | | | | | | |
| | | | Secured Debt | (9) (17) | | 10.25% (L+9.25%, Floor 1.00%) | 6/30/2020 | | 12,670 | | 12,670 | | 9,504 |
| | | | Preferred Member Units | (8) (19) | 4 | 6.00% PIK | | | | | 3,040 | | - |
| | | | | | | | | | | | 15,710 | | 9,504 |
| | | | | | | | | | | | | | |
Cadence Aerospace LLC | (10) | November 14, 2017 | Aerostructure Manufacturing | | | | | | | | | | | |
| | | | Secured Debt | (9) (19) | | 9.50% (4.25% Cash, 5.25% PIK) (5.25% PIK + L+3.25%, Floor 1.00%) | 11/14/2023 | | 19,687 | | 19,538 | | 18,732 |
| | | | | | | | | | | | | | |
CAI Software LLC | | October 10, 2014 | Provider of Specialized Enterprise Resource Planning Software | | | | | | | | | | | |
| | | | Secured Debt | | | 12.50% | 12/7/2023 | | 2,086 | | 2,101 | | 2,086 |
| | | | Member Units | (8) | 16,742 | | | | | | 188 | | 1,510 |
| | | | | | | | | | | | 2,289 | | 3,596 |
| | | | | | | | | | | | | | |
Cenveo Corporation | (11) | September 4, 2015 | Provider of Digital Marketing Agency Services | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 10.50% (L+9.50%, Floor 1.00%) | 6/7/2023 | | 4,117 | | 3,929 | | 3,849 |
| | | | Common Stock | | 138,889 | | | | | | 4,163 | | 2,049 |
| | | | | | | | | | | | 8,092 | | 5,898 |
| | | | | | | | | | | | | | |
Chisholm Energy Holdings, LLC | (10) | May 15, 2019 | Oil & Gas Exploration & Production | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.75% (L+6.25%, Floor 1.50%) | 5/15/2026 | | 3,571 | | 3,512 | | 3,274 |
| | | | | | | | | | | | | | |
Clarius BIGS, LLC | | | | | | | | | | | | | | |
| (10) | September 23, 2014 | Prints & Advertising Film Financing | | | | | | | | | | | |
| | | | Secured Debt | (14) (17) (19) | | 15.00% PIK | 1/5/2015 | | 2,849 | | 2,498 | | 31 |
| | | | | | | | | | | | | | |
Classic H&G Holdings, LLC | | March 12, 2020 | Provider of Engineered Packaging Solutions | | | | | | | | | | | |
| | | | Secured Debt | | | 12.00% | 3/12/2025 | | 6,200 | | 6,033 | | 6,200 |
| | | | Preferred Member Units | (8) | 39 | | | | | | 1,440 | | 2,380 |
| | | | | | | | | | | | 7,473 | | 8,580 |
| | | | | | | | | | | | | | |
Clickbooth.com, LLC | (10) | December 5, 2017 | Provider of Digital Advertising Performance Marketing Solutions | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 9.50% (L+8.50%, Floor 1.00%) | 1/31/2025 | | 7,850 | | 7,731 | | 7,850 |
| | | | | | | | | | | | | | |
Copper Trail Fund Investments | (12) (13) | July 17, 2017 | | | | | | | | | | | | |
| | | Investment Partnership | LP Interests (CTEF I, LP) | | 375 | | | | | | - | | 67 |
| | | | | | | | | | | | | | |
Corel Corporation | (11) (13) (21) | July 13, 2020 | Publisher of Desktop and Cloud-based Software | | | | | | | | | | | |
| | | | Secured Debt | | | 5.23% (L+5.00%) | 7/2/2026 | | 1,962 | | 1,866 | | 1,934 |
27
MSC Income Fund
Consolidated Schedule of Investments (Continued)
December 31, 2020
(dollars in thousands)
Portfolio Company (1) (20) | | Investment Date (22) | Business Description | Type of Investment (2) (3) (15) | | Shares/Units | Rate | Maturity Date | Principal (4) | Cost (4) | Fair Value (18) | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | | | |
Datacom, LLC | | May 30, 2014 | Technology and Telecommunications Provider | | | | | | | | | | | |
| | | | Secured Debt | (14) | | 8.00% | 5/31/2021 | | 200 | | 200 | | 179 |
| | | | Secured Debt | (14) (19) | | 10.50% PIK | 5/31/2021 | | 1,376 | | 1,369 | | 1,159 |
| | | | Class A Preferred Member Units | | - | | | | | | 144 | | - |
| | | | Class B Preferred Member Units | | 717 | | | | | | 670 | | - |
| | | | | | | | | | | | 2,383 | | 1,338 |
| | | | | | | | | | | | | | |
Digital River, Inc. | (11) | February 24, 2015 | Provider of Outsourced e-Commerce Solutions and Services | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 8.00% (L+7.00%, Floor 1.00%) | 2/12/2023 | | 8,377 | | 8,344 | | 8,335 |
| | | | | | | | | | | | | | |
DTE Enterprises, LLC | (10) | April 13, 2018 | Industrial Powertrain Repair and Services | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 10.00% (L+8.50%, Floor 1.50%) | 4/13/2023 | | 9,324 | | 9,225 | | 9,011 |
| | | | Class AA Preferred Member Units (non-voting) | (8) (19) | | 10.00% PIK | | | | | 951 | | 951 |
| | | | Class A Preferred Member Units | | 776,316 | | | | | | 776 | | 880 |
| | | | | | | | | | | | 10,952 | | 10,842 |
| | | | | | | | | | | | | | |
Dynamic Communities, LLC | (10) | July 17, 2018 | Developer of Business Events and Online Community Groups | | | | | | | | | | | |
| | | | Secured Debt | (9) (19) | | 12.50% (6.25% Cash, 6.25% PIK) (L+11.50%, Floor 1.00%) | 7/17/2023 | | 5,425 | | 5,364 | | 5,020 |
| | | | | | | | | | | | | | |
EPIC Y-Grade Services, LP | (11) | June 22, 2018 | NGL Transportation & Storage | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.00% (L+6.00%, Floor 1.00%) | 6/30/2027 | | 6,944 | | 6,855 | | 5,798 |
| | | | | | | | | | | | | | |
GoWireless Holdings, Inc. | (11) | December 31, 2017 | Provider of Wireless Telecommunications Carrier Services | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.50% (L+6.50%, Floor 1.00%) | 12/22/2024 | | 14,083 | | 13,998 | | 13,970 |
| | | | | | | | | | | | | | |
Gexpro Services | (10) | February 24, 2020 | Distributor of Industrial and Specialty Parts | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 8.00% (L+6.50%, Floor 1.50%) | 2/24/2025 | | 12,506 | | 12,202 | | 12,408 |
| | | | | | | | | | | | | | |
HDC/HW Intermediate Holdings | (10) | December 21, 2018 | Managed Services and Hosting Provider | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 8.50% (L+7.50%, Floor 1.00%) | 12/21/2023 | | 1,951 | | 1,926 | | 1,883 |
| | | | | | | | | | | | | | |
Hunter Defense Technologies, Inc. | (10) | March 29, 2018 | Provider of Military and Commercial Shelters and Systems | | | | | | | | | | | |
28
MSC Income Fund
Consolidated Schedule of Investments (Continued)
December 31, 2020
(dollars in thousands)
Portfolio Company (1) (20) | | Investment Date (22) | Business Description | Type of Investment (2) (3) (15) | | Shares/Units | Rate | Maturity Date | Principal (4) | Cost (4) | Fair Value (18) | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | Secured Debt | (9) | | 8.00% (L+7.00%, Floor 1.00%) | 3/29/2023 | | 16,583 | | 16,416 | | 16,583 |
| | | | | | | | | | | | | | |
HW Temps LLC | | July 2, 2015 | Temporary Staffing Solutions | | | | | | | | | | | |
| | | | Secured Debt | | | 12.00% | 3/29/2023 | | 2,450 | | 2,420 | | 2,248 |
| | | | | | | | | | | | | | |
Hyperion Materials & Technologies, Inc. | (11) (13) | September 12, 2019 | Manufacturer of Cutting and Machine Tools & Specialty Polishing Compounds | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 6.50% (L+5.50%, Floor 1.00%) | 8/28/2026 | | 7,425 | | 7,299 | | 6,938 |
| | | | | | | | | | | | | | |
Implus Footcare, LLC | (10) | June 1, 2017 | Provider of Footwear and Related Accessories | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 8.75% (L+7.75%, Floor 1.00%) | 4/30/2024 | | 17,264 | | 17,113 | | 15,694 |
| | | | | | | | | | | | | | |
Independent Pet Partners Intermediate Holdings, LLC | (10) | November 20, 2018 | Omnichannel Retailer of Specialty Pet Products | | | | | | | | | | | |
| | | | Secured Debt | (19) | | 6.00% PIK | 11/20/2023 | | 9,944 | | 8,992 | | 8,992 |
| | | | Preferred Stock (non-voting) | | | | | | | | 2,470 | | 2,470 |
| | | | Preferred Stock (non-voting) | | | | | | | | - | | - |
| | | | Member Units | | 1,191,667 | | | | | | 1,192 | | - |
| | | | | | | | | | | | 12,654 | | 11,462 |
| | | | | | | | | | | | | | |
Industrial Services Acquisition, LLC | (10) | June 17, 2016 | Industrial Cleaning Services | | | | | | | | | | | |
| | | | Unsecured Debt | (19) | | 13.00% (6.00% Cash, 7.00% PIK) | 12/17/2022 | | 12,892 | | 12,871 | | 12,892 |
| | | | Preferred Member Units | (8) (19) (23) | 336 | 10.00% PIK | | | | | 202 | | 202 |
| | | | Preferred Member Units | (8) (19) (23) | 187 | 20.00% PIK | | | | | 124 | | 124 |
| | | | Member Units | (23) | 2,100 | | | | | | 2,100 | | 1,237 |
| | | | | | | | | | | | 15,297 | | 14,455 |
| | | | | | | | | | | | | | |
Interface Security Systems, L.L.C | (10) | August 7, 2019 | Commercial Security & Alarm Services | | | | | | | | | | | |
| | | | Secured Debt | (9) (19) | | 11.75% (8.75% Cash, 3.00% PIK) (3.00% PIK + L+7.00%, Floor 1.75%) | 8/7/2023 | | 7,266 | | 7,168 | | 7,266 |
| | | | | | | | | | | | | | |
Intermedia Holdings, Inc. | (11) | August 3, 2018 | Unified Communications as a Service | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.00% (L+6.00%, Floor 1.00%) | 7/19/2025 | | 3,480 | | 3,456 | | 3,478 |
| | | | | | | | | | | | | | |
Invincible Boat Company, LLC. | (10) | August 28, 2019 | Manufacturer of Sport Fishing Boats | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 8.00% (L+6.50%, Floor 1.50%) | 8/28/2025 | | 8,876 | | 8,797 | | 8,876 |
| | | | | | | | | | | | | | |
Isagenix International, LLC | (11) | June 21, 2018 | Direct Marketer of Health & Wellness Products | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 6.75% (L+5.75%, Floor 1.00%) | 6/14/2025 | | 5,572 | | 5,533 | | 3,130 |
29
MSC Income Fund
Consolidated Schedule of Investments (Continued)
December 31, 2020
(dollars in thousands)
Portfolio Company (1) (20) | | Investment Date (22) | Business Description | Type of Investment (2) (3) (15) | | Shares/Units | Rate | Maturity Date | Principal (4) | Cost (4) | Fair Value (18) | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | | | |
Jackmont Hospitality, Inc. | (10) | May 26, 2015 | Franchisee of Casual Dining Restaurants | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.75% (L+6.75%, Floor 1.00%) | 5/26/2021 | | 7,908 | | 7,906 | | 6,315 |
| | | | | | | | | | | | | | |
Joerns Healthcare, LLC | (11) | April 3, 2013 | Manufacturer and Distributor of Health Care Equipment & Supplies | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.00% (L+6.00%, Floor 1.00%) | 8/21/2024 | | 3,336 | | 3,294 | | 3,336 |
| | | | Common Stock | | 392,514 | | | | | | 3,678 | | 2,322 |
| | | | | | | | | | | | 6,972 | | 5,658 |
| | | | | | | | | | | | | | |
Kemp Technologies Inc. | (10) | June 27, 2019 | Provider of Application Delivery Controllers | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.50% (L+6.50%, Floor 1.00%) | 3/29/2024 | | 7,388 | | 7,280 | | 7,388 |
| | | | | | | | | | | | | | |
Knight Energy Services LLC | (11) | November 14, 2018 | Oil and Gas Equipment & Services | | | | | | | | | | | |
| | | | Secured Debt | (17) (19) | | 8.50% PIK | 2/9/2024 | | 828 | | 882 | | 745 |
| | | | Common Stock | | 25,692 | | | | | | 1,843 | | - |
| | | | | | | | | | | | 2,725 | | 745 |
| | | | | | | | | | | | | | |
Kore Wireless Group Inc. | (11) | December 31, 2018 | Mission Critical Software Platform | | | | | | | | | | | |
| | | | Secured Debt | | | 5.75% (L+5.50%) | 12/20/2024 | | 6,000 | | 5,979 | | 5,917 |
| | | | | | | | | | | | | | |
Larchmont Resources, LLC | (11) | August 13, 2013 | Oil & Gas Exploration & Production | | | | | | | | | | | |
| | | | Secured Debt | (9) (19) | | 11.00% PIK (L+10.00% PIK, Floor 1.00%) | 8/9/2021 | | 3,715 | | 3,780 | | 1,672 |
| | | | Member Units | (23) | 4,806 | | | | | | 601 | | 192 |
| | | | | | | | | | | | 4,381 | | 1,864 |
| | | | | | | | | | | | | | |
Laredo Energy VI, LP | (10) | January 15, 2019 | Oil & Gas Exploration & Production | | | | | | | | | | | |
| | | | Member Units | | 1,155,952 | | | | | | 11,560 | | 10,238 |
| | | | | | | | | | | | | | |
Lightbox Holdings, L.P. | (11) | May 23, 2019 | Provider of Commercial Real Estate Software | | | | | | | | | | | |
| | | | Secured Debt | | | 5.15% (L+5.00%) | 5/9/2026 | | 4,925 | | 4,864 | | 4,777 |
| | | | | | | | | | | | | | |
LL Management, Inc. | (10) | May 2, 2019 | Medical Transportation Service Provider | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 8.25% (L+7.25%, Floor 1.00%) | 9/25/2023 | | 13,581 | | 13,485 | | 13,581 |
| | | | | | | | | | | | | | |
Logix Acquisition Company, LLC | (10) | June 24, 2016 | Competitive Local Exchange Carrier | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 6.75% (L+5.75%, Floor 1.00%) | 12/22/2024 | | 12,620 | | 12,560 | | 11,673 |
| | | | | | | | | | | | | | |
LSF9 Atlantis Holdings, LLC | (11) | May 17, 2017 | Provider of Wireless Telecommunications Carrier Services | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.00% (L+6.00%, Floor 1.00%) | 5/1/2023 | | 12,600 | | 12,555 | | 12,561 |
| | | | | | | | | | | | | | |
30
MSC Income Fund
Consolidated Schedule of Investments (Continued)
December 31, 2020
(dollars in thousands)
Portfolio Company (1) (20) | | Investment Date (22) | Business Description | Type of Investment (2) (3) (15) | | Shares/Units | Rate | Maturity Date | Principal (4) | Cost (4) | Fair Value (18) | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Lulu's Fashion Lounge, LLC | (10) | August 31, 2017 | Fast Fashion E-Commerce Retailer | | | | | | | | | | | |
| | | | Secured Debt | (9) (19) | | 10.50% (8.00% Cash, 2.50% PIK) (2.50% PIK + L+7.00%, Floor 1.00%) | 8/28/2022 | | 5,622 | | 5,539 | | 4,807 |
| | | | | | | | | | | | | | |
Lynx FBO Operating LLC | (10) | September 30, 2019 | Fixed Based Operator in the General Aviation Industry | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.25% (L+5.75%, Floor 1.50%) | 9/30/2024 | | 13,613 | | 13,370 | | 13,521 |
| | | | Member Units | | 3,704 | | | | | | 500 | | 594 |
| | | | | | | | | | | | 13,870 | | 14,115 |
| | | | | | | | | | | | | | |
Mac Lean-Fogg Company | (10) | April 22, 2019 | Manufacturer and Supplier for Auto and Power Markets | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 5.63% (L+5.00%, Floor 0.625%) | 12/22/2025 | | 7,375 | | 7,332 | | 7,375 |
| | | | Preferred Stock | (8) (19) | | 13.75% (4.50% Cash, 9.25% PIK) | | | 1 | | 793 | | 780 |
| | | | | | | | | | | | 8,125 | | 8,155 |
| | | | | | | | | | | | | | |
Mills Fleet Farm Group, LLC | (10) | October 24, 2018 | Omnichannel Retailer of Work, Farm and Lifestyle Merchandise | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.00% (L+6.00%, Floor 1.00%) | 10/24/2024 | | 13,875 | | 13,599 | | 13,623 |
| | | | | | | | | | | | | | |
NinjaTrader, LLC | (10) | December 18, 2019 | Operator of Futures Trading Platform | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 8.25% (L+6.75%, Floor 1.50%) | 12/18/2024 | | 16,875 | | 16,520 | | 16,828 |
| | | | | | | | | | | | | | |
NNE Partners, LLC | (10) | March 2, 2017 | Oil & Gas Exploration & Production | | | | | | | | | | | |
| | | | Secured Debt | (19) | | 9.48% (4.75% Cash, 4.50% PIK) (4.50% PIK + L+4.75%) | 12/31/2023 | | 20,649 | | 20,590 | | 18,331 |
| | | | | | | | | | | | | | |
Novetta Solutions, LLC | (11) | June 21, 2017 | Provider of Advanced Analytics Solutions for Defense Agencies | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 6.00% (L+5.00%, Floor 1.00%) | 10/17/2022 | | 14,668 | | 14,504 | | 14,638 |
| | | | | | | | | | | | | | |
NTM Acquisition Corp. | (11) | July 12, 2016 | Provider of B2B Travel Information Content | | | | | | | | | | | |
| | | | Secured Debt | (9) (19) | | 8.25% (7.25% Cash, 1.00% PIK) (1.00% PIK + L+6.25%, Floor 1.00%) | 6/7/2024 | | 4,347 | | 4,332 | | 3,912 |
| | | | | | | | | | | | | | |
PricewaterhouseCoopers Public Sector LLP | (11) | May 24, 2018 | Provider of Consulting Services to Governments | | | | | | | | | | | |
| | | | Secured Debt | | | 8.15% (L+8.00%) | 5/1/2026 | | 14,100 | | 14,063 | | 14,100 |
| | | | | | | | | | | | | | |
RM Bidder, LLC | (10) | November 12, 2015 | Scripted and Unscripted TV and Digital Programming Provider | | | | | | | | | | | |
| | | | Warrants | (26) | 218,601 | | 10/20/2025 | | | | 284 | | - |
31
MSC Income Fund
Consolidated Schedule of Investments (Continued)
December 31, 2020
(dollars in thousands)
Portfolio Company (1) (20) | | Investment Date (22) | Business Description | Type of Investment (2) (3) (15) | | Shares/Units | Rate | Maturity Date | Principal (4) | Cost (4) | Fair Value (18) | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | Member Units | | 1,854 | | | | | | 31 | | 17 |
| | | | | | | | | | | | 315 | | 17 |
| | | | | | | | | | | | | | |
Salient Partners L.P. | (11) | June 25, 2015 | Provider of Asset Management Services | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.00% (L+6.00%, Floor 1.00%) | 8/31/2021 | | 6,450 | | 6,505 | | 4,542 |
| | | | | | | | | | | | | | |
Signal Peak CLO 7, Ltd. (Mariner) | (12) (13) | May 8, 2019 | Structured Finance | | | | | | | | | | | |
| | | | Subordinated Structured Notes | | | 8.30% | 4/30/2032 | | 25,935 | | 21,705 | | 19,300 |
| | | | | | | | | | | | | | |
Slick Innovations, LLC | | September 13, 2018 | Text Message Marketing Platform | | | | | | | | | | | |
| | | | Secured Debt | | | 13.00% | 9/13/2023 | | 1,430 | | 1,241 | | 1,430 |
| | | | Common Stock | | 17,500 | | | | | | 175 | | 330 |
| | | | Warrants | (27) | 4,521 | | 9/13/2028 | | | | 45 | | 90 |
| | | | | | | | | | | | 1,461 | | 1,850 |
| | | | | | | | | | | | | | |
TGP Holdings III LLC | (11) | September 30, 2017 | Outdoor Cooking & Accessories | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 9.50% (L+8.50%, Floor 1.00%) | 9/25/2025 | | 5,000 | | 5,000 | | 4,825 |
| | | | | | | | | | | | | | |
The Pasha Group | (11) | February 2, 2018 | Diversified Logistics and Transportation Provided | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 9.00% (L+8.00%, Floor 1.00%) | 1/26/2023 | | 7,031 | | 6,916 | | 6,451 |
| | | | | | | | | | | | | | |
USA DeBusk LLC | (10) | October 22, 2019 | Provider of Industrial Cleaning Services | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 6.75% (L+5.75%, Floor 1.00%) | 10/22/2024 | | 16,632 | | 16,373 | | 16,394 |
| | | | | | | | | | | | | | |
U.S. TelePacific Corp. | (11) | September 14, 2016 | Provider of Communications and Managed Services | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 6.50% (L+5.50%, Floor 1.00%) | 5/2/2023 | | 12,500 | | 12,329 | | 11,328 |
| | | | | | | | | | | | | | |
Vida Capital, Inc | (11) | October 10, 2019 | Alternative Asset Manager | | | | | | | | | | | |
| | | | Secured Debt | | | 6.15% (L+6.00%) | 10/1/2026 | | 7,238 | | 7,145 | | 7,002 |
| | | | | | | | | | | | | | |
Vistar Media, Inc. | (10) | February 17, 2017 | Operator of Digital Out-of-Home Advertising Platform | | | | | | | | | | | |
| | | | Secured Debt | (9) (19) | | 12.00% (8.50% Cash, 3.50% PIK) (3.50% PIK + L+7.50%, Floor 1.00%) | 4/3/2023 | | 4,656 | | 4,550 | | 4,656 |
| | | | Preferred Stock | | 70,207 | | | | | | 767 | | 910 |
| | | | Warrants | (25) | 69,675 | | 4/3/2029 | | | | - | | 920 |
| | | | | | | | | | | | 5,317 | | 6,486 |
| | | | | | | | | | | | | | |
Volusion, LLC | | January 26, 2015 | Provider of Online Software-as-a-Service eCommerce Solutions | | | | | | | | | | | |
| | | | Secured Debt | (17) | | 11.50% | 1/26/2020 | | 8,672 | | 8,646 | | 8,247 |
| | | | Unsecured Convertible Debt | | | 8.00% | 11/16/2023 | | 175 | | 175 | | 124 |
| | | | Preferred Member Units | | 2,090,001 | | | | | | 6,000 | | 2,570 |
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MSC Income Fund
Consolidated Schedule of Investments (Continued)
December 31, 2020
(dollars in thousands)
Portfolio Company (1) (20) | | Investment Date (22) | Business Description | Type of Investment (2) (3) (15) | | Shares/Units | Rate | Maturity Date | Principal (4) | Cost (4) | Fair Value (18) | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | Warrants | (27) | 784,867 | | 1/26/2025 | | | | 1,104 | | - |
| | | | | | | | | | | | 15,925 | | 10,941 |
| | | | | | | | | | | | | | |
White Cap Parent, LLC | (10) | December 29, 2016 | Distribution Platform of Specialty Construction Materials to Professional Concrete and Masonry Contractors | | | | | | | | | | | |
| | | | Member Units | | | | | | | | 5,637 | | 8,617 |
| | | | | | | | | | | | | | |
YS Garments, LLC | (11) | August 22, 2018 | Designer and Provider of Branded Activewear | | | | | | | | | | | |
| | | | Secured Debt | (9) | | 7.00% (L+6.00%, Floor 1.00%) | 8/9/2024 | | 6,998 | | 6,951 | | 6,457 |
| | | | | | | | | | | | | | |
Subtotal Non-Control/Non-Affiliate Investments (109.4% of net assets at fair value) | | | | | | | | | | | $ | 678,764 | $ | 634,001 |
| | | | | | | | | | | | | | |
Total Portfolio Investments, December 31, 2020 (142.4% of net assets at fair value) | | | | | | | | | | | $ | 840,656 | $ | 825,522 |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Short Term Investments (28) | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Fidelity Institutional Money Market Funds (29) | | | | Prime Money Market Portfolio | | | | | | | $ | 3,989 | $ | 3,989 |
| | | | | | | | | | | | | | |
US Bank Money Market Account (29) | | | | | | | | | | | | 40,217 | | 40,217 |
| | | | | | | | | | | | | | |
Total Short Term Investments | | | | | | | | | | | $ | 44,206 | $ | 44,206 |
(1) | All investments are Lower Middle Market portfolio investments, unless otherwise noted. See Note C for a description of Lower Middle Market portfolio investments. All of the Company’s investments, unless otherwise noted, are encumbered either as security for one of the Company’s Credit Facilities. |
(2) | Debt investments are income producing, unless otherwise noted. Equity and warrants are non-income producing, unless otherwise noted. |
(3) | See C.2 and Schedule 12-14 for a summary of geographic location of portfolio companies. |
(4) | Principal is net of repayments. Cost is net of repayments and accumulated unearned income. |
(5) | Control investments are defined by the Investment Company Act of 1940, as amended ("1940 Act"), as investments in which more than 25% of the voting securities are owned or where the ability to nominate greater than 50% of the board representation is maintained. |
(6) | Affiliate investments are defined by the 1940 Act as investments in which between 5% and 25% (inclusive) of the voting securities are owned and the investments are not classified as Control investments. |
(7) | Non-Control/Non-Affiliate investments are defined by the 1940 Act as investments that are neither Control investments nor Affiliate investments. |
(8) | Income producing through dividends or distributions. |
(9) | Index based floating interest rate is subject to contractual minimum interest rate, or floors. |
(10) | Private Loan portfolio investment. See C.2 for a description of Private Loan portfolio investments. |
(11) | Middle Market portfolio investment. See C.2 for a description of Middle Market portfolio investments. |
(12) | Other Portfolio investment. See C.2 for a description of Other Portfolio investments. |
(13) | Investment is not a qualifying asset as defined under Section 55(a) of the 1940 Act. Qualifying assets must represent at least 70% of total assets at the time of acquisition of any additional non-qualifying assets. |
(14) | Non-accrual and non-income producing investment. |
(15) | All of the Company’s portfolio investments are generally subject to restrictions on resale as “restricted securities.” |
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MSC Income Fund
Consolidated Schedule of Investments (Continued)
December 31, 2020
(dollars in thousands)
(16) | Not used |
(17) | Maturity date is under on-going negotiations with the portfolio company and other lenders, if applicable. |
(18) | Investment fair value was determined using significant unobservable inputs, unless otherwise noted. See C.1 for further discussion. |
(19) | PIK interest income and cumulative dividend income represent income not paid currently in cash. |
(20) | All portfolio company headquarters are based in the United States, unless otherwise noted. |
(21) | Portfolio company headquarters are located outside of the United States. |
(22) | Investment date represents the date of initial investment in the portfolio company. |
(23) | Shares/Units represent ownership in an underlying Real Estate or HoldCo entity. |
(24) | Investment is not unitized. Presentation is made in percent of fully diluted ownership unless otherwise indicated. |
(25) | Warrants are presented in equivalent shares with a strike price of $10.92 per share. |
(26) | Warrants are presented in equivalent units with a strike price of $14.28 per unit. |
(27) | Warrants are presented in equivalent shares/units with a strike price of $0.01 per share/unit. |
(28) | Short term investments represent an investment in a fund that invests in highly liquid investments with average original maturity dates of three months or less. These short term investments are included as Cash and cash equivalents. |
(29) | Effective yield as of December 31, 2020 was approximately .05% at US Bank Money Market Account and .01% at Fidelity Institutional Money Market Funds. |
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MSC Income Fund, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE A—ORGANIZATION AND BASIS OF PRESENTATION
1. Organization
MSC Income Fund, Inc. (formerly known as HMS Income Fund, Inc. through October 30, 2020) (“MSC Income Fund” and, collectively with its consolidated subsidiaries, the “Company”) was formed as a Maryland corporation on November 28, 2011 under the General Corporation Law of the State of Maryland. The Company is an externally managed, non-diversified closed-end management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). MSC Income Fund has elected to be treated for U.S. federal income tax purposes as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). As a result, MSC Income Fund generally will not pay corporate-level U.S. federal income taxes on any net ordinary taxable income or capital gains that it distributes to its stockholders.
The Company’s primary investment objective is to generate current income through debt and equity investments. A secondary objective of the Company is to generate current dividend income and long-term capital appreciation through direct equity investments and equity-related investments, including warrants, convertible securities and other rights to acquire equity securities. The Company’s portfolio strategy is to invest primarily in illiquid debt and equity securities issued by lower middle market (“LMM”) companies, which generally have annual revenues between $10 million and $150 million, and debt securities issued by middle market (“Middle Market”) companies that are generally larger in size than the LMM companies. The Company’s LMM and Middle Market portfolio investments generally range in size from $1 million to $15 million. The Company categorizes some of its investments in LMM companies and Middle Market companies as private loan (“Private Loan”) portfolio investments. Private Loan investments, often referred to in the debt markets as “club deals,” are investments, generally in debt instruments, that the Company originates on a collaborative basis with other investment funds. Private Loan investments are typically similar in size, structure, terms and conditions to investments the Company holds in its LMM portfolio and Middle Market portfolio. The Company’s portfolio also includes other portfolio (“Other Portfolio”) investments primarily consisting of investments managed by third parties, which differ from the typical profiles for the Company’s other types of investments.
MSC Income Fund has certain direct and indirect wholly owned subsidiaries that are maintained for different specific operating purposes. Several of these subsidiaries have elected to be taxable entities (the “Taxable Subsidiaries”), with the primarily purpose of permitting the Company to hold equity investments in portfolio companies which are “pass through” entities for tax purposes. Two other subsidiaries were created to facilitate debt financing activities of the Company, including HMS Funding I LLC (“HMS Funding”), which was created in connection with the Deutsche Bank Credit Facility. MSIF Funding LLC (“MSIF Funding”) which was created in connection with the JPM SPV Facility. The Deutsche Bank Credit Facility, the TIAA Credit Facility and the JPM SPV Facility (each as defined below in “Note E — Debt”) are collectively referred to herein as our “Credit Facilities”.
Unless otherwise noted or the context otherwise indicates, the terms “we,” “us,” “our,” and the “Company” refer to MSC Income Fund and its consolidated subsidiaries.
Prior to October 30, 2020, the business of the Company was managed by HMS Adviser LP (“HMS Adviser”), a Texas limited partnership and affiliate of Hines Interests Limited Partnership (“Hines”), under an Investment Advisory and Administrative Services Agreement dated May 31, 2012 (as amended, the “Original Investment Advisory Agreement”). Prior to October 30, 2020, the Company and HMS Adviser retained MSC Adviser I, LLC (“MSC Adviser”), a wholly owned subsidiary of Main Street Capital Corporation (“Main Street”), a New York Stock Exchange-listed BDC, as the Company’s investment sub-adviser, pursuant to an Investment Sub-Advisory Agreement (the “Sub-Advisory Agreement”), to identify, evaluate, negotiate and structure prospective investments, make investment and portfolio management recommendations for approval by HMS Adviser, monitor the Company’s investment portfolio
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and provide certain ongoing administrative services to HMS Adviser. HMS Adviser and MSC Adviser are collectively referred to as the “Advisers,” and each is registered as an investment adviser under the Investment Advisers Act of 1940, as amended. Upon the execution of the Sub-Advisory Agreement, Main Street became an affiliate of the Company. The Company engaged Hines Securities, Inc. (the “Dealer Manager”), an affiliate of HMS Adviser, to serve as the Dealer Manager for previously offered and sold shares of its common stock on a continuous basis pursuant to registration statements on Form N-2 that were filed with and declared effective by the SEC.
HMS Adviser entered into an asset purchase agreement, dated June 26, 2020 (the “Purchase Agreement”), with MSC Adviser, Main Street (solely for the purposes set forth in the Purchase Agreement) and Hines (solely for the purposes set forth in the Purchase Agreement). The Purchase Agreement contemplated that, subject to approval by the Company’s Board of Directors and the Company’s stockholders, the Company would enter into the Investment Advisory and Administrative Services Agreement with MSC Adviser as sole investment adviser (the “Investment Advisory Agreement”) and that the Original Investment Advisory Agreement and the Sub-Advisory Agreement would terminate concurrently therewith.
On June 29, 2020, the Company’s Board of Directors, including all of its independent directors, unanimously approved and recommended to the stockholders of the Company for approval of the Investment Advisory Agreement. On October 28, 2020, the Company’s stockholders approved the Investment Advisory Agreement to take effect upon the closing of the transactions contemplated by the Purchase Agreement (collectively, the “Transaction”). Upon the closing of the Transaction on October 30, 2020, the Company entered into the Investment Advisory Agreement with MSC Adviser and MSC Adviser became the sole investment adviser to the Company. See “Note J — Related Party Transactions” for additional information regarding the Investment Advisory Agreement.
2. Basis of Presentation
The Company’s consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The Company is an investment company following accounting and reporting guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 946, Financial Services—Investment Companies (“ASC 946”). For each of the periods presented herein, the Company’s consolidated financial statements include the accounts of MSC Income Fund and its consolidated subsidiaries. The Investment Portfolio, as used herein, refers to all of the Company’s investments in Private Loan portfolio companies, LMM portfolio companies, Middle Market portfolio companies and Other Portfolio investments (see “Note C.2” for additional discussion of the Company’s Investment Portfolio). The Company’s results of operations for the three and nine months ended September 30, 2021 and 2020, cash flows for the nine months ended September 30, 2021 and 2020, and financial position as of September 30, 2021 and December 31, 2020, are presented on a consolidated basis. The effects of all intercompany transactions between MSC Income Fund and its consolidated subsidiaries have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements of the Company are presented in conformity with U.S. GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Articles 6, 10 and 12 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with U.S. GAAP are omitted. The unaudited financial statements and notes should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2020. In the opinion of management, the unaudited consolidated financial results included herein contain all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the interim periods included herein. The results of operations for the three and nine months ended September 30, 2021 and 2020 are not necessarily indicative of the operating results to be expected for the full year. Financial statements prepared on a U.S. GAAP basis require management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein.
Certain prior period information has been reclassified to conform to the current period presentation. The reclassification has no effect on the Company’s consolidated financial position or the consolidated results of operations as previously reported.
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Principles of Consolidation
Under ASC 946, the Company is precluded from consolidating other entities in which it has equity investments, including those in which it has a controlling interest, unless the other entity is another investment company. Accordingly, the Company consolidates its wholly-owned subsidiaries, including the Taxable Subsidiaries and does not consolidate its Investment Portfolio.
Portfolio Investment Classification
The Company classifies its Investment Portfolio in accordance with the requirements of the 1940 Act. Under the 1940 Act, (a) “Control Investments” are defined as investments in which the Company owns more than 25% of the voting securities or has rights to maintain greater than 50% of the board representation, (b) “Affiliate Investments” are defined as investments in which the Company owns between 5% and 25% (inclusive) of the voting securities and does not have rights to maintain greater than 50% of the board representation, and (c) “Non-Control/Non-Affiliate Investments” are defined as investments that are neither Control Investments nor Affiliate Investments. For purposes of determining the classification of its Investment Portfolio, the Company has excluded consideration of any voting securities or board appointment rights held by Main Street and other funds advised by Main Street.
NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Valuation of the Investment Portfolio
The Company accounts for its Investment Portfolio at fair value. As a result, the Company follows the provisions of ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. ASC 820 requires the Company to assume that the portfolio investment is to be sold in the principal market to independent market participants, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal market that are independent, knowledgeable and willing and able to transact. Pursuant to its internal valuation process and the requirements under the 1940 Act, the Company performs valuation procedures on each of its portfolio investments quarterly.
The Company’s portfolio strategy calls for it to invest primarily in illiquid debt and equity securities issued by privately held, LMM companies and more liquid debt securities issued by Middle Market companies that are generally larger in size than the LMM companies. The Company categorizes some of its investments in LMM companies and Middle Market companies as Private Loan portfolio investments, which are primarily debt securities in privately held companies that have been originated through strategic relationships with other investment funds on a collaborative basis, and are often referred to in the debt markets as “club deals.” Private Loan investments are typically similar in size, structure, terms and conditions to investments the Company holds in its LMM portfolio and Middle Market portfolio. The Company’s portfolio also includes Other Portfolio investments which primarily consist of investments that are not consistent with the typical profiles for its LMM portfolio investments, Middle Market portfolio investments or Private Loan portfolio investments, including investments which may be managed by third parties. The Company’s portfolio investments may be subject to restrictions on resale.
Private Loan investments may include investments which have no established trading market or have established markets that are not active. LMM investments and Other Portfolio investments (excluding the Company’s investment in Signal Peak CLO 7, Ltd. (the “Signal CLO”)) generally have no established trading market while Middle Market investments and the Signal CLO generally have established markets that are not active. The Company determines in good faith the fair value of its Investment Portfolio pursuant to a valuation policy in accordance with ASC 820 and a valuation process approved by its Board of Directors and in accordance with the 1940 Act. The Company’s valuation policies and processes are intended to provide a consistent basis for determining the fair value of the Company’s Investment Portfolio.
For LMM portfolio investments, the Company generally reviews external events, including private mergers, sales and acquisitions involving comparable companies, and includes these events in the valuation process by using an enterprise value waterfall methodology (“Waterfall”) for its LMM equity investments and an income approach using a
37
yield-to-maturity model (“Yield-to-Maturity”) for its LMM debt investments. For Middle Market portfolio investments, the Company primarily uses quoted prices in the valuation process. The Company determines the appropriateness of the use of third-party broker quotes, if any, in determining fair value based on its understanding of the level of actual transactions used by the broker to develop the quote and whether the quote was an indicative price or binding offer, the depth and consistency of broker quotes and the correlation of changes in broker quotes with underlying performance of the portfolio company and other market indices. For Middle Market and Private Loan portfolio investments in debt securities for which it has determined that third-party quotes or other independent pricing are not available or appropriate, the Company generally estimates the fair value based on the assumptions that it believes hypothetical market participants would use to value the investment in a current hypothetical sale using the Yield-to-Maturity valuation method. For its Other Portfolio equity investments, excluding its investment in Signal CLO, the Company generally calculates the fair value of the investment primarily based on the net asset value (“NAV”) of the fund and adjusts the fair value for other factors deemed relevant that would affect the fair value of the investment. All of the valuation approaches for the Company’s portfolio investments estimate the value of the investment as if the Company were to sell, or exit, the investment as of the measurement date.
These valuation approaches consider the value associated with the Company’s ability to control the capital structure of the portfolio company, as well as the timing of a potential exit. For valuation purposes, “control” portfolio investments are composed of debt and equity securities in companies for which the Company has a controlling interest in the equity ownership of the portfolio company or the ability to nominate a majority of the portfolio company’s board of directors. For valuation purposes, “non-control” portfolio investments are generally composed of debt and equity securities in companies for which the Company does not have a controlling interest in the equity ownership of the portfolio company or the ability to nominate a majority of the portfolio company’s board of directors.
Under the Waterfall valuation method, the Company estimates the enterprise value of a portfolio company using a combination of market and income approaches or other appropriate valuation methods, such as considering recent transactions in the equity securities of the portfolio company or third-party valuations of the portfolio company, and then performs a waterfall calculation by allocating the enterprise value over the portfolio company’s securities in order of their preference relative to one another. The enterprise value is the fair value at which an enterprise could be sold in a transaction between two willing parties, other than through a forced or liquidation sale. Typically, privately held companies are bought and sold based on multiples of earnings before interest, taxes, depreciation and amortization (“EBITDA”), cash flows, net income, revenues, or in limited cases, book value. There is no single methodology for estimating enterprise value. For any one portfolio company, enterprise value is generally described as a range of values from which a single estimate of enterprise value is derived. In estimating the enterprise value of a portfolio company, the Company analyzes various factors including the portfolio company’s historical and projected financial results. Due to SEC deadlines for the Company’s quarterly and annual financial reporting, the operating results of a portfolio company used in the current period valuation are generally the results from the period ended three months prior to such valuation date and may include unaudited, projected, budgeted or pro forma financial information and may require adjustments for non-recurring items or to normalize the operating results that may require significant judgment from the Company’s management. In addition, projecting future financial results requires significant judgment regarding future growth assumptions. In evaluating the operating results, the Company also analyzes the impact of exposure to litigation, loss of customers or other contingencies. After determining the appropriate enterprise value, the Company allocates the enterprise value to investments in order of the legal priority of the various components of the portfolio company’s capital structure. In applying the Waterfall valuation method, the Company assumes the loans are paid off at the principal amount in a change in control transaction and are not assumed by the buyer, which the Company believes is consistent with its past transaction history and standard industry practices.
Under the Yield-to-Maturity valuation method, the Company also uses the income approach to determine the fair value of debt securities based on projections of the discounted future free cash flows that the debt security will likely generate, including analyzing the discounted cash flows of interest and principal amounts for the debt security, as set forth in the associated loan agreements, as well as the financial position and credit risk of the portfolio company. The Company’s estimate of the expected repayment date of its debt securities is generally the maturity date of the instrument, as the Company generally intends to hold its loans and debt securities to maturity. The Yield-to-Maturity analysis also considers changes in leverage levels, credit quality, portfolio company performance, changes in market-based interest rates and other factors. The Company will generally use the value determined by the Yield-to-Maturity analysis as the fair value for that security; however, because of the Company’s general intent to hold its loans to maturity, the fair value will not exceed the principal amount of the debt security valued using the Yield-to-Maturity valuation method. A change in the assumptions that the Company uses to estimate the fair value of its debt securities using the Yield-to-Maturity
38
valuation method could have a material impact on the determination of fair value. If there is deterioration in credit quality or if a debt security is in workout status, the Company may consider other factors in determining the fair value of the debt security, including the value attributable to the debt security from the enterprise value of the portfolio company or the proceeds that would most likely be received in a liquidation analysis.
Under the NAV valuation method, for an investment in an investment fund that does not have a readily determinable fair value, the Company measures the fair value of the investment predominately based on the NAV of the investment fund as of the measurement date and adjusts the investment’s fair value for factors known to the Company that would affect that fund’s NAV, including, but not limited to, fair values for individual investments held by the fund if the Company holds the same investment or for a publicly traded investment. In addition, in determining the fair value of the investment, the Company considers whether adjustments to the NAV are necessary in certain circumstances, based on the analysis of any restrictions on redemption of the Company’s investment as of the measurement date, recent actual sales or redemptions of interests in the investment fund, and expected future cash flows available to equity holders, including the rate of return on those cash flows compared to an implied market return on equity required by market participants, or other uncertainties surrounding the Company’s ability to realize the full NAV of its interests in the investment fund.
For valuation purposes, all of the Company’s Private Loan portfolio investments are non-control investments. For Private Loan portfolio investments for which it has determined that third-party quotes or other independent pricing are not available or appropriate, the Company generally estimates the fair value based on the assumptions that it believes hypothetical market participants would use to value such Private Loan debt investments in a current hypothetical sale using the Yield-to-Maturity valuation method and such Private Loan equity investments in a current hypothetical sale using the Waterfall valuation method.
In addition to its internal valuation process, in arriving at estimates of fair value for its investments in its Private Loan portfolio companies, the Company, among other things, consults with a nationally recognized independent financial advisory services firm. The nationally recognized independent financial advisory services firm analyzes and provides observations and recommendations and an assurance certification regarding the Company’s determinations of the fair value of its Private Loan portfolio company investments. The nationally recognized independent financial advisory services firm is generally consulted relative to the Company’s investments in each Private Loan portfolio company at least once every calendar year, and for the Company’s investments in new Private Loan portfolio companies, at least once in the twelve-month period subsequent to the initial investment. In certain instances, the Company may determine that it is not cost-effective, and as a result is not in its stockholders’ best interest, to consult with the nationally recognized independent financial advisory services firm on its investments in one or more Private Loan portfolio companies. Such instances include, but are not limited to, situations where the fair value of the Company’s investment in a Private Loan portfolio company is determined to be insignificant relative to the total Investment Portfolio. The Company consulted with and received an assurance certification from its independent financial advisory services firm in arriving at its determination of fair value on its investments in a total of 19 Private Loan portfolio companies for the nine months ended September 30, 2021, representing approximately 47% of the total Private Loan portfolio at fair value as of September 30, 2021, and on a total of 23 Private Loan portfolio companies for the nine months ended September 30, 2020, representing approximately 57% of the total Private Loan portfolio at fair value as of September 30, 2020. Excluding its investments in Private Loan portfolio companies that, as of September 30, 2021 and 2020, as applicable, had not been in the Investment Portfolio for at least twelve months subsequent to the initial investment and its investments in Private Loan portfolio companies that were not reviewed because the investment is valued based upon third-party quotes or other independent pricing, the percentage of the Private Loan portfolio reviewed and certified by its independent financial advisory services firm for the nine months ended September 30, 2021 and 2020 was 66% and 65% of the total Private Loan portfolio at fair value as of September 30, 2021 and 2020, respectively.
In addition to its internal valuation process, in arriving at estimates of fair value for its investments in its LMM portfolio companies, the Company, among other things, consults with a nationally recognized independent financial advisory services firm. The nationally recognized independent financial advisory services firm analyzes and provides observations, recommendations and an assurance certification regarding the Company’s determinations of the fair value of its LMM portfolio company investments. The nationally recognized independent financial advisory services firm is generally consulted relative to the Company’s investments in each LMM portfolio company at least once every calendar year, and for the Company’s investments in new LMM portfolio companies, at least once in the twelve-month period subsequent to the initial investment. In certain instances, the Company may determine that it is not cost-effective,
39
and as a result is not in its stockholders’ best interest, to consult with the nationally recognized independent financial advisory services firm on its investments in one or more LMM portfolio companies. Such instances include, but are not limited to, situations where the fair value of the Company’s investment in a LMM portfolio company is determined to be insignificant relative to the total Investment Portfolio. The Company consulted with and received an assurance certification from its independent financial advisory services firm in arriving at the Company’s determination of fair value on its investments in a total of 27 LMM portfolio companies for the nine months ended September 30, 2021, representing approximately 75% of the total LMM portfolio at fair value as of September 30, 2021, and on a total of 25 LMM portfolio companies for the nine months ended September 30, 2020, representing approximately 75% of the total LMM portfolio at fair value as of September 30, 2020. Excluding its investments in LMM portfolio companies that, as of September 30, 2021 and 2020, as applicable, had not been in the Investment Portfolio for at least twelve months subsequent to the initial investment or whose primary purpose is to own real estate for which a third-party appraisal is obtained on at least an annual basis, the percentage of the LMM portfolio reviewed and certified by its independent financial advisory services firm for the nine months ended September 30, 2021 and 2020 was 81% and 77% of the total LMM portfolio at fair value as of September 30, 2021 and 2020, respectively.
For valuation purposes, all of the Company’s Middle Market portfolio investments are non-control investments. To the extent sufficient observable inputs are available to determine fair value, the Company uses observable inputs to determine the fair value of these investments through obtaining third-party quotes or other independent pricing. For Middle Market portfolio investments for which it has determined that third-party quotes or other independent pricing are not available or appropriate, the Company generally estimates the fair value based on the assumptions that it believes hypothetical market participants would use to value such Middle Market debt investments in a current hypothetical sale using the Yield-to-Maturity valuation method and such Middle Market equity investments in a current hypothetical sale using the Waterfall valuation method. Because the vast majority of the Middle Market portfolio investments are typically valued using third-party quotes or other independent pricing services (including 92% and 88% of the Middle Market portfolio investments as of September 30, 2021 and December 31, 2020, respectively), the Company generally does not consult with any financial advisory services firms in connection with determining the fair value of its Middle Market investments.
For valuation purposes, all of the Company’s Other Portfolio investments are non-control investments. The Company’s Other Portfolio investments comprised 4.4% and 6.1% of the Company’s Investment Portfolio at fair value as of September 30, 2021 and December 31, 2020, respectively. Similar to the LMM investment portfolio, market quotations for Other Portfolio equity investments, except for the Company’s investment in Signal CLO, are generally not readily available. For its Other Portfolio equity investments, except for the Company’s investment in Signal CLO, the Company generally determines the fair value of these investments using the NAV valuation method. For the Company’s investment in Signal CLO, the Company determines the appropriateness of the use of the third-party broker quote in determining fair value based on its understanding of the level of actual transactions used by the broker to develop the quote and whether the quote was an indicative price or binding offer, the depth and consistency of broker quotes and the correlation of changes in broker quotes with underlying performance of the portfolio company and other market indices. The Company often cannot observe the inputs considered by the third party in determining their quotes.
Due to the inherent uncertainty in the valuation process, the Company’s determination of fair value for its Investment Portfolio may differ materially from the values that would have been determined had a ready market for the securities existed. In addition, changes in the market environment, portfolio company performance and other events that may occur over the lives of the investments may cause the gains or losses ultimately realized on these investments to be materially different than the valuations currently assigned. The Company determines the fair value of each individual investment and records changes in fair value as unrealized appreciation or depreciation.
MSC Adviser, the Company’s investment adviser, uses an internally developed portfolio investment rating system in connection with its investment oversight, portfolio management and analysis and investment valuation procedures for the Company’s LMM portfolio companies. This system takes into account both quantitative and qualitative factors of the LMM portfolio company and the investments held therein.
The SEC has adopted Rule 2a-5 under the 1940 Act, which permits a BDC’s board of directors to designate its executive officers or investment adviser as a valuation designee to determine the fair value for its investment portfolio, subject to the active oversight of the board. The Company’s Board of Directors approved policies and procedures pursuant to Rule 2a-5 (the “Valuation Procedures”) and has designated MSC Adviser, and specifically a group of its
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executive officers, to serve as the Board’s valuation designee. The Company adopted the Valuation Procedures effective April 1, 2021. The Company believes its Investment Portfolio as of September 30, 2021 and December 31, 2020 approximates fair value as of those dates based on the markets in which the Company operates and other conditions in existence on those reporting dates.
2. Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results may differ from these estimates under different conditions or assumptions. Additionally, as explained in Note B.1., the consolidated financial statements include investments in the Investment Portfolio whose values have been estimated by the Company pursuant to valuation policies and procedures approved and overseen by the Company’s Board of Directors in the absence of readily ascertainable market values. Because of the inherent uncertainty of the Investment Portfolio valuations, those estimated values may differ materially from the values that would have been determined had a ready market for the securities existed.
The COVID-19 pandemic, and the related effect on the U.S. and global economies, has impacted, and threatens to continue to impact, the businesses and operating results of certain of the Company’s portfolio companies, as well as market interest rate spreads. As a result of these and other current effects of the COVID-19 pandemic, as well as the uncertainty regarding the extent and duration of its impact, the valuation of the Company’s Investment Portfolio has been experiencing increased volatility since the beginning of the COVID-19 pandemic.
3. Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents consist of cash and highly liquid investments with an original maturity of three months or less at the date of purchase. Cash and cash equivalents are carried at cost, which approximates fair value.
At September 30, 2021, cash balances totaling $4.3 million exceeded Federal Deposit Insurance Corporation insurance protection levels, subjecting the Company to risk related to the uninsured balance. All of the Company’s cash deposits are held at large established high credit quality financial institutions and management believes that the risk of loss associated with any uninsured balances is remote. At September 30, 2021, the Company had investments in short-term money market accounts totaling $15.7 million classified as cash equivalents.
Amounts included in restricted cash at December 31, 2020 represented balances in the cash accounts held at HMS Funding, which had been set aside pursuant to an amendment to the Deutsche Bank Credit Facility effective April 24, 2020 (see Note E — Debt) (i) as a reserve for draws on unfunded commitments related to investments held by HMS Funding or (ii) to be applied against outstanding advances on the facility. On February 3, 2021, the Deutsche Bank Credit Facility was fully repaid through the use of restricted cash and proceeds from borrowings under the JPM SPV Facility and accordingly, the Company has no other restrictions on cash (or restricted cash requirement) upon the extinguishment of the Deutsche Bank Credit Facility.
4. Interest, Dividend and Fee Income
The Company records interest and dividend income on the accrual basis to the extent amounts are expected to be collected. Dividend income is recorded as dividends are declared by the portfolio company or at the point an obligation exists for the portfolio company to make a distribution. In accordance with the Company’s valuation policies, the Company evaluates accrued interest and dividend income periodically for collectability. When a loan or debt security becomes 90 days or more past due, and if the Company otherwise does not expect the debtor to be able to service all of its debt or other obligations, the Company will generally place the loan or debt security on non-accrual status and cease recognizing interest income on that loan or debt security until the borrower has demonstrated the ability and intent to pay contractual amounts due. If a loan or debt security’s status significantly improves regarding the debtor’s ability to service the debt or other obligations, or if a loan or debt security is sold or written off, the Company removes it from non-accrual status.
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As of September 30, 2021, the Company’s total Investment Portfolio had three investments on non-accrual status, which comprised approximately 0.8% of its fair value and 2.3% of its cost. As of December 31, 2020, the Company’s total Investment Portfolio had three investments on non-accrual status, which comprised approximately 0.6% of its fair value and 1.3% of its cost.
Interest income from investments in the “equity” class of security of collateralized loan obligation (“CLO”) funds (typically subordinated notes) is recorded based upon an estimation of an effective yield to expected maturity utilizing estimated projected cash flows in accordance with ASC 325-40, Beneficial Interests in Securitized Financial Assets. The Company monitors the expected cash inflows from its investment in a CLO, including the expected residual payments, and the effective yield is determined and updated periodically.
The Company holds certain debt and preferred equity instruments in its Investment Portfolio that contain payment-in-kind (“PIK”) interest and cumulative dividend provisions. The PIK interest, computed at the contractual rate specified in each debt agreement, is periodically added to the principal balance of the debt and is recorded as interest income. Thus, the actual collection of this interest may be deferred until the time of debt principal repayment. Cumulative dividends are recorded as dividend income, and any dividends in arrears are added to the balance of the preferred equity investment. The actual collection of these dividends in arrears may be deferred until such time as the preferred equity is redeemed or sold. To maintain RIC tax treatment (as discussed in Note B.8. below), these non-cash sources of income may need to be paid out to stockholders in the form of distributions, even though the Company may not have collected the PIK interest and cumulative dividends in cash. For the three months ended September 30, 2021 and 2020, approximately 2.5% and 6.4%, respectively, of the Company’s total investment income was attributable to PIK interest income and cumulative dividend income not paid currently in cash. For the nine months ended September 30, 2021 and 2020, approximately 2.4% and 4.9%, respectively, of the Company’s total investment income was attributable to PIK interest income and cumulative dividend income not paid currently in cash. The Company stops accruing PIK interest and cumulative dividends and writes off any accrued and uncollected interest and dividends in arrears when it determines that such PIK interest and dividends in arrears are no longer collectible.
The Company may periodically provide services, including structuring and advisory services, to its portfolio companies or other third parties. For services that are separately identifiable and evidence exists to substantiate fair value, fee income is recognized as earned, which is generally when the investment or other applicable transaction closes. Fees received in connection with debt financing transactions for services that do not meet these criteria are treated as debt origination fees and are deferred and accreted into income over the life of the financing.
A presentation of total investment income the Company received from its Investment Portfolio in each of the periods presented is as follows:
| | Three Months Ended | | Nine Months Ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
| | (dollars in thousands) | | ||||||||||
Interest, fee and dividend income: | | | | | | | | | | | | | |
Interest income | | $ | 18,818 | | $ | 17,347 | | $ | 52,218 | | $ | 58,834 | |
Dividend income | |
| 3,249 | |
| 2,089 | |
| 12,227 | |
| 5,833 | |
Fee income | |
| 687 | |
| 83 | |
| 1,077 | |
| 1,099 | |
Total interest, fee and dividend income | | $ | 22,754 | | $ | 19,519 | | $ | 65,522 | | $ | 65,766 | |
5. Deferred Financing Costs
Deferred financing costs represent fees and other direct costs incurred in connection with arranging the Company’s borrowings. These costs were incurred in connection with the Company’s Credit Facilities and the Main Street Term Loan (see Note E — Debt) and have been capitalized. The deferred financing costs are being amortized to interest expense using the straight-line method over the life of the related credit facility, which the Company believes is materially consistent with the effective interest method.
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6. Equity Offering Costs
In accordance with the Original Investment Advisory Agreement and the Sub-Advisory Agreement, the Company had historically reimbursed HMS Adviser for any offering costs that were paid on the Company’s behalf, which consist of, among other costs, actual legal, accounting, bona fide out-of-pocket itemized and detailed due diligence costs, printing, filing fees, transfer agent costs, postage, escrow fees, data processing fees, advertising and sales literature and other offering costs. In connection with the Transaction, HMS Adviser agreed to permanently waive its right to receive reimbursement for any and all accrued and unpaid or unreimbursed expenses under the Original Investment Advisory Agreement, except for certain organizational and offering expenses described further in Note J - Related Party Transactions.
Deferred offering costs were fully amortized to expense upon the closing of the our prior public continuous offering of common stock to new investors. Any future offering costs will be currently expensed as incurred by the Company or as it becomes obligated to reimburse HMS Adviser for such costs.
7. Unearned Income—Debt Origination Fees and Original Issue Discount and Discounts / Premiums to Par Value
The Company capitalizes debt origination fees received in connection with financings and reflects such fees as unearned income netted against the applicable debt investments. The unearned income from the fees is accreted into income based on the effective interest method over the life of the financing.
In connection with its portfolio debt investments, the Company sometimes receives nominal cost warrants or warrants with an exercise price below the fair value of the underlying equity (together, “nominal cost equity”) that are valued as part of the negotiation process with the particular portfolio company. When the Company receives nominal cost equity, it allocates its cost basis in its investment between its debt security and its nominal cost equity at the time of origination based on amounts negotiated with the particular portfolio company. The allocated amounts are based upon the fair value of the nominal cost equity, which is then used to determine the allocation of cost to the debt security. Any discount recorded on a debt investment resulting from this allocation is reflected as unearned income, which is netted against the applicable debt investment, and accreted into interest income based on the effective interest method over the life of the debt investment. The actual collection of this interest is deferred until the time of debt principal repayment.
The Company may purchase debt securities at a discount or at a premium to the par value of the debt security. In the case of a purchase at a discount, the Company records the investment at the par value of the debt security net of the discount, and the discount is accreted into interest income based on the effective interest method over the life of the debt investment. In the case of a purchase at a premium, the Company records the investment at the par value of the debt security plus the premium, and the premium is amortized as a reduction to interest income based on the effective interest method over the life of the debt investment.
To maintain RIC tax treatment (as discussed in Note B.8. below), these non-cash sources of income may need to be paid out to stockholders in the form of distributions, even though the Company may not have collected the interest income. For the three months ended September 30, 2021 and 2020, approximately 5.9% and 4.7%, respectively, of the Company’s total investment income was attributable to interest income from the accretion of discounts associated with debt investments, net of any premium reduction. For the nine months ended September 30, 2021 and 2020, approximately 5.3% and 3.4%, respectively, of the Company’s total investment income was attributable to interest income from the accretion of discounts associated with debt investments, net of any premium reduction.
8. Income Taxes
The Company has elected to be treated for U.S. federal income tax purposes as a RIC. The Company’s taxable income includes the taxable income generated by the Company and certain of its subsidiaries, which are treated as disregarded entities for tax purposes. As a RIC, the Company generally will not pay corporate-level U.S. federal income taxes on any net ordinary taxable income or capital gains that the Company distributes to its stockholders. The Company must generally distribute at least 90% of its “investment company taxable income” (which is generally its net ordinary taxable income and realized net short-term capital gains in excess of realized net long-term capital losses) and 90% of its tax-exempt income to maintain its RIC status (pass-through tax treatment for amounts distributed). As part of
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maintaining RIC status, undistributed taxable income (subject to a 4% non-deductible U.S. federal excise tax) pertaining to a given fiscal year may be distributed up to 12 months subsequent to the end of that fiscal year, provided such dividends are declared on or prior to the later of (i) the filing of the U.S. federal income tax return for the applicable fiscal year or (ii) the fifteenth day of the ninth month following the close of the year in which such taxable income was generated.
The Taxable Subsidiaries primarily hold certain portfolio investments for the Company. The Taxable Subsidiaries permit the Company to hold equity investments in portfolio companies which are “pass-through” entities for tax purposes and to continue to comply with the “source-of-income” requirements contained in the RIC tax provisions of the Code. The Taxable Subsidiaries are consolidated with the Company for U.S. GAAP financial reporting purposes, and the portfolio investments held by the Taxable Subsidiaries are included in the Company’s consolidated financial statements as portfolio investments and are recorded at fair value. The Taxable Subsidiaries are not consolidated with the Company for income tax purposes and may generate income tax expense, or benefit, and tax assets and liabilities, as a result of their ownership of certain portfolio investments. The taxable income, or loss, of the Taxable Subsidiaries may differ from their book income, or loss, due to temporary book and tax timing differences and permanent differences. The Taxable Subsidiaries are each taxed at their normal corporate tax rates based on their taxable income. The income tax expense, or benefit, if any, and the related tax assets and liabilities, of the Taxable Subsidiaries are reflected in the Company’s consolidated financial statements.
The Taxable Subsidiaries use the liability method in accounting for income taxes. Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements, using statutory tax rates in effect for the year in which the temporary differences are expected to reverse. A valuation allowance is provided, if necessary, against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.
Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses. Taxable income generally excludes net unrealized appreciation or depreciation, as investment gains or losses are not included in taxable income until they are realized. The Company’s stockholder’s equity includes an adjustment to classification as a result of permanent book-to-tax differences, which include differences in the book and tax treatment of income and expenses.
9. Net Realized Gains or Losses and Net Unrealized Appreciation or Depreciation
Realized gains or losses are measured by the difference between the net proceeds from the sale or redemption of an investment or a financial instrument and the cost basis of the investment or financial instrument, without regard to unrealized appreciation or depreciation previously recognized, and includes investments written-off during the period net of recoveries and realized gains or losses from in-kind redemptions. Net unrealized appreciation or depreciation reflects the net change in the fair value of the Investment Portfolio and financial instruments and the reclassification of any prior period unrealized appreciation or depreciation on exited investments and financial instruments to realized gains or losses.
10. Fair Value of Financial Instruments
Fair value estimates are made at discrete points in time based on relevant information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. The Company believes that the carrying amounts of its financial instruments, consisting of cash and cash equivalents, receivables, payables and other liabilities approximate the fair values of such items due to the short-term nature of these instruments.
11. Earnings per Share
Net increase (decrease) in net assets resulting from operations per share and net investment income per share, are calculated based upon the weighted-average number of shares of common stock outstanding during the reporting period.
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12. Recently Issued or Adopted Accounting Standards
In March 2020, the FASB issued ASU 2020-04, “Reference rate reform (Topic 848)—Facilitation of the effects of reference rate reform on financial reporting.” The amendments in this update provide optional expedients and exceptions for applying U.S. GAAP to certain contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform and became effective upon issuance for all entities. The Company has agreements that have LIBOR as a reference rate with certain portfolio companies and also with certain lenders. Many of these agreements include language for choosing an alternative successor rate if LIBOR reference is no longer considered to be appropriate. Contract modifications are required to be evaluated in determining whether the modifications result in the establishment of new contracts or the continuation of existing contracts. The Company adopted this amendment in March 2020 and plans to apply the amendments in this update to account for contract modifications due to changes in reference rates when LIBOR reference is no longer used. The Company did not utilize the optional expedients and exceptions provided by ASU 2020-04 during the nine months ended September 30, 2021. The Company continues to evaluate the impact that the amendments in this update will have on its consolidated financial statements and disclosures when applied.
In May 2020, the SEC published Release No. 33-10786 (the “May 2020 Release”), Amendments to Financial Disclosures about Acquired and Disposed Businesses, announcing its adoption of rules amending Rule 1-02(w)(2) under Regulation S-X used in the determination of a significant subsidiary specific to investment companies, including BDCs. In part, the rules adopted pursuant to the May 2020 Release eliminated the use of the asset test, and amended the income and investment tests for determining whether an unconsolidated subsidiary requires additional disclosure in the footnotes of the financial statements. The Company adopted the rules pursuant to the May 2020 Release during the quarter ended December 31, 2020. The impact of the adoption of these rules on the Company’s consolidated financial statements was not material.
In December 2020, the SEC published Release No. IC-34084 (the “December 2020 Release”) Use of Derivatives by Registered Investment Companies and Business Development Companies, announcing its adoption of Rule 18f-4 and amendment of Rule 6c-11 under the 1940 Act to provide an updated, comprehensive approach to the regulation of registered investment companies’, including BDCs’, use of derivatives and address investor protection concerns. In part, the rules adopted pursuant to the December 2020 Release require that funds using derivatives generally will have to adopt a derivatives risk management program that a derivatives risk manager administers and that the fund’s board of directors oversees, and comply with an outer limit on fund leverage. Funds that use derivatives only in a limited manner will not be subject to these requirements, but they will have to adopt and implement policies and procedures reasonably designed to manage the fund’s derivatives risks. Funds also will be subject to reporting and recordkeeping requirements regarding their derivatives use. The Company adopted the rules pursuant to the December 2020 Release during the quarter ended March 31, 2021. As the Company is a limited user of derivatives, the impact of the adoption of these rules on the consolidated financial statements was not material.
From time to time, new accounting pronouncements are issued by the FASB or other standard-setting bodies that are adopted by the Company as of the specified effective date. The Company believes that the impact of recently issued standards and any that are not yet effective will not have a material impact on its consolidated financial statements upon adoption.
NOTE C—FAIR VALUE HIERARCHY FOR INVESTMENTS AND DEBENTURES—PORTFOLIO COMPOSITION
ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and enhances disclosure requirements for fair value measurements. The Company accounts for its investments at fair value.
1. Fair Value Hierarchy
In accordance with ASC 820, the Company has categorized its investments based on the priority of the inputs to the valuation technique into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical investments (Level 1) and the lowest priority to unobservable inputs (Level 3).
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Investments recorded on the Company’s balance sheet are categorized based on the inputs to the valuation techniques as follows:
Level 1—Investments whose values are based on unadjusted quoted prices for identical assets in an active market that the Company has the ability to access (examples include investments in active exchange-traded equity securities and investments in most U.S. government and agency securities).
Level 2—Investments whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the investment. Level 2 inputs include the following:
| ● | Quoted prices for similar assets in active markets (for example, investments in restricted stock); |
| ● | Quoted prices for identical or similar assets in non-active markets (for example, investments in thinly traded public companies); |
| ● | Pricing models whose inputs are observable for substantially the full term of the investment (for example, market interest rate indices); and |
| ● | Pricing models whose inputs are derived principally from, or corroborated by, observable market data through correlation or other means for substantially the full term of the investment. |
Level 3—Investments whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement (for example, investments in illiquid securities issued by privately held companies). These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the investment.
As required by ASC 820, when the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3). Therefore, unrealized appreciation and depreciation related to such investments categorized within the Level 3 tables below may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3).
As of September 30, 2021 and December 31, 2020, the Company’s Private Loan portfolio investments primarily consisted of investments in interest-bearing secured debt investments. The fair value determination for these investments consisted of a combination of observable inputs in non-active markets for which sufficient observable inputs were not available to determine the fair value of these investments and unobservable inputs. As a result, all of the Company’s Private Loan portfolio investments were categorized as Level 3 as of September 30, 2021 and December 31, 2020.
As of September 30, 2021 and December 31, 2020, all of the Company’s LMM portfolio investments consisted of illiquid securities issued by privately held companies and the fair value determination for these investments primarily consisted of unobservable inputs. As a result, all of the Company’s LMM portfolio investments were categorized as Level 3 as of September 30, 2021 and December 31, 2020.
As of September 30, 2021 and December 31, 2020, the Company’s Middle Market portfolio investments consisted primarily of investments in secured and unsecured debt investments and independently rated debt investments. The fair value determination for these investments and the Signal CLO consisted of a combination of observable inputs in non-active markets for which sufficient observable inputs were not available to determine the fair value of these investments and unobservable inputs. As a result, all of the Company’s Middle Market portfolio investments and the Signal CLO were categorized as Level 3 as of September 30, 2021 and December 31, 2020.
As of September 30, 2021 and December 31, 2020, the Company’s Other Portfolio investments (other than the Signal CLO) consisted of illiquid securities issued by privately held companies and the fair value determination for these
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investments primarily consisted of unobservable inputs. As a result, all of the Company’s Other Portfolio investments were categorized as Level 3 as of September 30, 2021 and December 31, 2020.
The fair value determination of each portfolio investment categorized as Level 3 required one or more of the following unobservable inputs:
| ● | Financial information obtained from each portfolio company, including unaudited statements of operations and balance sheets for the most recent period available as compared to budgeted numbers; |
| ● | Current and projected financial condition of the portfolio company; |
| ● | Current and projected ability of the portfolio company to service its debt obligations; |
| ● | Type and amount of collateral, if any, underlying the investment; |
| ● | Current financial ratios (e.g., fixed charge coverage ratio, interest coverage ratio and net debt/EBITDA ratio) applicable to the investment; |
| ● | Current liquidity of the investment and related financial ratios (e.g., current ratio and quick ratio); |
| ● | Pending debt or capital restructuring of the portfolio company; |
| ● | Projected operating results of the portfolio company; |
| ● | Current information regarding any offers to purchase the investment; |
| ● | Current ability of the portfolio company to raise any additional financing as needed; |
| ● | Changes in the economic environment which may have a material impact on the operating results of the portfolio company; |
| ● | Internal occurrences that may have an impact (both positive and negative) on the operating performance of the portfolio company; |
| ● | Qualitative assessment of key management; |
| ● | Contractual rights, obligations or restrictions associated with the investment; and |
| ● | Other factors deemed relevant. |
The use of significant unobservable inputs creates uncertainty in the measurement of fair value as of the reporting date. The significant unobservable inputs used in the fair value measurement of the Company’s LMM equity securities, which are generally valued through an average of the discounted cash flow technique and the market comparable/enterprise value technique (unless one of these approaches is determined to not be appropriate), are (i) EBITDA multiples and (ii) the weighted-average cost of capital (“WACC”). Significant increases (decreases) in EBITDA multiple inputs in isolation would result in a significantly higher (lower) fair value measurement. On the contrary, significant increases (decreases) in WACC inputs in isolation would result in a significantly lower (higher) fair value measurement. The significant unobservable inputs used in the fair value measurement of the Company’s LMM, Middle Market and Private Loan securities are (i) risk adjusted discount rates used in the Yield-to-Maturity valuation technique (see “Note B.1.—Valuation of the Investment Portfolio”) and (ii) the percentage of expected principal recovery. Significant increases (decreases) in any of these discount rates in isolation would result in a significantly lower (higher) fair value measurement. Significant increases (decreases) in any of these expected principal recovery percentages in isolation would result in a significantly higher (lower) fair value measurement. However, due to the nature of certain investments, fair value measurements may be based on other criteria, such as third-party appraisals of collateral and fair values as determined by independent third parties, which are not presented in the tables below.
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The following tables provide a summary of the significant unobservable inputs used to fair value the Company’s Level 3 portfolio investments as of September 30, 2021 and December 31, 2020:
|
| Fair Value as of |
| |
| |
| |
| |
| | | |
| | September 30, | | | | | | | | | | |
| |
Type of | | 2021 | | | | Significant | | | | Weighted | | |
| |
Investment |
| (in thousands) | | Valuation Technique | | Unobservable Inputs | | Range | | Average(3) | | Median(3) | | |
Equity investments | | $ | 199,332 |
| Discounted cash flow |
| WACC |
| 10.3% - 19.1% |
| 13.7 | % | 15.0 | % |
| | | |
| Market comparable / Enterprise Value |
| EBITDA multiple(1) |
| 4.9x - 9.0x(2) |
| 7.4x |
| 6.4x | |
Debt investments | | | 629,979 |
| Discounted cash flow |
| Risk adjusted discount factor |
| 5.5% - 15.2%(2) |
| 9.6 | % | 9.5 | % |
| | | | | |
| Expected principal recovery percentage |
| 1.0% - 100.0% |
| 99.6 | % | 100.0 | % |
Debt investments | | | 172,969 |
| Market approach |
| Third‑party quote |
| 38.2 - 101.3 |
| 94.2 |
| 97.3 | |
Total Level 3 investments | | $ | 1,002,280 | | | | | | | | | | | |
| (1) | EBITDA may include proforma adjustments and/or other addbacks based on specific circumstances related to each investment. |
| (2) | Range excludes outliers that are greater than one standard deviation from the mean. Including these outliers, the range for EBITDA multiple is 3.8x - 15.0x and the range for risk adjusted discount factor is 4.7% - 36.5%. |
| (3) | Does not include investments for which the valuation technique does not include the use of the applicable fair value input. |
|
| Fair Value as of |
| |
| |
| |
| |
| |
| |
| | December 31, | | | | | | | | | | |
| |
Type of | | 2020 | | | | Significant | | | | Weighted | | |
| |
Investment |
| (in thousands) | | Valuation Technique | | Unobservable Inputs | | Range(3) | | Average(3) | | Median(3) | | |
Equity investments | | $ | 187,099 |
| Discounted cash flow |
| WACC |
| 11.3%-19.9% |
| 14.1 | % | 15.3 | % |
| | | |
| Market comparable / Enterprise Value |
| EBITDA multiple(1) |
| 5.2x-8.5x(2) |
| 6.9x |
| 6.4x | |
Debt investments | | | 456,576 |
| Discounted cash flow |
| Risk adjusted discount factor |
| 7.4%-14.2%(2) |
| 10.3 | % | 10.2 | % |
| | | | | |
| Expected principal recovery percentage |
| 1.1%-100.0% |
| 99.3 | % | 100.0 | % |
Debt investments | | | 181,847 |
| Market approach |
| Third‑party quote |
| 45.0 - 100.0 |
| 92.0 | % | 93.4 | |
Total Level 3 investments | | $ | 825,522 | | | | | | | | | | | |
| (1) | EBITDA may include proforma adjustments and/or other addbacks based on specific circumstances related to each investment. |
| (2) | Range excludes outliers that are greater than one standard deviation from the mean. Including these outliers, the range for EBITDA multiple is 4.0x - 11.9x and the range for risk adjusted discount factor is 5.4% - 25.0%. |
| (3) | Does not include investments for which the valuation technique does not include the use of the applicable fair value input. |
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The following tables provide a summary of changes in fair value of the Company’s Level 3 portfolio investments for the nine-month periods ended September 30, 2021 and 2020 (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Net | | | | | | | | | | |
| | Fair Value | | Transfers | | | | | | | | Changes | | Net | | | | | Fair Value | |||||
| | as of | | Into | | | | | | | | from | | Unrealized | | | | | as of | |||||
Type of |
| December 31, |
| Level 3 |
| Redemptions/ |
| New |
| Unrealized |
| Appreciation | | | |
| September 30, | |||||||
Investment |
| 2020 |
| Hierarchy |
| Repayments |
| Investments |
| to Realized |
| (Depreciation) |
| Other(1) |
| 2021 | ||||||||
Debt | | $ | 638,423 | | $ | — | | $ | (193,819) | | $ | 351,851 | | $ | 4,997 | | $ | 2,466 | | $ | (970) | | $ | 802,948 |
Equity(2) | | | 185,041 | | | — | | | (18,133) | | | 13,064 | | | 1,209 | | | 16,372 | | | 976 | | | 198,529 |
Equity Warrant | | | 2,058 | | | — | | | — | | | — | | | (1,290) | | | 35 | | | — | | | 803 |
| | $ | 825,522 | | $ | — | | $ | (211,952) | | $ | 364,915 | | $ | 4,916 | | $ | 18,873 | | $ | 6 | | $ | 1,002,280 |
| (1) | Includes the impact of non-cash conversions. These transactions represent non-cash investing activities. See additional cash flow information at the consolidated statements of cash flows. |
| (2) | Includes the Company’s investment in the Signal CLO subordinated notes. (See Note D — Investment in Signal Peak CLO 7, Ltd.) |
|
| | |
| | |
| | |
| | |
| Net |
| | |
| | |
| | | |
| | Fair Value | | Transfers | | | | | | | | Changes | | Net | | | | | Fair Value | |||||
| | as of | | Into | | | | | | | | from | | Unrealized | | | | | as of | |||||
Type of | | December 31, | | Level 3 | | Redemptions/ | | New | | Unrealized | | Appreciation | | | | | September 30, | |||||||
Investment | | 2019 | | Hierarchy | | Repayments | | Investments |
| to Realized | | (Depreciation) | | Other(1) | | 2020 | ||||||||
Debt | | $ | 848,265 | | $ | — | | $ | (180,927) | | $ | 57,743 | | $ | 4,230 | | $ | (10,659) | | $ | (11,560) | | $ | 707,092 |
Equity(2) | |
| 177,993 | |
| — | | | (2,766) | | | 18,123 | | | — | | | (10,077) | | | 11,560 | | | 194,833 |
Equity Warrant | |
| 1,339 | |
| — | | | — | | | — | | | — | | | (606) | | | — | | | 733 |
| | $ | 1,027,597 | | $ | — | | $ | (183,693) | | $ | 75,866 | | $ | 4,230 | | $ | (21,342) | | $ | — | | $ | 902,658 |
| (1) | Includes the impact of non-cash conversions. These transactions represent non-cash investing activities. See additional cash flow information at the consolidated statements of cash flows. |
| (2) | Includes the Company’s investment in the Signal CLO subordinated notes. (See Note D — Investment in Signal Peak CLO 7, Ltd.) |
At September 30, 2021 and December 31, 2020, the Company's investments were categorized as follows in the fair value hierarchy for ASC 820 purposes:
| | | | | Fair Value Measurements | |||||||
| | | | | (in thousands) | |||||||
|
| | |
| Quoted Prices in |
| | |
| Significant | ||
| | | |
| Active Markets for |
| Significant Other |
| Unobservable | |||
| | | |
| Identical Assets |
| Observable Inputs |
| Inputs | |||
At September 30, 2021 | | Fair Value |
| (Level 1) | | (Level 2) |
| (Level 3) | ||||
Private Loan portfolio investments | | $ | 501,463 | | $ | — | | $ | — | | $ | 501,463 |
LMM portfolio investments | | | 265,197 | | | — | | | — | | | 265,197 |
Middle Market portfolio investments | |
| 191,472 | |
| — | |
| — | |
| 191,472 |
Other Portfolio investments (1) | |
| 44,148 | |
| — | |
| — | |
| 44,148 |
Total investments | | $ | 1,002,280 | | $ | — | | $ | — | | $ | 1,002,280 |
(1) Includes the Company's investment in the Signal CLO subordinated notes. (See Note D — Investment in Signal Peak CLO 7, Ltd.)
49
|
| | | | Fair Value Measurements | |||||||
| | | | | (in thousands) | |||||||
| | | | | Quoted Prices in | | | | | Significant | ||
| | | |
| Active Markets for |
| Significant Other | | Unobservable | |||
| | | |
| Identical Assets |
| Observable Inputs |
| Inputs | |||
At December 31, 2020 | | Fair Value |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
Private Loan portfolio investments | | $ | 366,649 | | $ | — | | $ | — | | $ | 366,649 |
LMM portfolio investments | | | 217,036 | | | — | | | — | | | 217,036 |
Middle Market portfolio investments | |
| 191,304 | |
| — | |
| — | |
| 191,304 |
Other Portfolio investments (1) | |
| 50,533 | |
| — | |
| — | |
| 50,533 |
Total investments | | $ | 825,522 | | $ | — | | $ | — | | $ | 825,522 |
(1) Includes the Company's investment in the Signal CLO subordinated notes. (See Note D — Investment in Signal Peak CLO 7, Ltd.)
2. Investment Portfolio Composition
The Company’s Private Loan portfolio investments are primarily debt securities in privately held companies that have been originated through strategic relationships with other investment funds on a collaborative basis, and are often referred to in the debt markets as “club deals.” Private Loan investments are typically similar in size, structure, terms and conditions to investments the Company holds in its LMM portfolio and Middle Market portfolio. The Company’s Private Loan portfolio debt investments are generally secured by either a first or second priority lien on the assets of the portfolio company and typically have a term of between three and seven years from the original investment date.
The Company’s LMM portfolio investments primarily consist of secured debt, equity warrants and direct equity investments in privately held, LMM companies based in the United States. The Company’s LMM portfolio companies generally have annual revenues between $10 million and $150 million, and its LMM investments generally range in size from $1 million to $15 million. The LMM debt investments are typically secured by either a first or second priority lien on the assets of the portfolio company, can include either fixed or floating rate terms and generally have a term of between five and seven years from the original investment date. In most LMM portfolio investments, the Company receives nominally priced equity warrants and/or makes direct equity investments in connection with a debt investment.
The Company’s Middle Market portfolio investments primarily consist of direct investments in or secondary purchases of interest-bearing debt securities in privately held companies based in the United States that are generally larger in size than the companies included in the Company’s LMM portfolio. The Company’s Middle Market portfolio companies generally have annual revenues between $150 million and $1.5 billion, and its Middle Market investments generally range in size from $1 million to $15 million. The Company’s Middle Market portfolio debt investments are generally secured by either a first or second priority lien on the assets of the portfolio company and typically have a term of between three and seven years from the original investment date.
The Company’s Other Portfolio investments primarily consist of investments that are not consistent with the typical profiles for its LMM, Middle Market or Private Loan portfolio investments, including investments which may be managed by third parties. In the Other Portfolio, the Company may incur indirect fees and expenses in connection with investments managed by third parties, such as investments in other investment companies or private funds. For Other Portfolio investments, the Company generally receives distributions related to the assets held by the portfolio company. Those assets are typically expected to be liquidated over a five to ten-year period.
Investment income, consisting of interest, dividends and fees, can fluctuate dramatically due to various factors, including the level of new investment activity, repayments of debt investments or sales of equity interests. Investment income in any given year could also be highly concentrated among several portfolio companies. For the three and nine months ended September 30, 2021 and 2020, the Company did not record investment income from any single portfolio company in excess of 10% of total investment income.
50
The following tables provide a summary of the Company’s investments in the LMM, Middle Market and Private Loan portfolios as of September 30, 2021 and December 31, 2020 (this information excludes the Other Portfolio investments which are discussed further below):
|
| As of September 30, 2021 |
| |||||||
| | LMM (a) | | Middle Market | | Private Loan |
| |||
| | (dollars in millions) |
| |||||||
Number of portfolio companies | | | 39 |
| | 26 |
| | 51 | |
Fair value | | $ | 265.2 |
| $ | 191.5 |
| $ | 501.5 | |
Cost | | $ | 231.9 |
| $ | 210.8 |
| $ | 507.5 | |
Debt investments as a % of portfolio (at cost) | | | 69.8 | % | | 94.2 | % | | 93.4 | % |
Equity investments as a % of portfolio (at cost) | | | 30.2 | % | | 5.8 | % | | 6.6 | % |
% of debt investments at cost secured by first priority lien | | | 99.8 | % | | 99.0 | % | | 97.8 | % |
Weighted-average annual effective yield (b) | | | 10.8 | % | | 7.6 | % | | 8.6 | % |
Average EBITDA(c) | | $ | 7.0 |
| $ | 92.2 |
| $ | 37.2 | |
| (a) | At September 30, 2021, the Company had equity ownership in approximately 97% of its LMM portfolio companies, and the average fully diluted equity ownership in those portfolio companies was approximately 9%. |
| (b) | The weighted average annual effective yields were computed using the effective interest rates for all debt investments at cost as of September 30, 2021, including amortization of deferred debt origination fees and accretion of original issue discount but excluding fees payable upon repayment of the debt instruments and any debt investments on non-accrual status. The weighted-average annual effective yield on the Company’s debt portfolio as of September 30, 2021 including debt investments on non-accrual status was 10.4% for its LMM portfolio, 7.1% for its Middle Market portfolio and 8.5% for its Private Loan portfolio. The weighted-average annual effective yield is not reflective of what an investor in shares of the Company’s common stock will realize on its investment because it does not reflect the Company’s expenses or any sales load paid by an investor. |
| (c) | The average EBITDA is calculated using a simple average for the LMM portfolio and a weighted-average for the Middle Market and Private Loan portfolios. These calculations exclude certain portfolio companies, including two Private Loan portfolio companies, as EBITDA is not a meaningful valuation metric for the Company’s investments in these portfolio companies, and those portfolio companies whose primary purpose is to own real estate. |
|
| As of December 31, 2020 |
| |||||||
| | LMM (a) | | Middle Market | | Private Loan |
| |||
| | (dollars in millions) |
| |||||||
Number of portfolio companies | | | 34 |
| | 28 |
| | 40 | |
Fair value | | $ | 217.0 |
| $ | 191.3 |
| $ | 366.6 | |
Cost | | $ | 191.2 |
| $ | 216.4 |
| $ | 378.2 | |
Debt investments as a % of portfolio (at cost) | | | 66.0 | % | | 93.5 | % | | 91.4 | % |
Equity investments as a % of portfolio (at cost) | | | 34.0 | % | | 6.5 | % | | 8.6 | % |
% of debt investments at cost secured by first priority lien | | | 99.7 | % | | 90.6 | % | | 91.3 | % |
Weighted-average annual effective yield (b) | | | 11.1 | % | | 8.2 | % | | 9.2 | % |
Average EBITDA (c) | | $ | 6.2 |
| $ | 78.5 |
| $ | 54.1 | |
| (a) | At December 31, 2020, the Company had equity ownership in approximately 97% of its LMM portfolio companies, and the average fully diluted equity ownership in those portfolio companies was approximately 10%. |
| (b) | The weighted-average annual effective yields were computed using the effective interest rates for all debt investments at cost as of December 31, 2020, including amortization of deferred debt origination fees and accretion of original issue discount but excluding fees payable upon repayment of the debt instruments and any debt investments on non-accrual status. The weighted-average annual effective yield on the Company’s debt portfolio as of December 31, 2020 including debt investments on non-accrual status was 10.4% for its LMM portfolio, 8.2% for its Middle Market portfolio and 9.2% for its Private Loan portfolio. The weighted-average annual effective yield is not reflective of what an investor in shares of the Company’s common stock will realize on its investment because it does not reflect the Company’s expenses or any sales load paid by an investor. |
51
| (c) | The average EBITDA is calculated using a simple average for the LMM portfolio and a weighted-average for the Middle Market and Private Loan portfolios. These calculations exclude certain portfolio companies, including three LMM portfolio companies, one Middle Market portfolio company and four Private Loan portfolio companies, as EBITDA is not a meaningful valuation metric for the Company’s investments in these portfolio companies, and those portfolio companies whose primary purpose is to own real estate. |
For the three months ended September 30, 2021 and 2020, the Company achieved an annualized total return on investments of 17.0% and 25.1%, respectively. For the nine months ended September 30, 2021 and 2020, the Company achieved an annualized total return on investments of 17.9% and 16.9%, respectively. Total return on investments is calculated using the interest, dividend, and fee income, as well as the realized and unrealized change in fair value of the Investment Portfolio for the specified period. The Company’s total return on investments is not reflective of what an investor in shares of the Company’s common stock will realize on its investment because it does not reflect the Company’s expenses or any sales load paid by an investor.
As of September 30, 2021, the Company had Other Portfolio investments in five companies, collectively totaling approximately $44.1 million in fair value and approximately $46.8 million in cost basis and which comprised approximately 4.4% and 4.7% of the Company’s Investment Portfolio at fair value and cost, respectively. As of December 31, 2020, the Company had Other Portfolio investments in five companies, collectively totaling approximately $50.5 million in fair value and approximately $54.9 million in cost basis and which comprised approximately 6.1% and 6.5% of the Company’s Investment Portfolio at fair value and cost, respectively.
The following tables summarize the composition of the Company’s total combined LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments at cost and fair value by type of investment as a percentage of the total combined LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments, as of September 30, 2021 and December 31, 2020 (this information excludes the Other Portfolio investments, which are discussed above).
Cost: |
| September 30, 2021 |
| December 31, 2020 | |
First lien debt |
| 86.6 | % | 79.5 | % |
Equity |
| 11.9 | % | 13.9 | % |
Second lien debt |
| 1.0 | % | 4.6 | % |
Equity warrants |
| 0.2 | % | 0.2 | % |
Other |
| 0.3 | % | 1.8 | % |
|
| 100.0 | % | 100.0 | % |
Fair Value: |
| September 30, 2021 |
| December 31, 2020 | |
First lien debt |
| 82.6 | % | 76.0 | % |
Equity |
| 16.0 | % | 17.3 | % |
Second lien debt |
| 1.0 | % | 4.6 | % |
Equity warrants |
| 0.1 | % | 0.3 | % |
Other |
| 0.3 | % | 1.8 | % |
|
| 100.0 | % | 100.0 | % |
52
The following tables summarize the composition of the Company’s total combined LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments by geographic region of the United States and other countries at cost and fair value as a percentage of the total combined LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments, as of September 30, 2021 and December 31, 2020 (this information excludes the Other Portfolio investments). The geographic composition is determined by the location of the corporate headquarters of the portfolio company.
|
| |
| |
| |
Cost: |
| September 30, 2021 |
| December 31, 2020 | | |
Southwest |
| 26.0 | % | 24.9 | % |
|
Northeast |
| 20.5 | % | 18.9 | % |
|
Southeast |
| 20.1 | % | 18.8 | % |
|
West |
| 19.7 | % | 17.5 | % |
|
Midwest |
| 12.7 | % | 18.2 | % |
|
Canada |
| 1.0 | % | 1.7 | % |
|
|
| 100.0 | % | 100.0 | % |
|
Fair Value: |
| September 30, 2021 |
| December 31, 2020 | |
Southwest |
| 27.9 | % | 25.7 | % |
Northeast |
| 20.6 | % | 19.2 | % |
West |
| 18.6 | % | 16.3 | % |
Southeast |
| 18.2 | % | 17.1 | % |
Midwest |
| 13.8 | % | 20.1 | % |
Canada |
| 0.9 | % | 1.6 | % |
|
| 100.0 | % | 100.0 | % |
53
The Company’s LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments are in companies conducting business in a variety of industries. The following tables summarize the composition of the Company’s total combined LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments by industry at cost and fair value as of September 30, 2021 and December 31, 2020 (this information excludes the Other Portfolio investments).
Cost: | | September 30, 2021 | | | December 31, 2020 | |
Commercial Services & Supplies |
| 8.0 | % | | 8.1 | % |
Internet Software & Services |
| 7.1 | % | | 5.4 | % |
Machinery |
| 5.5 | % | | 6.5 | % |
IT Services |
| 5.1 | % | | 4.0 | % |
Oil, Gas & Consumable Fuels |
| 5.1 | % | | 7.0 | % |
Diversified Telecommunication Services |
| 4.9 | % | | 5.4 | % |
Specialty Retail |
| 4.8 | % | | 4.5 | % |
Health Care Providers & Services |
| 4.4 | % | | 3.4 | % |
Leisure Equipment & Products |
| 4.2 | % | | 3.5 | % |
Communications Equipment |
| 4.1 | % | | 5.7 | % |
Aerospace & Defense |
| 4.1 | % | | 8.4 | % |
Construction & Engineering |
| 3.8 | % | | 3.4 | % |
Professional Services |
| 3.2 | % | | 2.2 | % |
Diversified Consumer Services |
| 2.9 | % | | 0.7 | % |
Containers & Packaging |
| 2.8 | % | | 1.6 | % |
Hotels, Restaurants & Leisure |
| 2.6 | % | | 3.1 | % |
Building Products |
| 2.5 | % | | 0.6 | % |
Diversified Financial Services |
| 2.5 | % | | 3.1 | % |
Distributors |
| 2.4 | % | | 3.1 | % |
Energy Equipment & Services |
| 1.6 | % | | 0.9 | % |
Textiles, Apparel & Luxury Goods |
| 1.6 | % | | 0.9 | % |
Software |
| 1.5 | % | | 1.2 | % |
Media |
| 1.5 | % | | 2.5 | % |
Transportation Infrastructure |
| 1.5 | % | | 2.6 | % |
Food Products |
| 1.3 | % | | 0.7 | % |
Food & Staples Retailing |
| 1.3 | % | | 1.5 | % |
Internet & Catalog Retail | | 1.2 | % | | 1.5 | % |
Trading Companies & Distributors | | 1.1 | % | | 1.6 | % |
Household Products | | 1.1 | % | | — | % |
Computers & Peripherals | | 1.0 | % | | 1.1 | % |
Electrical Equipment | | 1.0 | % | | 0.4 | % |
Air Freight & Logistics | | 1.0 | % | | 1.1 | % |
Electronic Equipment, Instruments & Components | | 0.8 | % | | 1.5 | % |
Other (1) | | 2.5 | % | | 2.8 | % |
|
| 100.0 | % | | 100.0 | % |
| (1) | Includes various industries with each industry individually less than 1.0% of the total combined LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments at each date. |
54
Fair Value: | | September 30, 2021 | | | December 31, 2020 | |
Commercial Services & Supplies |
| 7.8 | % | | 7.9 | % |
Machinery |
| 7.0 | % | | 8.5 | % |
Internet Software & Services |
| 6.6 | % | | 4.8 | % |
IT Services |
| 5.1 | % | | 4.0 | % |
Diversified Telecommunication Services |
| 4.9 | % | | 5.2 | % |
Specialty Retail |
| 4.8 | % | | 4.1 | % |
Construction & Engineering |
| 4.4 | % | | 4.1 | % |
Health Care Providers & Services |
| 4.4 | % | | 3.6 | % |
Oil, Gas & Consumable Fuels |
| 4.4 | % | | 6.1 | % |
Leisure Equipment & Products |
| 4.3 | % | | 3.5 | % |
Aerospace & Defense |
| 3.9 | % | | 8.5 | % |
Diversified Consumer Services |
| 3.5 | % | | 0.9 | % |
Containers & Packaging |
| 3.1 | % | | 1.8 | % |
Communications Equipment |
| 2.9 | % | | 4.6 | % |
Diversified Financial Services |
| 2.6 | % | | 3.3 | % |
Building Products |
| 2.6 | % | | 0.7 | % |
Distributors |
| 2.5 | % | | 3.1 | % |
Professional Services |
| 2.3 | % | | 1.2 | % |
Software |
| 2.1 | % | | 1.7 | % |
Computers & Peripherals |
| 2.0 | % | | 2.3 | % |
Hotels, Restaurants & Leisure |
| 1.7 | % | | 2.1 | % |
Textiles, Apparel & Luxury Goods |
| 1.6 | % | | 0.8 | % |
Media |
| 1.5 | % | | 2.7 | % |
Transportation Infrastructure |
| 1.5 | % | | 2.7 | % |
Food & Staples Retailing |
| 1.3 | % | | 1.6 | % |
Energy Equipment & Services |
| 1.2 | % | | 0.5 | % |
Food Products | | 1.2 | % | | 0.4 | % |
Construction Materials | | 1.2 | % | | 1.3 | % |
Internet & Catalog Retail | | 1.2 | % | | 1.4 | % |
Trading Companies & Distributors | | 1.1 | % | | 1.6 | % |
Air Freight & Logistics | | 1.1 | % | | 1.2 | % |
Household Products | | 1.1 | % | | — | % |
Electrical Equipment | | 1.0 | % | | 0.5 | % |
Electronic Equipment, Instruments & Components | | 0.4 | % | | 1.2 | % |
Other (1) | | 1.7 | % | | 2.1 | % |
|
| 100.0 | % | | 100.0 | % |
| (1) | Includes various industries with each industry individually less than 1.0% of the total combined LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments at each date. |
At September 30, 2021 and December 31, 2020, the Company had no portfolio investment that was greater than 10% of the Investment Portfolio at fair value.
3. Unconsolidated Significant Subsidiaries
In evaluating its unconsolidated controlled portfolio companies in accordance with Regulation S-X, there are two tests that the Company must utilize to determine if any of the Company’s Control Investments (as defined in Note A, including those unconsolidated portfolio companies defined as Control Investments in which the Company does not own greater than 50% of the voting securities or maintain greater than 50% of the board representation) are considered significant subsidiaries: the investment test and the income test. The investment test is generally measured by dividing the Company’s investment in the Control Investment by the value of the Company’s total investments. The income test is generally measured by dividing the absolute value of the combined sum of total investment income, net realized gain (loss) and net unrealized appreciation (depreciation) from the relevant Control Investment for the period being tested by the absolute value of the Company’s change in net assets resulting from operations for the same period.
55
Regulation S-X requires the Company to include (1) separate audited financial statements of an unconsolidated majority-owned subsidiary (Control Investments in which the Company owns greater than 50% of the voting securities) in an annual report and (2) summarized financial information of a Control Investment in a quarterly report, respectively, if certain thresholds of the investment or income tests are exceeded and the unconsolidated portfolio company qualifies as a significant subsidiary.
As of September 30, 2021 and December 31, 2020, the Company had no single investment that qualified as a significant subsidiary under either the investment or income tests.
Note D – Investment in Signal Peak CLO 7, LTD.
On April 4, 2017, the Company and ORIX Funds Corp. (“Orix”) entered into a limited liability company agreement to co-manage HMS-ORIX SLF LLC (“HMS-ORIX”), which invested primarily in broadly-syndicated loans. Pursuant to the terms of the limited liability agreement and through representation on the HMS-ORIX Board of Managers, the Company and Orix each had 50% voting control of HMS-ORIX and together were required to agree on all portfolio and investment decisions as well as all other significant actions for HMS-ORIX. The Company did not have sole control of significant actions of HMS-ORIX and, accordingly, did not consolidate the operations of HMS-ORIX within the consolidated financial statements. The Company and Orix funded an aggregate of $50.0 million of equity to HMS-ORIX, with the Company providing $30.0 million (60% of the equity) and Orix providing $20.0 million (40% of the equity).
On May 8, 2019, HMS-ORIX Holdings I LLC, a wholly owned subsidiary of HMS-ORIX, which held all of the investments in broadly-syndicated loans held by HMS-ORIX, was merged (the “HMS-ORIX Holdings Merger”) into Mariner CLO 7, Ltd., an exempted company incorporated under the laws of the Cayman Islands (“Mariner CLO”). In connection with the HMS-ORIX Holdings Merger, HMS-ORIX made certain distributions to its members. The Company used the cash proceeds it received from the HMS-ORIX Holdings Merger to purchase an aggregate principal amount of approximately $25.9 million of the “Subordinated Notes” (the equity tranche of the CLO’s securities) due in 2032 issued by Mariner CLO in connection with an offering of $405.9 million aggregate principal amount of notes. After distribution to its members of residual cash remaining after the HMS-ORIX Holdings Merger, HMS-ORIX was fully liquidated on September 26, 2019. On October 8, 2020, Mariner CLO changed its name to Signal Peak CLO 7, Ltd. (“Signal Peak CLO”).
During the three months ended September 30, 2021 and 2020, respectively, the Company recognized approximately $0.9 million and $0.5 million of interest income in respect of its investment in Signal Peak CLO. During the nine months ended September 30, 2021 and 2020, respectively, the Company recognized approximately $2.2 million and $1.5 million of interest income in respect of its investment in Signal Peak CLO.
NOTE E—DEBT
Summary of debt as of September 30, 2021 is as follows:
| | Outstanding Balance | | Unamortized Debt Issuance Costs | | Recorded Value | | Estimated Fair Value (1) | ||||
| (dollars in thousands) | |||||||||||
TIAA Credit Facility | | $ | 93,000 | | $ | (1,230) | | $ | 91,770 | | $ | 91,770 |
JPM SPV Facility | | | 260,688 | | | (2,745) | | | 257,943 | | | 257,943 |
Main Street Term Loan | | | 60,000 | | | (346) | | | 59,654 | | | 59,654 |
Total Debt | | $ | 413,688 | | $ | (4,321) | | $ | 409,367 | | $ | 409,367 |
(1) | Estimated fair value for outstanding debt if the Company had adopted the fair value option under ASC 825. |
56
Summary of debt as of December 31, 2020 is as follows:
| | | | | | | | | | | | |
| | Outstanding Balance | | Unamortized Debt Issuance Costs | | Recorded Value | | Estimated Fair Value (1) | ||||
| (dollars in thousands) | |||||||||||
TIAA Credit Facility | | $ | 44,000 | | $ | (491) | | $ | 43,509 | | $ | 43,509 |
Deutsche Bank Credit Facility | | | 257,816 | | | (2,200) | | | 255,616 | | | 255,616 |
Total Debt | | $ | 301,816 | | $ | (2,691) | | $ | 299,125 | | $ | 299,125 |
(1) | Estimated fair value for outstanding debt if the Company had adopted the fair value option under ASC 825. |
Summarized interest expense on the Company’s debt for the three and nine months ended September 30, 2021 and 2020 is as follows:
| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | (dollars in thousands) | ||||||||||
TIAA Credit Facility | | $ | 751 | | $ | 735 | | $ | 1,706 | | $ | 2,681 |
Deutsche Bank Credit Facility | | | — | | | 3,265 | | | 1,046 | | | 10,822 |
JPM SPV Facility | | | 2,257 | | | — | | | 5,830 | | | — |
Main Street Term Loan | | | 751 | | | — | | | 1,641 | | | — |
Total Interest Expense | | $ | 3,759 | | $ | 4,000 | | $ | 10,223 | | $ | 13,503 |
1. TIAA Credit Facility
The Company is a party to a senior secured revolving credit agreement dated March 6, 2017 (as amended, the “TIAA Credit Facility”) with TIAA, FSB (“TIAA Bank”), as administrative agent, and with TIAA Bank and other financial institutions as lenders. On September 22, 2021, the Company entered into an amendment to the credit agreement governing the TIAA Credit Facility which included the following modifications to the existing TIAA Credit Facility:
| ● | increased total commitments from $130.0 million to $165.0 million, while maintaining an expanded accordion feature that allows for an increase up to $200.0 million of total commitments from new and existing lenders on the same terms and conditions as the existing commitments, |
| ● | extended the revolving period and the maturity date to September 1, 2025 and March 1, 2026, respectively, while maintaining two, one-year extension options with lender approval, |
| ● | reduced interest rate for borrowings to (i) applicable LIBOR plus 2.40% from LIBOR plus 2.60% and (ii) base rate plus 1.40% from base rate plus 1.60%, as applicable, |
| ● | reduced the Asset Coverage Ratio requirement to 2.00:1.00 from 2.10:1.00, and |
| ● | and allows for additional unsecured debt, subject to specific terms. |
Borrowings under the TIAA Credit Facility bear interest, subject to the Company’s election, on a per annum basis at a rate equal to (i) LIBOR plus 2.40% or (ii) the base rate plus 1.40%. The base rate is defined as the higher of (a) the prime rate, (b) the Federal Funds Rate (as defined in the credit agreement) plus 0.5% or (c) LIBOR plus 1.0%. Additionally, the Company pays an annual unused commitment fee of 0.30% on the unused revolver commitments if more than 50% or more of the revolver commitments are being used and an annual unused commitment fee of 0.625% on the unused revolver commitments if less than 50% of the revolver commitments are being used.
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The TIAA Credit Facility permits the creation of certain “Structured Subsidiaries,” which are not guarantors under the TIAA Credit Facility and which are permitted to incur debt outside of the TIAA Credit Facility. Borrowings under the TIAA Credit Facility are secured by all of the Company’s assets, other than the assets of Structured Subsidiaries, or immaterial subsidiaries, as well as all of the assets, and a pledge of equity ownership interests, of any future subsidiaries of the Company (other than Structured Subsidiaries or immaterial subsidiaries). The TIAA Credit Facility contains affirmative and negative covenants usual and customary for credit facilities of this nature, including: (i) maintaining a minimum interest coverage ratio of at least 2.00 to 1.00; (ii) maintaining an asset coverage ratio of at least 2.00 to 1.00; and (iii) maintaining a minimum consolidated tangible net worth, excluding Structured Subsidiaries, of at least the greater of (a) the aggregate amount of the revolver commitments or (b) $50.0 million. Further, the TIAA Credit Facility contains limitations on incurrence of other indebtedness (other than by the Structured Subsidiaries), limitations on industry concentration, and an anti-hoarding provision to protect the collateral under the TIAA Credit Facility. Additionally, the Company must provide information to TIAA Bank on a regular basis, preserve its corporate existence, comply with applicable laws, including the 1940 Act, pay obligations when they become due, and invest the proceeds of the sales of common stock in accordance with its investment objectives and strategies (as set forth in the TIAA Credit Facility). Further, the credit agreement contains usual and customary default provisions including: (i) a default in the payment of interest and principal; (ii) insolvency or bankruptcy of the Company; (iii) a material adverse change in the Company’s business; or (iv) breach of any covenant, representation or warranty in the loan agreement or other credit documents and failure to cure such breach within defined periods. Additionally, the TIAA Credit Facility requires the Company to obtain written approval from the administrative agent prior to entering into any material amendment, waiver or other modification of any provision of the Investment Advisory Agreement.
As of September 30, 2021, the interest rate on the TIAA Credit Facility was 2.49%. The average cost of borrowings on the TIAA Credit Facility, excluding amortization of deferred financing costs and unused fees, was approximately 2.67% and 2.95% per annum for the three months ended September 30, 2021 and 2020, respectively. The average costs of borrowings was approximately 2.71% and 3.66% per annum for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, the Company was not aware of any instances of noncompliance with covenants related to the TIAA Credit Facility.
2. JPM SPV Facility
On February 3, 2021, MSIF Funding, the Company’s wholly-owned subsidiary that primarily holds originated loan investments, entered into a senior secured revolving credit facility (as amended from time to time, the “JPM SPV Facility”) by and among JPMorgan Chase Bank, National Association (“JPM”), as administrative agent, and U.S. Bank, N.A., as collateral agent and collateral administrator and the Company as portfolio manager. The revolving period under the JPM SPV Facility expires on February 3, 2024 and the JPM SPV Facility is scheduled to mature on February 3, 2025. Advances under the JPM SPV Facility bear interest at a per annum rate equal to the three-month LIBOR in effect, plus the applicable margin of 2.90% per annum. MSIF Funding will also pay a commitment fee of 0.75% per annum on the average daily unused amount of the financing commitments until the third anniversary of the JPM SPV Facility. The initial commitment amount of the JPM SPV Facility is $300 million. The JPM SPV Facility has an accordion feature, subject to the satisfaction of various conditions, which could bring total commitments and borrowing availability under the JPM SPV Facility to up to $450 million.
Initial proceeds from borrowings under the JPM SPV Facility were used to purchase certain investments and participating interest from HMS Funding. HMS Funding, in turn, used the proceeds from these transactions and restricted cash to fully repay its existing indebtedness under the Deutsche Bank Credit Facility (as defined below). Concurrently, the Company and HMS Funding extinguished the Deutsche Bank Credit Facility and transferred certain portfolio investments previously held by HMS Funding to MSIF Funding. The Deutsche Bank Credit Facility had been in an amortization period, requiring that all principal and interest payments received on investments held by HMS Funding be paid to lenders to retire the outstanding balance under the Deutsche Bank Credit Facility, since April 2020.
As of September 30, 2021, the interest rate on the JPM SPV Facility, excluding amortization of deferred financing costs and unused fees, was 3.04%. The average cost of borrowings on the JPM SPV Facility, excluding amortization of deferred financing costs and unused fees, was approximately 3.04% and 3.08% per annum for the three months and nine months ended September 30, 2021, respectively. As of September 30, 2021, the Company was not aware of any instances of noncompliance with covenants related to the JPM SPV Facility.
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3. Deutsche Bank Credit Facility
On May 18, 2015, HMS Funding entered into an amended and restated credit agreement (as amended, the “Deutsche Bank Credit Facility”) among HMS Funding, as borrower, the Company, as equity holder and as servicer, Deutsche Bank AG, New York Branch (“Deutsche Bank”), as administrative agent, the financial institutions party thereto as lenders (together with Deutsche Bank, the “HMS Funding Lenders”), and U.S. Bank National Association, as collateral agent and collateral custodian. On April 24, 2020, the Deutsche Bank Credit Facility was amended to, among other things, terminate the revolver commitments effective on April 24, 2020 and begin the amortization period, through November 20, 2022, the maturity date. On February 3, 2021, the total amount outstanding on the facility under the Deutsche Bank Credit Facility was fully repaid. As a result, the Company recorded a loss on the extinguishment of debt in the amount of $2.1 million, which represented the write-off of the unamortized deferred financing fees related to the Deutsche Bank Credit Facility.
For the three months ended September 30, 2020, the average cost of borrowings on the Deutsche Bank Credit Facility, excluding amortization of deferred financing costs, was approximately 4.01% per annum. For the nine months ended September 30, 2021 and 2020, the average cost of borrowings on the Deutsche Bank Credit Facility was approximately 2.93% and 4.29% per annum, respectively.
4. Main Street Term Loan
On January 27, 2021, the Company entered into a term loan agreement (the “Main Street Term Loan”) with Main Street, which initially provided for an aggregate principal amount of $40.0 million in borrowings. The Company paid a 1.0% upfront fee to Main Street on the closing date.
On July 27, 2021, the Company entered into an amendment to the Main Street Term Loan that allowed the Company to initially draw an additional $20.0 million, with another $15.0 million available to be drawn in two separate $7.5 million tranches (each a “Delayed Draw Term Loan”) at a later date. Following the amendment, as of September 30, 2021, the aggregate principal amount outstanding under the Main Street Term Loan was $60.0 million bearing interest at a fixed rate of 5.00% per annum and maturing on January 27, 2026.
Borrowings under the Main Street Term Loan were expressly subordinated and junior in right of payment to all secured indebtedness of the Company. As of September 30, 2021, the Company was not aware of any instances of noncompliance with covenants related to the Main Street Term Loan. On October 22, 2021, the Company fully repaid all borrowings outstanding under the Main Street Term Loan and the Main Street Term Loan was terminated. See Note – E Debt and Note K – Subsequent Events for further discussion.
NOTE F—FINANCIAL HIGHLIGHTS
|
| Nine Months Ended September 30, | ||||
Per Share Data: |
| 2021 |
| 2020 | ||
NAV at the beginning of the period | | $ | 7.28 | | $ | 7.77 |
Net investment income(1) | |
| 0.49 | | | 0.43 |
Net realized loss(1)(2) | |
| (0.08) | | | (0.45) |
Net unrealized appreciation (depreciation)(2) | |
| 0.25 | | | (0.29) |
Net increase (decrease) in net assets resulting from operations(1) | |
| 0.66 | | | (0.31) |
Dividends paid(1)(3) | |
| (0.38) | | | (0.35) |
Other(4) | |
| (0.01) | | | (0.01) |
NAV at the end of the period | | $ | 7.56 | | $ | 7.10 |
Shares of common stock outstanding at end of period | | | 79,756,378 | | | 79,608,304 |
Weighted-average shares of common stock outstanding | |
| 79,831,292 | | | 79,079,204 |
| (1) | Based on weighted-average number of common shares outstanding for the period. |
| (2) | Net realized gains or losses, net unrealized appreciation or depreciation, and income taxes can fluctuate significantly from period to period. |
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| (3) | Dividends paid represent the stockholder distributions declared during the period. |
| (4) | Includes the impact of the different share amounts as a result of calculating per share data based on the weighted-average basic shares outstanding during the period and certain per share data based on the shares outstanding as of a period end or transaction date. |
| Nine Months Ended September 30, | ||||||
| | 2021 | | | | 2020 | |
| (dollars in thousands) | ||||||
| | | | | | | |
NAV at end of period | $ | 603,349 | | | $ | 565,141 | |
Average NAV | $ | 591,476 | | | $ | 551,821 | |
Average outstanding debt | $ | 293,110 | | | $ | 402,009 | |
Ratios to average net assets: | | | | | | | |
Ratio of operating expenses to average NAV(1)(2) | | 4.43 | % | | | 5.70 | % |
Ratio of operating expenses excluding interest expense to NAV(1)(2) | | 2.70 | % | | | 3.21 | % |
Ratio of net investment income to average NAV(2) | | 6.65 | % | | | 6.22 | % |
Portfolio turnover ratio(2) | | 19.99 | % | | | 16.00 | % |
Total return based on change in NAV(2)(3) | | 9.00 | % | | | (4.12) | % |
| (1) | Total expenses are the sum of operating expenses and net income tax provision/benefit. Net income tax provision/benefit includes the accrual of net deferred tax provision/benefit relating to the net unrealized appreciation/depreciation on portfolio investments held in Taxable Subsidiaries and due to the change in the loss carryforwards, which are non-cash in nature and may vary significantly from period to period. The Company is required to include net deferred tax provision/benefit in calculating its total expenses even though these net deferred taxes are not currently payable/receivable. |
| (2) | Not annualized. |
| (3) | Total return is based on change in net asset value as calculated using the sum of ending net asset value plus dividends to stockholders and other non-operating changes during the period, as divided by the beginning net asset value. Non-operating changes include any items that affect net asset value other than the net increase in net assets resulting from operations, such as the effects of stock offerings, shares issued under the dividend reinvestment plan and other miscellaneous items. |
NOTE G—DIVIDENDS, DISTRIBUTIONS AND TAXABLE INCOME
The Company currently pays quarterly dividends to its stockholders. Future quarterly dividends, if any, will be determined by its Board of Directors on a quarterly basis. The Company paid dividends of $10.0 million, or $0.125 per share, during the three months ended September 30, 2021, and $17.9 million, or $0.225 per share, during the nine months ended September 30, 2021, compared to no dividends paid during the three months ended September 30, 2020, and $27.5 million, or $0.350 per share, during the nine months ended September 30, 2020.
The Company has elected to be treated for U.S. federal income tax purposes as a RIC. The Company’s taxable income includes the taxable income generated by the Company and certain of its subsidiaries which are treated as disregarded entities for tax purposes. As a RIC, the Company generally will not pay corporate-level U.S. federal income taxes on any net ordinary taxable income or capital gains that the Company distributes to its stockholders. The Company must generally distribute at least 90% of its “investment company taxable income” (which is generally its net ordinary taxable income and realized net short-term capital gains in excess of realized net long-term capital losses) and 90% of its tax-exempt income to maintain its RIC status (pass-through tax treatment for amounts distributed). As part of maintaining RIC status, undistributed taxable income (subject to a 4% non-deductible U.S. federal excise tax) pertaining to a given fiscal year may be distributed up to 12 months subsequent to the end of that fiscal year, provided such dividends are declared on or prior to the later of (i) filing of the U.S. federal income tax return for the applicable fiscal year or (ii) the fifteenth day of the ninth month following the close of the year in which such taxable income was generated.
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The determination of the tax attributes for the Company’s distributions is made annually, based upon its taxable income for the full year and distributions paid for the full year. Therefore, a determination made on an interim basis may not be representative of the actual tax attributes of distributions for a full year. Ordinary dividend distributions from a RIC do not qualify for the 20% maximum tax rate (plus a 3.8% Medicare surtax, if applicable) on dividend income from domestic corporations and qualified foreign corporations, except to the extent that the RIC received the income in the form of qualifying dividends from domestic corporations and qualified foreign corporations. The tax attributes for distributions will generally include both ordinary income and qualified dividends, but may also include either one or both of capital gains and return of capital.
Listed below is a reconciliation of “Net increase (decrease) in net assets resulting from operations” to taxable income and to total distributions declared to common stockholders for the nine months ended September 30, 2021 and 2020.
| | Nine Months Ended September 30, | ||||||
| | | 2021 | | | | 2020 | |
| | (estimated, | ||||||
| | | | | | | | |
| | | | | | | | |
Net increase (decrease) in net assets resulting from operations | | $ | 52,448 | | | $ | (24,245) | |
Net unrealized (appreciation) depreciation | | | (20,363) | | | | 23,017 | |
Income tax provision | | | 1,283 | | | | 192 | |
Pre-tax book (income) loss not consolidated for tax purposes | | | (10,763) | | | | 31,317 | |
Book income (loss) and tax income differences, including debt origination, structuring fees, dividends, realized gains and changes in estimates | | | 3,437 | | | | 893 | |
Estimated taxable income (1) | | | 26,042 | | | | 31,174 | |
Taxable income earned in prior year and carried forward for distribution in current year | | | 29,173 | | | | 16,796 | |
Taxable income earned prior to period end and carried forward for distribution next period | | | (37,290) | | | | (20,450) | |
Dividend accrued as of period end and paid-in the following period | | | 11,964 | | | | - | |
Taxable income earned to be carried forward | | | (25,326) | | | | (20,450) | |
Total distributions accrued or paid to common stockholders | | $ | 29,889 | | | $ | 27,520 | |
| (1) | The Company’s taxable income for each period is an estimate and will not be finally determined until the Company files its tax return for each year. Therefore, the final taxable income, and the taxable income earned in each period and carried forward for distribution in the following period, may be different than this estimate. |
The Taxable Subsidiaries primarily hold certain portfolio investments for MSC Income Fund. The Taxable Subsidiaries permit MSC Income Fund to hold equity investments in portfolio companies which are “pass-through” entities for tax purposes and to continue to comply with the “source-of-income” requirements contained in the RIC tax provisions of the Code. The Taxable Subsidiaries are consolidated with MSC Income Fund for U.S. GAAP financial reporting purposes, and the portfolio investments held by the Taxable Subsidiaries are included in the Company’s consolidated financial statements as portfolio investments and recorded at fair value. The Taxable Subsidiaries are not consolidated with the Company for income tax purposes and may generate income tax expense, or benefit, and tax assets and liabilities, as a result of their ownership of certain portfolio investments. The taxable income, or loss, of the Taxable Subsidiaries may differ from their book income, or loss, due to temporary book and tax timing differences and permanent differences. The Taxable Subsidiaries are each taxed at their normal corporate tax rates based on their taxable income. The income tax expense, or benefit, if any, and the related tax assets and liabilities, of the Taxable Subsidiaries are reflected in The Company’s consolidated financial statements.
The income tax expense (benefit) for the Company is generally composed of (i) deferred tax expense (benefit), which is primarily the result of the net activity relating to the portfolio investments held in the Taxable Subsidiaries, including changes in loss carryforwards, changes in net unrealized appreciation or depreciation and other temporary book tax differences, and (ii) current tax expense, which is primarily the result of current U.S. federal income and state taxes and excise taxes on the Company’s estimated undistributed taxable income. The income tax expense, or benefit, and the related tax asset and liabilities generated by the Taxable Subsidiaries, if any, are reflected in the Company’s
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consolidated statement of operations. The Company’s provision for income taxes was comprised of the following for the three and nine months ended September 30, 2021 and 2020 (amounts in thousands):
|
| |
|
| |
|
| |
|
| |
| Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
| 2021 | | 2020 | | 2021 | | 2020 | ||||
Current tax expense (benefit): | | | | | | | | | | | |
Federal | $ | — | | $ | — | | $ | — | | $ | — |
State | | 82 | | | 97 | | | 251 | | | 192 |
Excise | | 371 | | | — | | | 1,032 | | | — |
Total current tax expense (benefit) | | 453 | | | 97 | | | 1,283 | | | 192 |
Deferred tax expense (benefit): | | | | | | | | | | | |
Federal | | — | | | — | | | — | | | — |
State | | — | | | — | | | — | | | — |
Total deferred tax expense (benefit) | | — | | | — | | | — | | | — |
| | | | | | | | | | | |
Total income tax provision (benefit) | $ | 453 | | $ | 97 | | $ | 1,283 | | $ | 192 |
The net deferred tax liability at September 30, 2021 and December 31, 2020 was $0. Deferred tax asset and liability balances primarily related to net unrealized appreciation or depreciation, loss carryforwards, and other temporary book-tax differences relating to portfolio investments held by the Taxable Subsidiaries. The Company recorded a valuation allowance to reduce the carrying value of deferred tax assets to the amount that more likely than not can be realized. At September 30, 2021, for U.S. federal income tax purposes, the Taxable Subsidiaries had net operating loss carryforwards from prior years which, if unused, will expire in various taxable years from 2034 through 2037. Any net operating losses generated in 2018 and future periods are not subject to expiration and will carryforward indefinitely until utilized. The net capital loss carryforwards of the Company will expire in taxable years 2021 through 2025. The timing and manner in which the Company will utilize any loss carryforwards in such taxable years, or in total, may be limited in the future under the provisions of the Code. Additionally, the Taxable Subsidiaries have interest expense limitation carryforwards which have an indefinite carryforward period.
NOTE H—SHARE REPURCHASE PROGRAM
Prior to March 31, 2020, the Company historically conducted quarterly tender offers pursuant to its share repurchase program. On March 31, 2020, the Company’s Board of Directors unanimously approved a temporary suspension of the Company’s share repurchase program commencing with the second quarter of 2020. The Board of Directors determined that it was in the best interest of the Company to suspend the share repurchase program in order to preserve financial flexibility and liquidity given the potential prolonged impact of COVID-19. From April 2020 through March 2021, the share repurchase plan remained suspended due to the impacts of the COVID-19 pandemic. On March 8, 2021, the Company announced that its Board of Directors approved the reinstatement of the share repurchase program following the payment of the dividend declared by the Board of Directors for payment on April 1, 2021.
Under the terms of the reinstated share repurchase program, the Company offers to purchase shares at the estimated NAV per share, as determined within 48 hours prior to the repurchase date. The amount of shares of the Company’s common stock to be repurchased during any calendar quarter may be equal to the lesser of (i) the number of shares of common stock the Company could repurchase with the proceeds it received from the issuance of common stock under the Company’s dividend reinvestment plan or (ii) 2.5% of the weighted-average number of shares of common stock outstanding in the prior four calendar quarters. Upon resuming making offers to repurchase shares pursuant to the share repurchase program, the Company is currently limiting repurchase offers to the number of shares of common stock it can repurchase with 90% of the cash retained as a result of issuances of common stock under the Company’s dividend reinvestment plan.
At the discretion of the Company’s Board of Directors, the Company may also use cash on hand, cash available from borrowings and cash from the sale of investments as of the end of the applicable period to repurchase shares. The Company’s Board of Directors may amend, suspend or terminate the share repurchase program upon 30 days’ notice. Since inception of its share repurchase program, the Company has funded the repurchase of $109.2 million in shares of common stock. For the three months ended September 30, 2021, the Company funded $3.3 million for shares of its common stock tendered for repurchase under the plan. The share repurchase program was suspended during the second
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quarter of 2020, and therefore no shares were repurchased for the three months ended September 30, 2020. For the nine months ended September 30, 2021 and 2020, the Company funded $6.2 million and $6.1 million, respectively, for shares of its common stock tendered for repurchase under the plan.
NOTE I—COMMITMENTS AND CONTINGENCIES
At September 30, 2021, the Company had the following outstanding commitments (in thousands):
Investments with equity capital commitments that have not yet funded: |
| Amount |
| |
|
| | | |
Brightwood Capital Fund III, LP | | $ | 1,000 | |
Freeport First Lien Loan Fund III LP | | | 4,032 | |
HPEP 3, L.P. | | | 1,555 | |
| | | | |
Total Equity Commitments | | $ | 6,587 | |
| | | | |
Investments with commitments to fund revolving loans that have not been fully drawn or term loans with additional commitments not yet funded: | | | | |
| | | | |
Adams Publishing Group, LLC | | $ | 5,000 | |
MB2 Dental Solutions, LLC | | | 4,874 | |
Roof Opco, LLC | | | 4,861 | |
NWN Corporation | | | 3,488 | |
SI East, LLC | | | 2,500 | |
Computer Data Source, LLC | | | 2,417 | |
Evergreen North America Acquisitions, LLC | | | 1,935 | |
Lynx FBO Operating LLC | | | 1,875 | |
IG Parent Corporation | | | 1,667 | |
Mako Steel, LP | | | 1,623 | |
Burning Glass Intermediate Holding Company, Inc. | | | 1,549 | |
RA Outdoors LLC | | | 1,235 | |
Invincible Boat Company, LLC. | | | 1,080 | |
Student Resource Center, LLC | | | 833 | |
DTE Enterprises, LLC | | | 750 | |
NinjaTrader, LLC | | | 750 | |
GRT Rubber Technologies LLC | | | 660 | |
Classic H&G Holdco, LLC | | | 650 | |
Wall Street Prep, Inc. | | | 500 | |
Clickbooth.com, LLC | | | 457 | |
Direct Marketing Solutions, Inc. | | | 400 | |
Chamberlin Holding LLC | | | 400 | |
Cody Pools, Inc. | | | 400 | |
Trantech Radiator Topco, LLC | | | 400 | |
Colonial Electric Company LLC | | | 400 | |
The Affiliati Network, LLC | | | 400 | |
Dynamic Communities, LLC | | | 250 | |
American Nuts, LLC | | | 247 | |
Orttech Holdings, LLC | | | 156 | |
Hawk Ridge Systems, LLC | | | 154 | |
HW Temps LLC | | | 100 | |
Arcus Hunting LLC | | | 96 | |
| | | | |
Total Loan Commitments | | $ | 42,107 | |
| | | | |
Total Commitments | | $ | 48,694 | |
The Company will fund its unfunded commitments from the same sources it uses to fund its investment commitments that are funded at the time they are made (which are typically through existing cash and cash equivalents and borrowings under the Credit Facilities). The Company follows a process to manage its liquidity and ensure that it has available capital to fund its unfunded commitments as necessary. The Company had no unrealized depreciation on the outstanding unfunded commitments as of September 30, 2021.
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NOTE J - RELATED PARTY TRANSACTIONS
1. Advisory Agreements and Conditional Fee and Expense Reimbursement Waivers
Prior to October 30, 2020, the business of the Company was managed by HMS Adviser (an affiliate of Hines), pursuant to Original Investment Advisory Agreement. On October 30, 2020, the Company entered into the Investment Advisory Agreement with MSC Adviser, which includes similar terms to those contained in Original Investment Advisory Agreement with HMS Adviser. The agreements state that the respective adviser will oversee the management of the Company’s activities and is responsible for making investment decisions with respect to, and providing day-to-day management and administration of, the Company’s investment portfolio. Prior to October 30, 2020, the Company and HMS Adviser had engaged MSC Adviser pursuant to a sub-advisory agreement to identify, evaluate, negotiate and structure the Company’s prospective investments, make investment and portfolio management recommendations for approval by HMS Adviser, monitor the Company’s investment portfolio and provide certain ongoing administrative services to HMS Adviser in exchange for which HMS Adviser agreed to pay MSC Adviser 50.0% of the base management fee and incentive fees described below as compensation for its services.
Pursuant to the Original Investment Advisory Agreement, the Company paid HMS Adviser a base management fee and incentive fees as compensation for the services described above. The base management fee was calculated at an annual rate of 2.0% of the Company’s average gross assets. The term “gross assets” means total assets of the Company as disclosed on the Company’s balance sheet. “Average gross assets” are calculated based on the Company’s gross assets at the end of the two most recently completed calendar quarters. The base management fee was payable quarterly in arrears. Under the Investment Advisory Agreement, the Company pays a 1.75% base management fee to MSC Adviser on substantially the same terms as the Original Investment Advisory Agreement. The base management fee is expensed as incurred.
The incentive fee under the Original Investment Advisory Agreement and under the Investment Advisory Agreement is the same. The incentive fees consist of two parts. The first part, referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears based on pre-incentive fee net investment income for the immediately preceding quarter. The subordinated incentive fee on income is equal to 20.0% of the Company’s pre-incentive fee net investment income for the immediately preceding quarter, expressed as a quarterly rate of return on adjusted capital at the beginning of the most recently completed calendar quarter, exceeding 1.875% (or 7.5% annualized), subject to a “catch up” feature (as described below).
For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive from portfolio companies) accrued during the calendar quarter, minus our operating expenses for the quarter (including the management fee, expenses payable under any proposed administration agreement and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount debt instruments and PIK interest and zero coupon securities), accrued income that we have not yet received in cash. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. For purposes of this fee, adjusted capital means cumulative gross proceeds generated from sales of the Company’s common stock (including proceeds from the Company’s dividend reinvestment plan) reduced for non-liquidating distributions, other than distributions of profits, paid to the Company’s stockholders and amounts paid for share repurchases pursuant to the Company’s share repurchase program. The subordinated incentive fee on income is expensed in the quarter in which it is incurred.
The calculation of the subordinated incentive fee on income for each quarter is as follows:
• | No subordinated incentive fee on income shall be payable to MSC Adviser in any calendar quarter in which the Company’s pre-incentive fee net investment income does not exceed the hurdle rate of 1.875% (or 7.5% annualized) on adjusted capital; |
• | 100% of the Company’s pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than or equal to 2.34375% in any calendar quarter (9.375% annualized) shall be payable to MSC Adviser. This portion of the subordinated incentive fee on income is referred to as the “catch up” and is |
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intended to provide MSC Adviser with an incentive fee of 20.0% on all of the Company’s pre-incentive fee net investment income as if the hurdle rate did not apply when the pre-incentive fee net investment income exceeds 2.34375% (9.375% annualized) in any calendar quarter; and
• | For any quarter in which the Company’s pre-incentive fee net investment income exceeds 2.34375% (9.375% annualized), the subordinated incentive fee on income shall equal 20.0% of the amount of the Company’s pre-incentive fee net investment income, as the hurdle rate and catch-up will have been achieved. |
The second part of the incentive fee, referred to as the incentive fee on capital gains, is an incentive fee on realized capital gains earned from the portfolio of the Company and is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement). This fee equals 20.0% of the Company’s incentive fee capital gains, which equals the Company’s realized capital gains on a cumulative basis from inception, calculated as of the end of each calendar 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. At the end of each reporting period, the Company estimates the incentive fee on capital gains and accrues the fee based on a hypothetical liquidation of its portfolio. Therefore, the accrual includes both net realized gains and net unrealized gains (the net unrealized difference between the fair value and the par value of its portfolio), if any. The incentive fee accrued pertaining to the unrealized gain is neither earned nor payable to MSC Adviser until such time it is realized.
For the three months ended September 30, 2021 and 2020, the Company incurred base management fees of approximately $4.5 million and $4.7 million, respectively. For the three months ended September 30, 2021 and 2020, the Company did not incur any subordinated incentive fees on income or any capital gains incentive fees. For the nine months ended September 30, 2021 and 2020, the Company incurred base management fees of approximately $12.5 million and $14.3 million, respectively. For the nine months ended September 30, 2021 and 2020, the Company did not incur any subordinated incentive fees on income or any capital gains incentive fees.
Pursuant to the Investment Advisory Agreement and the Original Investment Advisory Agreement, the Company is required to pay or reimburse MSC Adviser or its prior investment adviser, HMS Adviser, as applicable, for administrative services expenses, which include all costs and expenses related to the Company’s day-to-day administration and management not related to advisory services, whether such administrative services were performed by a third party service provider or affiliates of the applicable investment adviser (to the extent performed by MSC Adviser, HMS Adviser or their affiliates, the “Internal Administrative Services”). MSC Adviser does not, and HMS Adviser did not, earn any profit under their provision of Internal Administrative Services to the Company. For the three months ended September 30, 2021 and 2020, the Company incurred, and the Advisers, as applicable, waived 100.0% of the reimbursements of, Internal Administrative Services expenses of approximately $1.2 million, and $1.0 million, respectively. For the nine months ended September 30, 2021 and 2020, the Company incurred, and the Advisers, as applicable, waived 100.0% of the reimbursements of, Internal Administrative Services expenses of approximately $3.2 million, and $2.5 million, respectively. MSC Adviser also agreed to waive reimbursement of Internal Administrative Expenses from October 30, 2020 through September 30, 2021. Since inception, the Advisers waived the reimbursement of total Internal Administrative Services expenses of $23.0 million. Waived Internal Administrative Services expenses are permanently waived and are not subject to future reimbursement.
2. Offering Costs
In accordance with the Original Investment Advisory Agreement and the Sub-Advisory Agreement, the Company reimbursed HMS Adviser for any offering costs that are paid on the Company’s behalf, which consisted of, among other costs, actual legal, accounting, bona fide out-of-pocket itemized and detailed due diligence costs, printing, filing fees, transfer agent costs, postage, escrow fees, advertising and sales literature and other costs incurred in connection with an offering of the Company including the Company’s dividend reinvestment plan. The Advisers were responsible for the payment of offering costs to the extent they exceeded 1.5% of the aggregate gross stock offering proceeds. Pursuant to the Transaction, HMS Adviser agreed to permanently waive reimbursement of organizational and offering expenses except for $580,338 which remained payable to HMS Adviser. No outstanding amount was payable to MSC Adviser. As of September 30, 2021, $525,405 of the Company’s reimbursement obligation to HMS Adviser for organizational and offering expenses remained outstanding.
65
As of September 30, 2021, the Company has reimbursed HMS Advisers approximately $12.8 million since inception for offering costs.
3. Main Street Term Loan
On January 27, 2021, the Company entered into the Main Street Term Loan with Main Street. As of September 30, 2021, $60.0 million was drawn on the Main Street Term Loan , bearing interest at a fixed rate of 5.00% per annum and maturing on January 27, 2026. The Company paid a 1.0% upfront fee to Main Street on the closing date of the initial $40.0 million drawn on the Main Street Term Loan. On July 27, 2021, the Company entered into an amendment to the Main Street Term Loan that allowed the Company to initially draw an additional $20.0 million, and $15.0 million to be drawn in two separate $7.5 million tranches (each a “Delayed Draw Term Loan”) at a later date. Borrowings under the Main Street Term Loan were expressly subordinated and junior in right of payment to all secured indebtedness of the Company. On October 22, 2021, the Company fully repaid all borrowings outstanding under the Main Street Term Loan and the Main Street Term Loan was terminated. See Note E – Debt and Note K – Subsequent Events for further discussion.
NOTE K—SUBSEQUENT EVENTS
On October 22, 2021, the Company and certain qualified institutional investors entered into a Master Note Purchase Agreement (the “Note Purchase Agreement”), which governs the issuance of $150.0 million in aggregate principal amount of the Company’s 4.04% Series A Senior Notes due 2026 (the “Series A Notes”). The Series A Notes bear a fixed interest rate of 4.04% per year and will mature on October 30, 2026, unless redeemed, purchased or prepaid prior to such date by the Company in accordance with their terms. The Company issued $77.5 million of Series A Notes up entering into the Note Purchase Agreement, and will issue an additional $72.5 million in January 2022. Proceeds from the initial issuance were primarily used to fully repay the $60.0 million of the principal amount outstanding under the Main Street Term Loan plus accrued interest and fees, in connection with which the Main Street Term Loan was terminated.
Interest on the Series A Notes will be due semiannually on April 30 and October 30 each year, beginning on April 30, 2022. The Series A Notes may be redeemed in whole or in part at any time or from time to time at the Company’s option at par plus accrued interest to the prepayment date and, if applicable, a make-whole premium. In addition, the Company is obligated to offer to prepay the Series A Notes at par plus accrued and unpaid interest up to, but excluding, the date of prepayment, if certain change in control events occur. The Series A Notes are general unsecured obligations of the Company that rank pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by the Company.
The Note Purchase Agreement contains customary terms and conditions for senior unsecured notes issued in a private placement, including, without limitation, affirmative and negative covenants such as information reporting, maintenance of the Company’s status as a BDC within the meaning of the 1940 Act, a minimum asset coverage ratio of 2.00 to 1.00, subject to reduction to 1.50 to 1.00 upon the Company obtaining the approval required under the 1940 Act, a minimum interest coverage ratio of 2.00 to 1.00, which may be reduced to 1.25 to 1.00 under certain conditions, and minimum unsecured debt coverage ratio of 1.25 to 1.00. In addition, in the event that a Below Investment Grade Event (as defined in the Note Purchase Agreement) occurs, the Series A Notes will bear interest at a fixed rate of 5.04% per year from the date of the occurrence of the Below Investment Grade Event to and until the date on which the Below Investment Grade Event is no longer continuing.
The Note Purchase Agreement also contains customary events of default with customary cure and notice periods, including, without limitation, nonpayment, incorrect representation in any material respect, breach of covenant, cross-default under other indebtedness of the Company or subsidiary guarantors subject to a cure pass-through, certain judgments and orders and certain events of bankruptcy.
On November 1, 2021, the Company repurchased 511,026 shares of its common stock validly tendered and not withdrawn on the terms set forth in the tender offer statement on Schedule TO and Offer to Purchase filed with the SEC on September 13, 2021. The shares were repurchased at a price of $7.60 per share, which was the Company’s net asset value per share as of November 1, 2021, for an aggregate purchase price of $3.9 million (an amount equal to 90% of the
66
proceeds the Company received from the issuance of shares under the Company’s distribution reinvestment plan from the November 1, 2021 dividend payment).
On November 11, 2021, our Board of Directors declared a quarterly cash dividend of $0.15 per share payable February 1, 2022 to stockholders of record as of December 31, 2021.
Schedule 12-14
MSC Income Fund, Inc.
Consolidated Schedule of Investments In and Advances to Affiliates
September 30, 2021
(dollars in thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | Amount of | | | | | | | | | | | | | |
| | | | | | | | | | | | Interest, | | | | | | | | | | | | | |
| | | | | | | | | | | | Fees or | | | | | | | | | | | | | |
| | | | | | Amount of | | Amount of | | Dividends | | December 31, | | | | | | | | September 30, | |||||
| | | | | | Realized | | Unrealized | | Credited to | | 2020 | | Gross | | Gross | | 2021 | |||||||
Company |
| Investment(1)(10)(11) |
| Geography |
| Gain/(Loss) |
| Gain/(Loss) |
| Income(2) |
| Fair Value |
| Additions(3) |
| Reductions(4) |
| Fair Value | |||||||
| |
| |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
GRT Rubber Technologies LLC |
| 7.10% (L+7.00%) Secured Debt |
| (8) | | $ | - | | $ | (16) | | $ | 449 | | $ | 8,262 | | $ | 4 | | $ | 16 | | $ | 8,250 |
|
| Member Units |
| (8) | |
| - | | | - | | | 1,739 | | | 22,120 | | | - | | | - | | | 22,120 |
Harris Preston Fund Investments |
| LP Interests (2717 MH, L.P.) |
| (8) | |
| - | | | 585 | | | - | | | 2,702 | | | 689 | | | - | | | 3,391 |
Copper Trail Energy Fund I, LP - CTMH |
| LP Interests (CTMH, LP) |
| (9) | |
| - | | | - | | | - | | | 747 | | | - | | | 37 | | | 710 |
Other | | | | | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Total Control Investments | | | | | | $ | - | | $ | 569 | | $ | 2,188 | | $ | 33,831 | | $ | 693 | | $ | 53 | | $ | 34,471 |
Affiliate Investments | | | | | | | | | | | | | | | | | | | | | | | | | |
AFG Capital Group, LLC |
| Preferred Member Units |
| (8) | | $ | - | | $ | 400 | | $ | 50 | | $ | 1,450 | | $ | 400 | | $ | - | | $ | 1,850 |
|
| 10.00% Secured Debt |
| (8) | |
| - | | | - | | | 7 | | | 123 | | | - | | | 65 | | | 58 |
ASK (Analytical Systems Keco Holdings, LLC) |
| Preferred Member Units |
| (8) | |
| - | | | (800) | | | - | | | 800 | | | - | | | 800 | | | - |
| | Preferred Member Units | | (8) | | | - | | | 593 | | | - | | | - | | | 1,200 | | | - | | | 1,200 |
|
| 12.00% (L+10.00%, Floor 2.00%) Secured Debt |
| (8) | |
| - | | | - | | | 163 | | | 1,180 | | | 66 | | | 55 | | | 1,191 |
|
| Warrants |
| (8) | |
| - | | | - | | | - | | | - | | | - | | | - | | | - |
ATX Networks Corp. | | 10.00% PIK Unsecured Debt | | (6) | | | - | | | - | | | 30 | | | - | | | 1,973 | | | - | | | 1,973 |
| | 8.50% (L+7.50%, Floor 1.00%) Secured Debt | | (6) | | | - | | | - | | | 55 | | | - | | | 7,121 | | | - | | | 7,121 |
| | 8.75% (7.25% Cash, 1.50% PIK) (1.50% PIK + L+6.25%, Floor 1.00%) Secured Debt | | (6) | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Barfly Ventures, LLC |
| Preferred Member Units |
| (5) | |
| - | | | 115 | | | - | | | 528 | | | 115 | | | - | | | 643 |
Brewer Crane Holdings, LLC |
| Preferred Member Units |
| (9) | |
| - | | | (390) | | | 99 | | | 1,460 | | | - | | | 390 | | | 1,070 |
|
| 11.00% (L+10.00%, Floor 1.00%) Secured Debt |
| (9) | |
| - | | | - | | | 181 | | | 2,119 | | | 7 | | | 93 | | | 2,033 |
Centre Technologies Holdings, LLC |
| 12.00% (L+10.00%, Floor 2.00%) Secured Debt |
| (8) | |
| - | | | - | | | 247 | | | 2,868 | | | 14 | | | 515 | | | 2,367 |
|
| Preferred Member Units |
| (8) | |
| - | | | (80) | | | - | | | 1,540 | | | - | | | 80 | | | 1,460 |
Chamberlin Holding LLC |
| 9.00% (L+8.00%, Floor 1.00%) Secured Debt |
| (8) | |
| - | | | - | | | 281 | | | 3,803 | | | 1,000 | | | 349 | | | 4,454 |
|
| Member Units |
| (8) | |
| - | | | (990) | | | 895 | | | 7,020 | | | - | | | 990 | | | 6,030 |
|
| Member Units |
| (8) | |
| - | | | 41 | | | 13 | | | 317 | | | 41 | | | - | | | 358 |
Charlotte Russe, Inc |
| Common Stock | | (9) | | | (2,470) | | | 2,470 | | | - | | | - | | | 2,470 | | | 2,470 | | | - |
Charps, LLC |
| Preferred Member Units |
| (5) | |
| - | | | 930 | | | 530 | | | 2,630 | | | 930 | | | - | | | 3,560 |
|
| 15.00% Secured Debt |
| (5) | |
| - | | | - | | | 1 | | | 167 | | | - | | | 167 | | | - |
Clad-Rex Steel, LLC |
| 10.50% (L+9.50%, Floor 1.00%) Secured Debt |
| (5) | |
| - | | | - | | | 246 | | | 2,706 | | | 11 | | | 100 | | | 2,617 |
|
| Member Units |
| (5) | |
| - | | | 407 | | | 545 | | | 2,153 | | | 407 | | | - | | | 2,560 |
|
| Member Units |
| (5) | |
| - | | | 2 | | | - | | | 132 | | | 2 | | | - | | | 134 |
|
| 10.00% Secured Debt |
| (5) | |
| - | | | - | | | 21 | | | 275 | | | - | | | 5 | | | 270 |
Cody Pools, Inc. |
| 12.25% (L+10.50%, Floor 1.75%) Secured Debt |
| (8) | | | - | | | 11 | | | 398 | | | 3,554 | | | 2,025 | | | 1,070 | | | 4,509 |
|
| Preferred Member Units |
| (8) | | | - | | | 3,858 | | | 367 | | | 3,740 | | | 3,860 | | | - | | | 7,600 |
Colonial Electric Company LLC |
| 12.00% Secured Debt |
| (6) | |
| - | | | - | | | 396 | | | - | | | 6,156 | | | 79 | | | 6,077 |
|
| Preferred Member Units |
| (6) | |
| - | | | 190 | | | - | | | - | | | 2,110 | | | - | | | 2,110 |
Copper Trail Energy Fund I, LP |
| LP Interests (Copper Trail Energy Fund I, LP) |
| (9) | |
| (203) | | | 379 | | | 482 | | | 1,782 | | | 379 | | | 2,161 | | | - |
Datacom, LLC |
| Preferred Member Units |
| (8) | |
| - | | | - | | | - | | | - | | | 290 | | | - | | | 290 |
|
| 5.00% Secured Debt |
| (8) | |
| - | | | - | | | 47 | | | - | | | 910 | | | 9 | | | 901 |
Digital Products Holdings LLC |
| 11.00% (L+10.00%, Floor 1.00%) Secured Debt |
| (5) | |
| - | | | - | | | 382 | | | 4,493 | | | 17 | | | 248 | | | 4,262 |
|
| Preferred Member Units |
| (5) | |
| - | | | - | | | 38 | | | 2,459 | | | - | | | - | | | 2,459 |
Direct Marketing Solutions, Inc. |
| Preferred Stock |
| (9) | |
| - | | | (550) | | | 168 | | | 4,840 | | | - | | | 550 | | | 4,290 |
|
| 12.00% (L+11.00%, Floor 1.00%) Secured Debt |
| (9) | |
| - | | | - | | | 362 | | | 3,717 | | | 19 | | | 59 | | | 3,677 |
Freeport Financial Funds |
| LP Interests (Freeport First Lien Loan Fund III LP) |
| (5) | |
| - | | | 66 | | | 613 | | | 10,321 | | | 66 | | | 3,156 | | | 7,231 |
Gamber-Johnson Holdings, LLC |
| 9.00% (L+7.00%, Floor 2.00%) Secured Debt |
| (5) | |
| - | | | (25) | | | 375 | | | 4,960 | | | 225 | | | 25 | | | 5,160 |
|
| Member Units |
| (5) | |
| - | | | 8 | | | 849 | | | 13,120 | | | 720 | | | - | | | 13,840 |
GFG Group, LLC. |
| Preferred Member Units |
| (5) | |
| - | | | 525 | | | 115 | | | - | | | 1,750 | | | - | | | 1,750 |
|
| 12.00% Secured Debt |
| (5) | |
| - | | | - | | | 245 | | | - | | | 3,849 | | | 800 | | | 3,049 |
Gulf Publishing Holdings, LLC |
| 10.50% (5.25% Cash, 5.25% PIK) (L+9.50%, Floor 1.00%) Secured Debt |
| (8) | |
| - | | | - | | | 6 | | | 63 | | | 1 | | | - | | | 64 |
|
| 12.50% (6.25% Cash, 6.25% PIK) Secured Debt |
| (8) | |
| - | | | (499) | | | 250 | | | 2,988 | | | 127 | | | 499 | | | 2,616 |
Hawk Ridge Systems, LLC |
| 9.00% Secured Debt |
| (9) | |
| - | | | (13) | | | 257 | | | 3,350 | | | 13 | | | 13 | | | 3,350 |
67
| | | | | | | | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | Amount of | | | | | | | | | | | | | |
| | | | | | | | | | | | Interest, | | | | | | | | | | | | | |
| | | | | | | | | | | | Fees or | | | | | | | | | | | | | |
| | | | | | Amount of | | Amount of | | Dividends | | December 31, | | | | | | | | September 30, | |||||
| | | | | | Realized | | Unrealized | | Credited to | | 2020 | | Gross | | Gross | | 2021 | |||||||
Company |
| Investment(1)(10)(11) |
| Geography |
| Gain/(Loss) |
| Gain/(Loss) |
| Income(2) |
| Fair Value |
| Additions(3) |
| Reductions(4) |
| Fair Value | |||||||
| | 7.00% (L+6.00%, Floor 1.00%) Secured Debt | | (9) | | | - | | | 1 | | | 5 | | | - | | | 646 | | | - | | | 646 |
|
| Preferred Member Units |
| (9) | |
| - | | | 1,282 | | | 173 | | | 2,008 | | | 1,282 | | | - | | | 3,290 |
|
| Preferred Member Units |
| (9) | |
| - | | | 65 | | | - | | | 105 | | | 65 | | | - | | | 170 |
HPEP 3, L.P. |
| LP Interests (HPEP 3, L.P.) |
| (8) | |
| - | | | 803 | | | - | | | 3,258 | | | 925 | | | - | | | 4,183 |
J&J Services, Inc. |
| 11.50% Secured Debt |
| (7) | |
| - | | | (15) | | | 285 | | | 3,200 | | | 15 | | | 515 | | | 2,700 |
|
| Preferred Stock |
| (7) | |
| - | | | 680 | | | - | | | 3,170 | | | 680 | | | - | | | 3,850 |
Kickhaefer Manufacturing Company, LLC |
| Member Units |
| (5) | |
| - | | | - | | | 19 | | | 3,060 | | | - | | | - | | | 3,060 |
|
| 11.50% Secured Debt |
| (5) | |
| - | | | - | | | 497 | | | 5,500 | | | 32 | | | 500 | | | 5,032 |
|
| 9.00% Secured Debt |
| (5) | |
| - | | | - | | | 67 | | | 978 | | | - | | | 6 | | | 972 |
|
| Member Units |
| (5) | |
| - | | | 12 | | | - | | | 290 | | | 12 | | | - | | | 302 |
Market Force Information, LLC |
| 12.00% PIK Secured Debt |
| (9) | |
| - | | | (601) | | | - | | | 3,391 | | | - | | | 601 | | | 2,790 |
MH Corbin Holding LLC |
| 13.00% (10.00% Cash, 3.00% PIK) Secured Debt |
| (5) | |
| - | | | (515) | | | 215 | | | 2,070 | | | 7 | | | 575 | | | 1,502 |
|
| Preferred Member Units |
| (5) | |
| - | | | (590) | | | - | | | 590 | | | - | | | 590 | | | - |
Oneliance, LLC | | Preferred Stock | | (7) | | | - | | | - | | | - | | | - | | | 264 | | | - | | | 264 |
| | 12.00% (L+11.00%, Floor 1.00%) Secured Debt | | (7) | | | - | | | - | | | 27 | | | - | | | 1,373 | | | - | | | 1,373 |
Orttech Holdings, LLC | | Preferred Stock | | (5) | | | - | | | - | | | - | | | - | | | 2,900 | | | - | | | 2,900 |
| | 12.00% (L+11.00%, Floor 1.00%) Secured Debt | | (5) | | | - | | | - | | | 132 | | | - | | | 5,972 | | | - | | | 5,972 |
Mystic Logistics Holdings, LLC |
| 12.00% Secured Debt |
| (6) | |
| - | | | - | | | 153 | | | 1,682 | | | 2 | | | 7 | | | 1,677 |
|
| Common Stock |
| (6) | |
| - | | | (456) | | | 137 | | | 2,248 | | | - | | | 456 | | | 1,792 |
NexRev LLC |
| Preferred Member Units |
| (8) | |
| - | | | 450 | | | 15 | | | 370 | | | 450 | | | - | | | 820 |
| | 11.00% Secured Debt | | (8) | | | - | | | 4 | | | 17 | | | 197 | | | 4 | | | - | | | 201 |
|
| 11.00% Secured Debt |
| (8) | |
| - | | | (345) | | | 345 | | | 3,980 | | | 15 | | | 509 | | | 3,486 |
NuStep, LLC |
| Preferred Member Units |
| (5) | |
| - | | | 680 | | | - | | | 2,700 | | | 680 | | | - | | | 3,380 |
| | 7.50% (L+6.50%, Floor 1.00%) Secured Debt | | (5) | | | - | | | - | | | 6 | | | - | | | 500 | | | 100 | | | 400 |
|
| 10.50% Secured Debt |
| (5) | |
| - | | | 7 | | | 384 | | | 4,288 | | | 22 | | | - | | | 4,310 |
SI East, LLC (Stavig) |
| 10.25% Secured Debt |
| (7) | |
| - | | | (37) | | | 782 | | | 10,987 | | | 11,512 | | | 1,300 | | | 21,199 |
| | Preferred Member Units |
| (7) | |
| - | | | 1,804 | | | 699 | | | 3,260 | | | 1,804 | | | 1,594 | | | 3,470 |
Sonic Systems International, LLC | | Common Stock | | (8) | | | - | | | - | | | 25 | | | - | | | 1,250 | | | - | | | 1,250 |
| | 8.50% (L+7.50%, Floor 1.00%) Secured Debt | | (8) | | | - | | | - | | | 144 | | | - | | | 13,725 | | | - | | | 13,725 |
Tedder Industries, LLC |
| 12.00% Secured Debt |
| (9) | |
| - | | | - | | | 366 | | | 4,025 | | | 123 | | | 400 | | | 3,748 |
|
| Preferred Member Units |
| (9) | |
| - | | | - | | | - | | | 2,034 | | | - | | | - | | | 2,034 |
|
| 12.00% Secured Debt |
| (9) | |
| - | | | (2) | | | 21 | | | - | | | 401 | | | 2 | | | 399 |
Trantech Radiator Topco, LLC |
| Common Stock |
| (7) | |
| - | | | 150 | | | 22 | | | 1,510 | | | 150 | | | - | | | 1,660 |
|
| 12.00% Secured Debt |
| (7) | |
| - | | | (8) | | | 211 | | | 2,131 | | | 11 | | | 8 | | | 2,134 |
Other | | | | | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Total Affiliate investments | | | | | | $ | (2,673) | | $ | 10,017 | | $ | 13,461 | | $ | 157,690 | | $ | 83,096 | | $ | 21,911 | | $ | 218,875 |
| (1) | The principal amount, the ownership detail for equity investments and if the investment is income producing is included in the consolidated schedule of investments. |
| (2) | Represents the total amount of interest, fees and dividends credited to income for the portion of the period for which an investment was included in Control or Affiliate categories, respectively. For investments transferred between Control and Affiliate categories during the period, any income or investment balances related to the time period it was in the category other than the one shown at period end is included in “Amounts related to investments transferred to or from other 1940 Act classifications during the period.” |
| (3) | Gross additions include increases in the cost basis of investments resulting from new portfolio investments, follow-on investments and accrued PIK interest, and the exchange of one or more existing securities for one or more new securities. Gross additions also include net increases in unrealized appreciation or net decreases in net unrealized depreciation as well as the movement of an existing portfolio company into this category and out of a different category. |
| (4) | Gross reductions include decreases in the cost basis of investments resulting from principal repayments or sales and the exchange of one or more existing securities for one or more new securities. Gross reductions also include net increases in net unrealized depreciation or net decreases in unrealized appreciation as well as the movement of an existing portfolio company out of this category and into a different category. |
| (5) | Portfolio company located in the Midwest region as determined by location of the corporate headquarters. The fair value as of September 30, 2021 for affiliate investments located in this region was $75,365. This represented 12.5% of net assets as of September 30, 2021. |
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| (6) | Portfolio company located in the Northeast region as determined by location of the corporate headquarters. The fair value as of September 30, 2021 for affiliate investments located in this region was $11,657. This represented 1.9% of net assets as of September 30, 2021. |
| (7) | Portfolio company located in the Southeast region as determined by location of the corporate headquarters. The fair value as of September 30, 2021 for affiliate investments located in this region was $36,650. This represented 6.1% of net assets as of September 30, 2021. |
| (8) | Portfolio company located in the Southwest region as determined by location of the corporate headquarters. The fair value as of September 30, 2021 for control investments located in this region was $33,761. This represented 5.6% of net assets as of September 30, 2021. The fair value as of September 30, 2021 for affiliate investments located in this region was $58,612. This represented 9.7% of net assets as of September 30, 2021. |
| (9) | Portfolio company located in the West region as determined by location of the corporate headquarters. The fair value as of September 30, 2021 for control investments located in this region was $710. This represented 0.1% of net assets as of September 30, 2021. The fair value as of September 30, 2021 for affiliate investments located in this region was $27,497. This represented 4.6% of net assets as of September 30, 2021. |
| (10) | All of the Company’s portfolio investments are generally subject to restrictions on resale as “restricted securities,” unless otherwise noted. |
| (11) | This schedule should be read in conjunction with the consolidated schedule of investments and notes to the consolidated financial statements. Supplemental information can be located within the schedule of investments including end of period interest rate, preferred dividend rate, maturity date, investments not paid currently in cash and investments whose value was determined using significant unobservable inputs. |
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Schedule 12-14
MSC Income Fund, Inc.
Consolidated Schedule of Investments in and Advances to Affiliates
September 30, 2020
(dollars in thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | Amount of | | | | | | | | | | | | | |
| | | | | | | | | | | | Interest, | | | | | | | | | | | | | |
| | | | | | | | | | | | Fees or | | | | | | | | | | | | | |
| | | | | | Amount of | | Amount of | | Dividends | | December 31, | | | | | | | | September 30, | |||||
| | | | | | Realized | | Unrealized | | Credited to | | 2019 | | Gross | | Gross | | 2020 | |||||||
Company |
| Investment(1)(10)(11) |
| Geography |
| Gain/(Loss) |
| Gain/(Loss) |
| Income(2) | | Fair Value | | Additions(3) | | Reductions(4) | | Fair Value | |||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
GRT Rubber Technologies LLC | | LIBOR Plus 7.00% | | (8) | | $ | - | | $ | (4) | | $ | 491 | | $ | 7,396 | | $ | 870 | | $ | 4 | | $ | 8,262 |
| | Member Units | | (8) | | | - | | | (997) | | | 1,260 | | | 23,372 | | | - | | | 998 | | | 22,374 |
Copper Trail Fund Investments | | LP Interests (CTMH, LP) | | (9) | | | - | | | - | | | 125 | | | 872 | | | - | | | - | | | 872 |
Harris Preston Fund Investments | | LP Interests (2717 MH, L.P.) | | (8) | | | - | | | 120 | | | - | | | 3,156 | | | 121 | | | - | | | 3,277 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Other Amounts related to investments transferred to or from other 1940 Act classification during the period | | | | | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Total Control investments | | | | | | $ | - | | $ | (881) | | $ | 1,876 | | $ | 34,796 | | $ | 991 | | $ | 1,002 | | $ | 34,785 |
Affiliate Investments | | | | | | | | | | | | | | | | | | | | | | | | | |
AFG Capital Group, LLC | | 10.00% Secured Debt | | (8) | | $ | - | | $ | - | | $ | 13 | | $ | 209 | | $ | - | | $ | 65 | | $ | 144 |
| | Preferred Member Units | | (8) | | | - | | | 45 | | | - | | | 1,295 | | | 45 | | | - | | | 1,340 |
Analytical Systems Keco, LLC | | LIBOR Plus 10.00% (Floor 2.00%) | | (8) | | | - | | | (1) | | | 131 | | | 1,266 | | | 9 | | | 86 | | | 1,189 |
| | Preferred Member Units | | (8) | | | - | | | - | | | - | | | 800 | | | - | | | - | | | 800 |
| | Warrants | | (8) | | | - | | | 10 | | | - | | | 79 | | | 10 | | | 1 | | | 88 |
Brewer Crane Holdings, LLC | | LIBOR Plus 10.00% (Floor 1.00%) | | (9) | | | - | | | - | | | 195 | | | 2,233 | | | 6 | | | 92 | | | 2,147 |
| | Preferred Member Units | | (9) | | | - | | | 333 | | | 23 | | | 1,070 | | | 333 | | | - | | | 1,403 |
Centre Technologies Holdings, LLC | | LIBOR Plus 10.00% (Floor 2.00%) | | (8) | | | - | | | - | | | 284 | | | 3,008 | | | 11 | | | 117 | | | 2,902 |
| | Preferred Member Units | | (8) | | | - | | | 55 | | | 23 | | | 1,460 | | | 55 | | | - | | | 1,515 |
Chamberlin Holding LLC | | LIBOR Plus 10.00% (Floor 1.00%) | | (8) | | | - | | | (22) | | | 400 | | | 4,443 | | | 22 | | | 472 | | | 3,993 |
| | Member Units | | (8) | | | - | | | 992 | | | 728 | | | 6,009 | | | 992 | | | - | | | 7,001 |
| | Member Units | | (8) | | | - | | | (133) | | | 13 | | | 363 | | | - | | | 133 | | | 230 |
Charlotte Russe, Inc | | Common Stock | | (9) | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Charps, LLC | | 15.00% Secured Debt | | (5) | | | - | | | - | | | 56 | | | 500 | | | - | | | 38 | | | 462 |
| | Preferred Member Units | | (5) | | | - | | | 620 | | | 113 | | | 1,730 | | | 620 | | | - | | | 2,350 |
Clad-Rex Steel, LLC | | LIBOR Plus 9.50% (Floor 1.00%) | | (5) | | | - | | | (2) | | | 229 | | | 2,696 | | | 9 | | | 2 | | | 2,703 |
| | Member Units | | (5) | | | - | | | (255) | | | 79 | | | 2,408 | | | - | | | 255 | | | 2,153 |
| | 10% Secured Debt | | (5) | | | - | | | - | | | 21 | | | 282 | | | - | | | 5 | | | 277 |
| | Member Units | | (5) | | | - | | | - | | | - | | | 115 | | | - | | | - | | | 115 |
Cody Pools, Inc. | | LIBOR Plus 10.50% (Floor 1.75%) | | (8) | | | - | | | 76 | | | 290 | | | - | | | 4,084 | | | 184 | | | 3,900 |
| | Preferred Member Units | | (8) | | | - | | | 882 | | | 15 | | | - | | | 2,961 | | | - | | | 2,961 |
Copper Trail Fund Investments | | LP Interests (Copper Trail Energy Fund I, LP) | | (9) | | | 21 | | | (562) | | | 1,184 | | | 1,643 | | | 1,212 | | | 1,001 | | | 1,854 |
Direct Marketing Solutions, Inc. | | LIBOR Plus 11.00% (Floor 1.00%) | | (9) | | | - | | | (16) | | | 376 | | | 3,929 | | | 16 | | | 173 | | | 3,772 |
| | Preferred Stock | | (9) | | | - | | | (36) | | | - | | | 5,051 | | | - | | | 36 | | | 5,015 |
Digital Products Holdings LLC | | LIBOR Plus 10.00% (Floor 1.00%) | | (5) | | | - | | | 157 | | | 422 | | | 4,611 | | | 172 | | | 278 | | | 4,505 |
| | Preferred Member Units | | (5) | | | - | | | 433 | | | 50 | | | 1,294 | | | 433 | | | - | | | 1,727 |
| | LP Interests (Freeport First Lien Loan Fund III LP) | | (5) | | | - | | | (205) | | | 630 | | | 9,696 | | | 990 | | | 365 | | | 10,321 |
Gamber-Johnson Holdings, LLC | | LIBOR Plus 6.50% (Floor 2.00%) | | (5) | | | - | | | (11) | | | 329 | | | 4,755 | | | 419 | | | 214 | | | 4,960 |
| | Member Units | | (5) | | | - | | | (41) | | | 763 | | | 13,352 | | | - | | | 41 | | | 13,311 |
Guerdon Modular Holdings, Inc. | | 16.00% Secured Debt | | (9) | | | (2,792) | | | 3,117 | | | 30 | | | - | | | 3,147 | | | 3,147 | | | - |
| | LIBOR Plus 8.50% (Floor 1.00%) | | (9) | | | (252) | | | 252 | | | - | | | - | | | 253 | | | 253 | | | - |
| | Preferred Stock | | (9) | | | (285) | | | 285 | | | - | | | - | | | 285 | | | 285 | | | - |
| | Common Stock | | (9) | | | (746) | | | 746 | | | - | | | - | | | 746 | | | 746 | | | - |
Gulf Publishing Holdings, LLC | | LIBOR Plus 9.50% (Floor 1.00%) | | (8) | | | - | | | - | | | 5 | | | 70 | | | 1 | | | 10 | | | 61 |
| | 6.25% Current / 6.25% PIK | | (8) | | | - | | | (279) | | | 312 | | | 3,124 | | | 96 | | | 279 | | | 2,941 |
| | Member Units | | (8) | | | - | | | (605) | | | - | | | 605 | | | - | | | 605 | | | - |
Harris Preston Fund Investments | | LP Interests (HPEP 3, L.P.) | | (8) | | | - | | | - | | | - | | | 2,474 | | | 597 | | | - | | | 3,071 |
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| | | | | | | | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | Amount of | | | | | | | | | | | | | |
| | | | | | | | | | | | Interest, | | | | | | | | | | | | | |
| | | | | | | | | | | | Fees or | | | | | | | | | | | | | |
| | | | | | Amount of | | Amount of | | Dividends | | December 31, | | | | | | | | September 30, | |||||
| | | | | | Realized | | Unrealized | | Credited to | | 2019 | | Gross | | Gross | | 2020 | |||||||
Company |
| Investment(1)(10)(11) |
| Geography |
| Gain/(Loss) |
| Gain/(Loss) |
| Income(2) | | Fair Value | | Additions(3) | | Reductions(4) | | Fair Value | |||||||
Hawk Ridge Systems, LLC | | LIBOR Plus 6.00% (Floor 1.00%) | | (9) | | | - | | | - | | | - | | | 148 | | | 100 | | | - | | | 248 |
| | 11.00% Secured Debt | | (9) | | | - | | | (12) | | | 139 | | | 3,350 | | | 12 | | | 12 | | | 3,350 |
| | Preferred Member Units | | (9) | | | - | | | 33 | | | 17 | | | 1,975 | | | 33 | | | - | | | 2,008 |
| | Preferred Member Units | | (9) | | | - | | | - | | | - | | | 105 | | | - | | | - | | | 105 |
J&J Services, Inc. | | 11.50% Secured Debt | | (7) | | | - | | | 59 | | | 391 | | | 4,315 | | | 85 | | | 800 | | | 3,600 |
| | Preferred Stock | | (7) | | | - | | | 1,207 | | | - | | | 1,790 | | | 1,207 | | | 18 | | | 2,979 |
Kickhaefer Manufacturing Company, LLC | | 9.50% Current/2.00% PIK Secured Debt | | (5) | | | - | | | (1) | | | 587 | | | 6,146 | | | 371 | | | 741 | | | 5,776 |
| | Member Units | | (5) | | | - | | | (21) | | | 17 | | | 290 | | | - | | | 21 | | | 269 |
| | 9.00% Secured Debt | | (5) | | | - | | | - | | | 76 | | | 977 | | | 8 | | | 5 | | | 980 |
| | Member Units | | (5) | | | - | | | - | | | - | | | 3,060 | | | - | | | - | | | 3,060 |
Market Force Information, LLC | | 12.00% PIK Secured Debt | | (9) | | | - | | | (2,927) | | | 63 | | | 5,625 | | | 790 | | | 2,986 | | | 3,429 |
| | Member Units | | (9) | | | - | | | (1,319) | | | - | | | 1,319 | | | - | | | 1,319 | | | - |
MH Corbin Holding LLC | | 13.00% Secured Debt | | (5) | | | - | | | (20) | | | 223 | | | 2,213 | | | 17 | | | 80 | | | 2,150 |
| | Preferred Member Units | | (5) | | | - | | | (452) | | | - | | | 1,192 | | | - | | | 452 | | | 740 |
| | Preferred Member Units | | (5) | | | - | | | (5) | | | - | | | 5 | | | - | | | 5 | | | - |
Mystic Logistics Holdings, LLC | | 12.00% Secured Debt | | (6) | | | - | | | - | | | 156 | | | 1,561 | | | 254 | | | 134 | | | 1,681 |
| | Common Stock | | (6) | | | - | | | 440 | | | - | | | 2,103 | | | 440 | | | - | | | 2,543 |
NexRev LLC | | 11.00% PIK Secured Debt | | (8) | | | - | | | (126) | | | 378 | | | 4,331 | | | 56 | | | 237 | | | 4,150 |
| | Preferred Member Units | | (8) | | | - | | | (1,340) | | | (14) | | | 1,577 | | | - | | | 1,340 | | | 237 |
NuStep, LLC | | 12.00% Secured Debt | | (5) | | | - | | | - | | | 469 | | | 4,901 | | | 19 | | | 40 | | | 4,880 |
| | Preferred Member Units | | (5) | | | - | | | - | | | - | | | 2,550 | | | - | | | - | | | 2,550 |
SI East, LLC | | 9.50% Current, Secured Debt | | (7) | | | - | | | (25) | | | 827 | | | 10,988 | | | 25 | | | 25 | | | 10,988 |
| | Preferred Member Units | | (7) | | | - | | | 506 | | | 431 | | | 2,734 | | | 506 | | | 1 | | | 3,239 |
Tedder Industries, LLC | | 12.00% Secured Debt | | (9) | | | - | | | (65) | | | 391 | | | 4,066 | | | 176 | | | 65 | | | 4,177 |
| | 12.00% Secured Debt | | (9) | | | - | | | - | | | 15 | | | 158 | | | - | | | 158 | | | - |
| | Preferred Member Units | | (9) | | | - | | | - | | | - | | | 2,034 | | | - | | | - | | | 2,034 |
Trantech Radiator Topco, LLC | | 12% Secured Debt | | (7) | | | - | | | 50 | | | 217 | | | 2,237 | | | 63 | | | 120 | | | 2,180 |
| | Common Stock | | (7) | | | - | | | 778 | | | 22 | | | 1,164 | | | 778 | | | 1 | | | 1,941 |
Other Amounts related to investments transferred to or from other 1940 Act classification during the period | | | | | | | - | | | 22 | | | 10 | | | 674 | | | 22 | | | 696 | | | - |
Total Affiliate investments | | | | | | $ | (4,054) | | $ | 2,617 | | $ | 11,129 | | $ | 154,158 | | $ | 22,486 | | $ | 18,139 | | $ | 158,505 |
| (1) | The principal amount, the ownership detail for equity investments and if the investment is income producing is included in the consolidated schedule of investments. |
| (2) | Represents the total amount of interest, fees and dividends credited to income for the portion of the period for which an investment was included in Control or Affiliate categories, respectively. For investments transferred between Control and Affiliate categories during the period, any income or investment balances related to the time period it was in the category other than the one shown at period end is included in “Amounts related to investments transferred to or from other 1940 Act classifications during the period.” |
| (3) | Gross additions include increases in the cost basis of investments resulting from new portfolio investments, follow-on investments and accrued PIK interest, and the exchange of one or more existing securities for one or more new securities. Gross additions also include net increases in unrealized appreciation or net decreases in net unrealized depreciation as well as the movement of an existing portfolio company into this category and out of a different category. |
| (4) | Gross reductions include decreases in the cost basis of investments resulting from principal repayments or sales and the exchange of one or more existing securities for one or more new securities. Gross reductions also include net increases in net unrealized depreciation or net decreases in unrealized appreciation as well as the movement of an existing portfolio company out of this category and into a different category. |
| (5) | Portfolio company located in the Midwest region as determined by location of the corporate headquarters. The fair value as of September 30, 2020 for affiliate investments located in this region was $63,289. This represented 11.2% of net assets as of September 30, 2020. |
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| (6) | Portfolio company located in the Northeast region as determined by location of the corporate headquarters. The fair value as of September 30, 2020 for affiliate investments located in this region was $4,224. This represented 0.7% of net assets as of September 30, 2020. |
| (7) | Portfolio company located in the Southeast region as determined by location of the corporate headquarters. The fair value as of September 30, 2020 for affiliate investments located in this region was $24,927. This represented 4.4% of net assets as of September 30, 2020. |
| (8) | Portfolio company located in the Southwest region as determined by location of the corporate headquarters. The fair value as of September 30, 2020 for control investments located in this region was $33,913. This represented 6.0% of net assets as of September 30, 2020. The fair value as of September 30, 2020 for affiliate investments located in this region was $36,523. This represented 6.5% of net assets as of September 30, 2020. |
| (9) | Portfolio company located in the West region as determined by location of the corporate headquarters. The fair value as of September 30, 2020 for control investments located in this region was $872. This represented 0.2% of net assets as of September 30, 2020. The fair value as of September 30, 2020 for affiliate investments located in this region was $29,542. This represented 5.2% of net assets as of September 30, 2020. |
| (10) | All of the Company’s portfolio investments are generally subject to restrictions on resale as “restricted securities,” unless otherwise noted. |
| (11) | This schedule should be read in conjunction with the consolidated schedule of investments and notes to the consolidated financial statements. Supplemental information can be located within the schedule of investments including end of period interest rate, preferred dividend rate, maturity date, investments not paid currently in cash and investments whose value was determined using significant unobservable inputs. |
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements regarding the plans and objectives of management for future operations and which relate to future events or our future performance or financial condition. Any such forward-looking statements may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology. These forward-looking statements are based on assumptions that may be incorrect, and we cannot assure you that the projections included in these forward-looking statements will come to pass. Our actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors, including, without limitation: changes in laws and regulations and adverse changes in the economy generally or in the industries in which our portfolio companies operate, including with respect to changes from the impact of the COVID-19 pandemic, and the resulting impacts on our and our portfolio companies’ business and operations, liquidity and access to capital; and such other factors referenced in Item 1A entitled “Risk Factors” below in Part II of this Quarterly Report on Form 10-Q, if any, and discussed in Item 1A entitled “Risk Factors” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (“SEC”) on March 30, 2021 and elsewhere in this Quarterly Report on Form 10-Q and our other SEC filings.
We have based the forward-looking statements included in this Quarterly Report on Form 10-Q on information available to us on the date of filing of this Quarterly Report on Form 10-Q, and we assume no obligation to update any such forward-looking statements, unless we are required to do so by applicable law. However, you are advised to refer to any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including subsequent periodic and current reports.
COVID-19 UPDATE
The COVID-19 pandemic, and the related effect on the U.S. and global economies, has had, and threatens to continue to have, adverse consequences for our business and operating results, and the businesses and operating results of our portfolio companies. During the quarter ended September 30, 2021, MSC Adviser continued to work collectively with its personnel and our portfolio companies to navigate the significant challenges created by the COVID-19 pandemic, including the ongoing the labor and supply constraints, rising costs, and supply chain disruptions currently being experienced across the U.S. economy. MSC Adviser remains focused on ensuring the safety of its personnel and the employees of our portfolio companies, while also managing our ongoing business activities. In this regard, MSC Adviser remains heavily engaged with our portfolio companies. As discussed below under “Discussion and Analysis of Results of Operations,” our investment income, principally our interest and dividend income, was negatively impacted by the economic effects of the COVID-19 pandemic in 2020. We continue to maintain access to multiple sources of liquidity, including cash, and unused capacity under our TIAA Credit Facility and JPM SPV Facility (as defined below). As of September 30, 2021, we were in compliance with all debt covenants and do not anticipate any issues with our ability to comply with all covenants in the future. Refer to “— Financial Condition, Liquidity and Capital Resources” below for further discussion as of September 30, 2021.
Neither our management, MSC Adviser nor our Board of Directors is able to predict the full impact of the COVID-19 pandemic, including its duration and the magnitude of its economic and societal impact. As such, while we will continue to monitor the evolving situation and guidance from U.S. authorities, including federal, state and local public health authorities, we are unable to predict with any certainty the extent to which the outbreak will negatively affect our portfolio companies’ operating results and financial condition or the impact that such disruptions may have on our results of operations and financial condition in the future.
OVERVIEW
Our primary investment objective is to generate current income through debt and equity investments. A secondary objective is to generate long-term capital appreciation through such equity and equity-related investments,
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including warrants, convertible securities and other rights to acquire equity securities. Our strategy is to invest primarily in illiquid debt and equity securities issued by lower middle market (“LMM”) companies, which generally have annual revenues between $10 million and $150 million, and middle market (“Middle Market”) companies that are generally larger in size than the LMM companies and have annual revenues typically between $150 million and $1.5 billion. Our LMM and Middle Market portfolio investments generally range in size from $1 million to $15 million. We categorize some of our investments in LMM companies and Middle Market companies as private loan (“Private Loan”) portfolio investments. Private Loan investments, often referred to in the debt markets as “club deals,” are investments, generally in debt instruments, that we originate on a collaborative basis with other investment funds. Private Loan investments are typically similar in size, structure, terms and conditions to investments we hold in our LMM portfolio and Middle Market portfolio. Our investment portfolio also includes other portfolio (“Other Portfolio”) investments primarily consisting of investments managed by third parties, which may differ from the typical profiles for our other types of investments. In our Other Portfolio, we may incur indirect fees and expenses in connection with investments managed by third parties, such as investments in other investment companies or private funds.
The level of new portfolio investment activity will fluctuate from period to period based upon our view of the current economic fundamentals, our ability to identify new investment opportunities that meet our investment criteria, and our ability to consummate the identified opportunities. The level of new investment activity, and associated interest and fee income, will directly impact future investment income. In addition, the level of dividends paid by portfolio companies and the portion of our portfolio debt investments on non-accrual status will directly impact future investment income. While we intend to grow our portfolio and our investment income over the long term, our growth and our operating results may be more limited during depressed economic periods. However, we intend to appropriately manage our cost structure and liquidity position based on applicable economic conditions and our investment outlook. The level of realized gains or losses and unrealized appreciation or depreciation on our investments will also fluctuate depending upon portfolio activity, economic conditions and the performance of our individual portfolio companies. The changes in realized gains and losses and unrealized appreciation or depreciation could have a material impact on our operating results.
Our LMM investments include customized direct secured and unsecured loans to and equity securities of LMM companies. Companies that issue customized LMM securities to us are privately held at the time we invest in them. Our investments in LMM companies are co-investments with Main Street and/or its affiliates and, as a result, we obtained an exemptive order from the SEC, as discussed below, to permit us to do so. While the structure of our investments in customized LMM securities is likely to vary, we may invest in senior secured debt, senior unsecured debt, subordinated secured debt, subordinated unsecured debt, mezzanine debt, convertible debt, convertible preferred equity, preferred equity, common equity, warrants and other instruments, many of which generate current yields. We will make other investments as allowed by the 1940 Act and consistent with our continued qualification as a RIC. For a discussion of the risks inherent in our portfolio investments, see “Item 1A. Risk Factors — Risks Relating to our Business and Structure” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
Our investments may include other equity investments, such as warrants, options to buy a minority interest in a portfolio company, or contractual payment rights or rights to receive a proportional interest in the operating cash flow or net income of such company. When determined by MSC Adviser to be in our best interest, we, in conjunction with other investment funds managed by or affiliated with MSC Adviser, may acquire a controlling interest in a portfolio company. Any warrants we receive with our debt securities may require only a nominal cost to exercise, and thus, as a portfolio company appreciates in value, we may achieve additional investment return from this equity interest. We intend to structure such warrants to include provisions protecting our rights as a minority-interest or, if applicable, controlling-interest holder, as well as puts, or rights to sell such securities back to the company upon the occurrence of specified events. In addition, we may obtain demand or “piggyback” registration rights in connection with these equity interests.
We plan to hold many of our investments to maturity or repayment but may sell our investments earlier if a liquidity event takes place, such as the sale or recapitalization of a portfolio company, or if we determine the sale to be in our best interest.
As a BDC, we are subject to certain regulatory restrictions in making our investments, including limitations on our ability to co-invest with certain affiliates. In April 2014, we received an exemptive order from the SEC permitting co-investments by us and Main Street in certain negotiated transactions where co-investing would otherwise be
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prohibited under the 1940 Act. During December 2020, we received an amended exemptive order from the SEC permitting co-investments by us, Main Street and other funds advised by MSC Adviser in certain negotiated transactions where co-investing would otherwise be prohibited under the 1940 Act. We have made co-investments with Main Street and in the future intend to make co-investments with Main Street and other funds advised by MSC Adviser, in accordance with the conditions of the order. The order requires, among other things, that we and MSC Adviser consider whether each such investment opportunity is appropriate for us and Main Street and other funds advised by MSC Adviser, as applicable, and if it is appropriate, to propose an allocation of the investment opportunity between such parties. Because MSC Adviser is not managing our investment activities as its sole activity, this may provide MSC Adviser an incentive to allocate opportunities to other funds instead of us. However, MSC Adviser has policies and procedures in place to manage this conflict, including oversight by the independent members of our Board of Directors and the independent members of the Board of Directors of Main Street. Additional information regarding the operation of the co-investment program is set forth in the order granting exemptive relief, which may be reviewed on the SEC’s Website at www.sec.gov.
In addition to the co-investment program described in this Form 10-Q and in the SEC’s order for co-investment exemptive relief, we may continue to co-invest in syndicated deals and secondary loan market transactions where only price is negotiated by MSC Adviser and its affiliates.
See “Note C.2 – Investment Portfolio Composition” in the notes to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a summary of the Company’s investments in the LMM, Middle Market and Private Loan portfolios as of September 30, 2021 and December 31, 2020.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. Critical accounting policies are those that require management to make subjective or complex judgments about the effect of matters that are inherently uncertain and may change in subsequent periods. Changes that may be required in the underlying assumptions or estimates in these areas could have a material impact on our current and future financial condition and results of operations.
Management has discussed the development and selection of each critical accounting policy and estimate with the Audit Committee of the Board of Directors. Our critical accounting policies and estimates include the Investment Portfolio Valuation and Revenue Recognition policies described below. Our significant accounting policies are described in greater detail in Note B in the notes to our consolidated financial statements included in “Item 1.– Consolidated Financial Statements” of this Quarterly Report on Form 10-Q.
Investment Portfolio Valuation
The most significant determination inherent in the preparation of our consolidated financial statements is the valuation of our Investment Portfolio and the related amounts of unrealized appreciation and depreciation. We consider this determination to be a critical accounting estimate, given the significant judgments and subjective measurements required. As of September 30, 2021 and December 31, 2020 our Investment Portfolio valued at fair value represented approximately 96% and 93% of our total assets, respectively. We are required to report our investments at fair value. We follow the provisions of FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. ASC 820 requires us to assume that the portfolio investment is to be sold in the principal market to independent market participants, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal market that are independent, knowledgeable and willing and able to transact. See “Note B.1.—Valuation of the Investment Portfolio” in the notes to our consolidated financial statements for a detailed discussion of our investment portfolio valuation process and procedures.
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Due to the inherent uncertainty in the valuation process, our determination of fair value for our Investment Portfolio may differ materially from the values that would have been determined had a ready market for the securities existed. In addition, changes in the market environment, portfolio company performance and other events that may occur over the lives of the investments may cause the gains or losses ultimately realized on these investments to be materially different than the valuations currently assigned. We determine the fair value of each individual investment and record changes in fair value as unrealized appreciation or depreciation.
The SEC has adopted Rule 2a-5 under the 1940 Act, which permits a BDC’s board of directors to designate its executive officers or investment adviser as a valuation designee to determine the fair value for its investment portfolio, subject to the active oversight of the board. Our Board of Directors has approved valuation policies and procedures pursuant to Rule 2a-5 (the “Valuation Procedures”) and has designated MSC Adviser, and specifically a group of its executive officers, to serve as the Board’s valuation designee. We adopted the Valuation Procedures effective April 1, 2021. We believe our investment portfolio as of September 30, 2021 and December 31, 2020 approximates fair value as of those dates based on the markets in which we operate and other conditions in existence on those reporting dates.
Revenue Recognition
Interest and Dividend Income
We record interest and dividend income on the accrual basis to the extent amounts are expected to be collected. Dividend income is recorded as dividends are declared by the portfolio company or at the point an obligation exists for the portfolio company to make a distribution. In accordance with our valuation policies, we evaluate accrued interest and dividend income periodically for collectability. When a loan or debt security becomes 90 days or more past due, and if we otherwise do not expect the debtor to be able to service all of its debt or other obligations, we will generally place the loan or debt security on non-accrual status and cease recognizing interest income on that loan or debt security until the borrower has demonstrated the ability and intent to pay contractual amounts due. If a loan or debt security’s status significantly improves regarding the debtor’s ability to service the debt or other obligations, or if a loan or debt security is sold or written off, we remove it from non-accrual status.
Payment-in-Kind (“PIK”) Interest and Cumulative Dividends
We hold certain debt and preferred equity instruments in our Investment Portfolio that contain PIK interest and cumulative dividend provisions. The PIK interest, computed at the contractual rate specified in each debt agreement, is periodically added to the principal balance of the debt and is recorded as interest income. Thus, the actual collection of this interest may be deferred until the time of debt principal repayment. Cumulative dividends are recorded as dividend income, and any dividends in arrears are added to the balance of the preferred equity investment. The actual collection of these dividends in arrears may be deferred until such time as the preferred equity is redeemed or sold. To maintain RIC tax treatment (as discussed in “Income Taxes” within “Note B. Summary of Significant Accounting Policies” in the notes to our consolidated financial statements), these non-cash sources of income may need to be paid out to stockholders in the form of distributions, even though we may not have collected the PIK interest and cumulative dividends in cash. We stop accruing PIK interest and cumulative dividends and write off any accrued and uncollected interest and dividends in arrears when we determine that such PIK interest and dividends in arrears are no longer collectible. For the three months ended September 30, 2021 and 2020, approximately 2.5% and 6.4%, respectively, of our total investment income was attributable to PIK interest income and cumulative dividend income not paid currently in cash. For the nine months ended September 30, 2021 and 2020, approximately 2.4% and 4.9%, respectively, of our total investment income was attributable to PIK interest income and cumulative dividend income not paid currently in cash.
INVESTMENT PORTFOLIO COMPOSITION
Our LMM portfolio investments primarily consist of secured debt, equity warrants and direct equity investments in privately held, LMM companies based in the United States. Our LMM portfolio companies generally have annual revenues between $10 million and $150 million, and our LMM investments generally range in size from $1 million to $15 million. The LMM debt investments are typically secured by either a first or second priority lien on the assets of the portfolio company, can include either fixed or floating rate terms and generally have a term of between five
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and seven years from the original investment date. In most LMM portfolio investments, we receive nominally priced equity warrants and/or make direct equity investments in connection with a debt investment.
Our Middle Market portfolio investments primarily consist of direct investments in or secondary purchases of interest-bearing debt securities in privately held companies based in the United States that are generally larger in size than the companies included in our LMM portfolio. Our Middle Market portfolio companies generally have annual revenues between $150 million and $1.5 billion, and our Middle Market investments generally range in size from $1 million to $15 million. Our Middle Market portfolio debt investments are generally secured by either a first or second priority lien on the assets of the portfolio company and typically have a term of between three and seven years from the original investment date.
Our Private Loan portfolio investments are primarily debt securities in privately held companies which have been originated through strategic relationships with other investment funds on a collaborative basis and are often referred to in the debt markets as “club deals.” Private Loan investments are typically similar in size, structure, terms and conditions to investments we hold in our LMM portfolio and Middle Market portfolio. Our Private Loan portfolio debt investments are generally secured by either a first or second priority lien on the assets of the portfolio company and typically have a term of between three and seven years from the original investment date.
Our Other Portfolio investments primarily consist of investments which are not consistent with the typical profiles for LMM, Middle Market and Private Loan portfolio investments, including investments which may be managed by third parties. In the Other Portfolio, we may incur indirect fees and expenses in connection with investments managed by third parties, such as investments in other investment companies or private funds. For Other Portfolio investments, we generally receive distributions related to the assets held by the portfolio company. Those assets are typically expected to be liquidated over a five to ten-year period.
The following tables summarize the composition of our total combined LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments at cost and fair value by type of investment as a percentage of the total combined LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments as of September 30, 2021 and December 31, 2020 (this information excludes the Other Portfolio investments).
Cost: |
| September 30, 2021 |
| December 31, 2020 | |
First lien debt |
| 86.6 | % | 79.5 | % |
Equity |
| 11.9 | % | 13.9 | % |
Second lien debt |
| 1.0 | % | 4.6 | % |
Equity warrants |
| 0.2 | % | 0.2 | % |
Other |
| 0.3 | % | 1.8 | % |
|
| 100.0 | % | 100.0 | % |
Fair Value: |
| September 30, 2021 |
| December 31, 2020 | |
First lien debt |
| 82.6 | % | 76.0 | % |
Equity |
| 16.0 | % | 17.3 | % |
Second lien debt |
| 1.0 | % | 4.6 | % |
Equity warrants |
| 0.1 | % | 0.3 | % |
Other |
| 0.3 | % | 1.8 | % |
|
| 100.0 | % | 100.0 | % |
Our LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments carry a number of risks including: (1) investing in companies which may have limited operating histories and financial resources; (2) holding investments that generally are not publicly traded and which may be subject to legal and other restrictions on resale; and (3) other risks common to investing in below investment-grade debt and equity investments in our Investment Portfolio. Please see “Item 1A. Risk Factors—Risks Related to Our Investments” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 for a more complete discussion of the risks involved with investing in our Investment Portfolio.
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PORTFOLIO ASSET QUALITY
We utilize an internally developed investment rating system to rate the performance of each LMM portfolio company and to monitor our expected level of returns on each of our LMM investments in relation to our expectations for the portfolio company. The investment rating system takes into consideration various factors, including each investment’s expected level of returns, the collectability of our debt investments and the ability to receive a return of the invested capital in our equity investments, comparisons to competitors and other industry participants, the portfolio company’s future outlook and other factors that are deemed to be significant to the portfolio company.
As of September 30, 2021, our total Investment Portfolio had three investments on non-accrual status, which comprised approximately 0.8% of its fair value and 2.3% of its cost. As of December 31, 2020, our total Investment Portfolio had three investments on non-accrual status, which comprised approximately 0.6% of its fair value and 1.3% of its cost.
The operating results of our portfolio companies are impacted by changes in the broader fundamentals of the United States economy. In periods during which the United States economy contracts, as it did due to the impact of COVID-19, it is likely that the financial results of small to mid-sized companies, like those in which we invest, could experience deterioration or limited growth from current levels, which could ultimately lead to difficulty in meeting their debt service requirements, to an increase in defaults on our debt investments or in realized losses on our investments and to difficulty in maintaining historical dividend payment rates and unrealized appreciation on our equity investments. Consequently, we can provide no assurance that the performance of certain portfolio companies will not be negatively impacted by future economic cycles or other conditions, which could also have a negative impact on our future results.
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
Comparison of the three months ended September 30, 2021 and September 30, 2020
| | Three Months Ended | | | | | |
| ||||
| | September 30, | | Net Change | ||||||||
|
| 2021 |
| 2020 |
| Amount |
| % | ||||
| | (dollars in thousands) | ||||||||||
| | | | | | | | | | | | |
Total investment income | | $ | 22,754 | | $ | 19,519 | | $ | 3,235 | | 17 | % |
Total expenses (net of fee and expense waivers) | | | 9,632 | | | 9,532 | | | 100 | | 1 | % |
Net investment income | | | 13,122 | | | 9,987 | | | 3,135 | | 31 | % |
Net realized gain (loss) from investments | | | (3,676) | | | (17,868) | | | 14,192 | | NM | |
Net unrealized appreciation (depreciation) from investments | | | 7,343 | | | 47,924 | | | (40,581) | | NM | |
Income tax benefit (provision) | | | (453) | | | (97) | | | (356) | | NM | |
Net increase (decrease) in net assets resulting from operations | | $ | 16,336 | | $ | 39,946 | | $ | (23,610) | | (59) | % |
NM | Not Meaningful |
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Investment Income
Total investment income for the three months ended September 30, 2021 was $22.8 million, a 17% increase from the $19.5 million of total investment income for the corresponding period of 2020. The following table provides a summary of the changes in the comparable period activity.
| | Three Months Ended | | | | | |
| | ||||
| | September 30, | | Net Change | | ||||||||
|
| 2021 |
| 2020 |
| Amount |
| % | | ||||
| | (dollars in thousands) | | ||||||||||
Interest income | | $ | 18,818 | | $ | 17,347 | | $ | 1,471 | | 8 | % | (a) |
Dividend income | |
| 3,249 | | | 2,089 | | | 1,160 | | 56 | % | (b) |
Fee income | | | 687 | | | 83 | | | 604 | | 728 | % | |
Total investment income | | $ | 22,754 | | $ | 19,519 | | $ | 3,235 | | 17 | % | |
| (a) | The increase in interest income was primarily related to higher average levels of Investment Portfolio debt investments and repayment, repricing and other activities related to certain Investment Portfolio debt investments. |
| (b) | The increase in dividend income from equity investments is primarily a result of improved operating results, financial condition and liquidity positions of certain of our portfolio companies following the impacts from the COVID-19 pandemic in 2020. |
Expenses
Total expenses, net of fee and expense waivers, for the three months ended September 30, 2021 were $9.6 million, a 1% increase from $9.5 million in the corresponding period of 2020. The following table provides a summary of the changes in the comparable period activity.
| | Three Months Ended | | | | | | | | ||||
| | September 30, | | Net Change | | ||||||||
| | 2021 | | 2020 | | Amount | | % | | ||||
| | | (dollars in thousands) | | | ||||||||
Interest expense | | $ | 3,759 | | $ | 4,000 | | $ | (241) | | (6) | % | |
Base management fees | | | 4,473 | | | 4,701 | | | (228) | | (5) | % | (a) |
Internal administrative services fees | | | 1,152 | | | 959 | | | 193 | | 20 | % | |
Offering costs | | | 55 | | | 28 | | | 27 | | 96 | % | |
Professional fees | | | 490 | | | 226 | | | 264 | | 117 | % | (b) |
Insurance | | | 114 | | | 103 | | | 11 | | 11 | % | |
Board of director fees | | | 97 | | | 86 | | | 11 | | 13 | % | |
General and administrative | | | 644 | | | 388 | | | 256 | | 66 | % | |
Total expenses before fee and expense waivers | | | 10,784 | | | 10,491 | | | 293 | | 3 | % | |
Waiver of internal administrative services expenses | | | (1,152) | | | (959) | | | (193) | | 20 | % | |
Total expenses | | $ | 9,632 | | $ | 9,532 | | $ | 100 | | 1 | % | |
| (a) | The decrease in base management fees relates to the decrease in the base management fee percentage from 2.00% to 1.75% as the result MSC Adviser becoming the sole investment manager to the Company. |
| (b) | The increase in professional fees is primarily due to an increase in legal fees. |
Net Investment Income
Net investment income for the three months ended September 30, 2021 increased 31% to $13.1 million, or $0.16 per share, compared to net investment income of $10.0 million, or $0.12 per share, for the corresponding period of 2020. The increase in net investment income was principally attributable to the increase in total investment income, partially offset by the increase in total expenses, both as discussed above.
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Net Realized Gain (Loss) from Investments
The following table provides a summary of the primary components of the total net realized gain (loss) on investments of $3.7 million for the three months ended September 30, 2021:
| | Three Months Ended September 30, 2021 | |||||||||||||||||||
| | Full Exits | | Partial Exits | | Restructures | | Other (a) | | Total (a) | |||||||||||
| | Net Gain/(Loss) | | # of Investments | | Net Gain/(Loss) | | # of Investments | | Net Gain/(Loss) | | # of Investments | | Net Gain/(Loss) | | Net Gain/(Loss) | |||||
| | (dollars in thousands) | |||||||||||||||||||
LMM Portfolio | | $ | — | | — | | $ | - | | - | | $ | - | | - | | $ | - | | $ | - |
Middle Market Portfolio | | | - | | - | | | - | | - | | | (4,179) | | 1 | | | 108 | | | (4,071) |
Private Loan Portfolio | | | - | | - | | | - | | - | | | - | | - | | | 598 | | | 598 |
Other Portfolio | | | - | | - | | | - | | - | | | - | | - | | | (203) | | | (203) |
| | | | | | | | | | | | | | | | | | | | | |
Total Net Realized Gain/(Loss) | | $ | - | | - | | $ | - | | - | | $ | (4,179) | | 1 | | $ | 503 | | $ | (3,676) |
| | | | | | | | | | | | | | | | | | | | | |
| (a) | Other activity includes realized gains and losses from transactions involving five portfolio companies which are not considered to be significant individually or in the aggregate. |
Net Unrealized Appreciation (Depreciation)
The following table provides a summary of the total net unrealized appreciation of $7.3 million for the three months ended September 30, 2021:
| | Three Months Ended September 30, 2021 | |||||||||||||
| | | | | Middle | | Private | | | | | | | ||
|
| LMM(a) |
| Market |
| Loan |
| Other | | Total | |||||
|
| (dollars in millions) | |||||||||||||
Accounting reversals of net unrealized (appreciation) depreciation recognized in prior periods due to net realized (gains/income) losses recognized during the current period | | $ | — | | $ | 0.6 | | $ | (1.5) | | $ | 0.2 | | $ | (0.7) |
Net unrealized appreciation relating to investments | |
| 3.6 | |
| 1.5 | |
| 2.3 | |
| 0.6 | |
| 8.0 |
Total net appreciation relating to investments | | $ | 3.6 | | $ | 2.1 | | $ | 0.8 | | $ | 0.8 | | $ | 7.3 |
| | | | | | | | | | | | | | | |
| (a) | LMM includes unrealized appreciation on 19 LMM portfolio investments and unrealized depreciation on 17 LMM portfolio investments. |
Income Tax Benefit (Provision)
The income tax provision for the three months ended September 30, 2021 of $0.5 million consisted of a current tax provision of $0.5 million, related to a $0.4 million provision for excise tax on our estimated undistributed taxable income and $0.1 million provision for current state income taxes.
Net Increase (Decrease) in Net Assets Resulting from Operations
The net increase in net assets resulting from operations for the three months ended September 30, 2021 was $16.3 million, or $0.20 per share, compared with a net increase in net assets of $39.9 million, or $0.50 per share, during the three months ended September 30, 2020. The tables above provide a summary of the net increase in net assets resulting from operations for the three months ended September 30, 2021.
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Comparison of the nine months ended September 30, 2021 and September 30, 2020
| | | | | | | | | | | | |
| | Nine Months Ended | | | | | |
| ||||
| | September 30, | | Net Change | ||||||||
|
| 2021 |
| 2020 |
| Amount |
| % | ||||
| | (dollars in thousands) | ||||||||||
| | | | | | | | | | | | |
Total investment income | | $ | 65,522 | | $ | 65,766 | | $ | (244) | | (0) | % |
Total expenses (net of fee and expense waivers) | | | 26,214 | | | 31,241 | | | (5,027) | | (16) | % |
Net investment income | | | 39,308 | | | 34,525 | | | 4,783 | | 14 | % |
Net realized loss | | | (5,940) | | | (35,561) | | | 29,621 | | NM | |
Net unrealized appreciation (depreciation) from investments | | | 20,363 | | | (23,017) | | | 43,380 | | NM | |
Income tax benefit (provision) | | | (1,283) | | | (192) | | | (1,091) | | NM | |
Net increase (decrease) in net assets resulting from operations | | $ | 52,448 | | $ | (24,245) | | $ | 76,693 | | NM | |
NM | Not Meaningful |
Investment Income
Total investment income for the nine months ended September 30, 2021 was $65.5 million as compared to $65.8 million of total investment income for the corresponding period of 2020. The following table provides a summary of the changes in the comparable period activity.
| | Nine Months Ended | | | | | | | | ||||
| | September 30, | | Net Change | | ||||||||
| | 2021 | | 2020 | | Amount | | % | | ||||
| | | (dollars in thousands) | | | ||||||||
Interest Income | | $ | 52,218 | | $ | 58,834 | | $ | (6,616) | | (11) | % | (a) |
Dividend Income | | | 12,227 | | | 5,833 | | | 6,394 | | 110 | % | (b) |
Fee Income | | | 1,077 | | | 1,099 | | | (22) | | (2) | % | |
Total Investment Income | | $ | 65,522 | | $ | 65,766 | | $ | (244) | | (0) | % | |
| (a) | The decrease in interest income was primarily due to lower average levels of Investment Portfolio debt investments. |
| (b) | The increase in dividend income from equity investments is primarily a result of improved operating results, financial condition and liquidity positions of certain of our portfolio companies following the impacts from the COVID-19 pandemic in 2020. |
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Expenses
Total expenses, net of fee and expense waivers, for the nine months ended September 30, 2021 were $26.2 million, a 16% decrease from $31.2 million in the corresponding period of 2020. The following table provides a summary of the changes in the comparable period activity.
| | Nine Months Ended | | | | | | | | ||||
| | September 30, | | Net Change | | ||||||||
| | 2021 | | 2020 | | Amount | | % | | ||||
| | | (dollars in thousands) | | | ||||||||
Interest expense | | $ | 10,223 | | $ | 13,503 | | $ | (3,280) | | (24) | % | (a) |
Base management fees | | | 12,534 | | | 14,325 | | | (1,791) | | (13) | % | (b) |
Internal administrative services fees | | | 3,247 | | | 2,495 | | | 752 | | 30 | % | (c) |
Offering costs | | | 110 | | | 205 | | | (95) | | (46) | % | |
Professional fees | | | 1,298 | | | 1,726 | | | (428) | | (25) | % | (d) |
Insurance | | | 343 | | | 310 | | | 33 | | 11 | % | |
Board of director fees | | | 295 | | | 309 | | | (14) | | (5) | % | |
General and administrative | | | 1,411 | | | 863 | | | 548 | | 63 | % | |
Total expenses before fee and expense waivers | | | 29,461 | | | 33,736 | | | (4,275) | | (13) | % | |
Waiver of internal administrative services expenses | | | (3,247) | | | (2,495) | | | (752) | | 30 | % | (c) |
Total expenses | | $ | 26,214 | | $ | 31,241 | | $ | (5,027) | | (16) | % | |
| (a) | The decrease in interest expense was primarily due to lower floating interest rates on our revolving lines of credit based upon the decline in LIBOR and lower amounts outstanding under our Credit Facilities (as defined below). |
| (b) | The decrease in the base management fees relates to a decrease in the base management fee from 2.00% to 1.75% as a result of MSC Adviser becoming the sole investment manager to the Company. |
| (c) | The increase in both the internal administrative services fees and waiver of internal administrative services expenses are both primarily due to higher expenses allocated from MSC Adviser to the Company as a result increased activities performed by MSC Adviser for the Company. These increases fully offset each other and as a result have no impact on the Company’s operating results as these items were fully waived by MSC Adviser. |
| (d) | The decrease in professional fees is primarily related to lower legal expenses in the 2021 period as compared to the legal expenses incurred during the comparable period in connection with the Asset Purchase Agreement between HMS Adviser and MSC Adviser and related transactions which were completed in 2020. |
Net Investment Income
Net investment income for the nine months ended September 30, 2021 increased 14% to $39.3 million, or $0.49 per share, compared to net investment income of $34.5 million, or $0.43 per share, for the corresponding period of 2020. The increase in net investment income was principally attributable to the decrease in total expenses, partially offset by the decrease in total investment income, both as discussed above.
Net Realized Gain (Loss)
The net realized loss of $5.9 million for the nine months ended September 30, 2021 includes a realized loss on extinguishment of debt of $2.1 million associated with the repayment and termination of the Deutsche Bank Credit Facility in the first quarter 2021 and a net realized loss from investments of $3.8 million. The following table provides a
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summary of the primary components of the total net realized gain (loss) on investments of $3.8 million for the nine months ended September 30, 2021:
| | Nine Months Ended September 30, 2021 | |||||||||||||||||||
| | Full Exits | | Partial Exits | | Restructures | | | Other (a) | Total (a) | |||||||||||
| | Net Gain/(Loss) | | # of Investments | | Net Gain/(Loss) | | # of Investments | | Net Gain/(Loss) | | # of Investments | | | Net Gain/(Loss) | Net Gain/(Loss) | |||||
| | (dollars in thousands) | |||||||||||||||||||
LMM Portfolio | | $ | (2,470) | | 1 | | $ | - | | - | | $ | (1,193) | | 1 | | $ | - | | $ | (3,663) |
Middle Market Portfolio | | | (798) | | 1 | | | 4,262 | | 1 | | | (4,179) | | 1 | | | 134 | | | (581) |
Private Loan Portfolio | | | - | | - | | | - | | - | | | - | | - | | | 598 | | | 598 |
Other Portfolio | | | - | | - | | | - | | - | | | - | | - | | | (203) | | | (203) |
| | | | | | | | | | | | | | | | | | | | | |
Total Net Realized Gain/(Loss) | | $ | (3,268) | | 2 | | $ | 4,262 | | 1 | | $ | (5,372) | | 2 | | $ | 529 | | $ | (3,849) |
| (a) | Other activity includes realized gains and losses from transactions involving six portfolio companies which are not considered to be significant individually or in the aggregate. |
Net Unrealized Appreciation (Depreciation)
The following table provides a summary of the total net unrealized appreciation of $20.4 million for the nine months ended September 30, 2021:
| | Nine Months Ended September 30, 2021 | |||||||||||||
| | | | | Middle | | Private | | | | | | | ||
|
| LMM(a) |
| Market |
| Loan |
| Other | | Total | |||||
|
| (dollars in millions) | |||||||||||||
Accounting reversals of net unrealized (appreciation) depreciation recognized in prior periods due to net realized (gains / income) losses recognized during the current period | | $ | (1.3) | | $ | 3.8 | | $ | (1.4) | | $ | 0.2 | | $ | 1.3 |
Net unrealized appreciation relating to investments | |
| 8.8 | |
| 2.0 | |
| 6.7 | |
| 1.6 | |
| 19.1 |
Total net unrealized appreciation relating to investments | | $ | 7.5 | | $ | 5.8 | | $ | 5.3 | | $ | 1.8 | | $ | 20.4 |
| | | | | | | | | | | | | | | |
| (a) | LMM includes unrealized appreciation on 26 LMM portfolio investments and unrealized depreciation on 18 LMM portfolio investments. |
Income Tax Benefit (Provision)
The income tax provision for the nine months ended September 30, 2021 of $1.3 million consisted of a current tax provision of $1.3 million, related to a $1.0 million provision for excise tax on our estimated undistributed taxable income and $0.3 million provision for current state income taxes.
Net Increase (Decrease) in Net Assets Resulting from Operations
The net increase in net assets resulting from operations for the nine months ended September 30, 2021 was $52.4 million, or $0.66 per share, compared with a net decrease in net assets of $24.2 million, or $0.31 per share, during the nine months ended September 30, 2020. The tables above provide a summary of the net increase in net assets resulting from operations for the nine months ended September 30, 2021.
Financial Condition, Liquidity and Capital Resources
This “Financial Condition, Liquidity and Capital Resources” section should be read in conjunction with the “COVID-19 Update” section above.
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Cash and Cash Equivalents
As of September 30, 2021, we had $21.4 million in cash and cash equivalents, which we held in various custodial accounts and our NAV totaled approximately $603.3 million, equating to approximately $7.56 per share. As of December 31, 2020, we had approximately $49.1 million in cash, restricted cash and cash equivalents, which we held in various custodial accounts and our NAV totaled approximately $579.6 million equating to approximately $7.28 per share.
Cash Flows
For the nine months ended September 30, 2021, we experienced a net decrease in cash and cash equivalents of $27.6 million, which is the net result of $118.0 million of cash used in our operating activities and $90.4 million of cash provided by our financing activities.
The $118.0 million of cash used in our operating activities resulted primarily from the funding of new portfolio investments of $334.9 million, partially offset by (i) cash proceeds totaling $182.4 million from the sales and repayments of debt investments and sales of and return on capital of equity investments, (ii) cash flows we generated from the operating profits earned totaling $31.4 million, which is our net investment income, excluding the non-cash effects of the accretion of unearned income, payment-in-kind interest income, cumulative dividends and the amortization of expenses for deferred financing costs and (iii) cash proceeds of $3.2 million related to the change in other assets and liabilities.
The $90.4 million provided by financing activities principally consisted of $51.9 million net cash proceeds related to our Deutsche Bank Credit Facility, TIAA Credit Facility and JPM SPV Facility (together, the “Credit Facilities”), $60.0 million of cash proceeds from our Main Street Term Loan (see Note E – Debt in the notes to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for these defined terms) and $0.5 million net cash proceeds related to our common stock issuance, as described below in “Item 2. Unregistered Sales of Equity Securities and Use of Proceeds” of Part II of this Quarterly Report on Form 10-Q, partially offset by (i) $11.1 million in cash dividends paid to stockholders, (ii) $4.6 million for deferred financing costs, (iii) $6.2 million for the repurchase of common stock and (iv) $0.1 million in offering costs.
Share Repurchase Program
On March 31, 2020, the Company’s Board of Directors unanimously approved a temporary suspension of the Company’s share repurchase program commencing with the second quarter of 2020. The Board of Directors determined that it was the best interest of the Company to suspend the share repurchase program in order to preserve the financial flexibility and liquidity given the prolonged impact of COVID-19.
On March 2, 2021, the Company’s Board of Directors unanimously approved the reinstatement of the Company’s share repurchase program commencing in April 2021 with repurchases effectuated via tender offers and generally equal to 90% of the amount of the dividend reinvestment plan proceeds resulting from dividend payments. See “Item 2. Unregistered Sales of Equity Securities and Use of Proceeds” of Part II of this Quarterly Report on Form 10-Q for more information regarding repurchases of our common stock during the three months ended September 30, 2021.
Capital Resources
As of September 30, 2021, we had $21.4 million in cash and cash equivalents, $111.3 million of unused capacity under our Credit Facilities, which we maintain to support our investment and operating activities, and $15.0 million of unused capacity under the Main Street Term Loan. As of September 30, 2021, our net asset value totaled $603.3 million, or $7.56 per share.
As of September 30, 2021, we had $93.0 million outstanding and $72.0 million of undrawn commitments under our TIAA Credit Facility, and $260.7 million outstanding and $39.3 million of undrawn commitments under the JPM SPV Facility, both of which we estimate approximated fair value. As of September 30, 2021, we also had $60.0 million outstanding and $15.0 million of undrawn commitments under our Main Street Term Loan. Availability under the TIAA Credit Facility is subject to certain borrowing base limitations and the asset coverage restrictions. Availability under the JPM SPV Facility is subject to certain borrowing base limitations. For further information on our Credit Facilities,
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including key terms and financial covenants, refer to “Note E — Debt” in the notes to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Subsequent to September 30, 2021, we completed several activities to provide additional liquidity - see “Recent Developments” below for a discussion of our entry into the Note Purchase Agreement governing the issuance of $150.0 million in aggregate principal amount of our Series A Notes and the related repayment and termination of the repayment of the Main Street Term Loan occurring subsequent to quarter-end.
We anticipate that we will continue to fund our investment activities through existing cash and cash equivalents, cash flows generated through our ongoing operating activities, utilization of available borrowings under our Credit Facilities, the Note Purchase Agreement, and future issuances of debt capital. Our primary uses of funds will be investments in portfolio companies, operating expenses, cash distributions to holders of our common stock and share repurchases under our share repurchase program.
We may occasionally invest excess cash balances into marketable securities and idle funds investments. The primary investment objective of marketable securities and idle funds investments is to generate incremental cash returns on excess cash balances prior to utilizing those funds for investment in our LMM, Middle Market and Private Loan portfolio investments. Marketable securities and idle funds investments generally consist of debt investments, independently rated debt investments, certificates of deposit with financial institutions, diversified bond funds and publicly traded debt and equity investments.
In order to satisfy the Code requirements applicable to a RIC, we intend to distribute to our stockholders, after consideration and application of our ability under the Code to carry forward certain excess undistributed taxable income from one tax year into the next tax year, substantially all of our taxable income. In addition, as a BDC, we generally are required to meet a coverage ratio of total assets to total senior securities, which include borrowings and any preferred stock we may issue in the future, of at least 200% (or 150% if certain requirements are met). This requirement limits the amount that we may borrow.
Although we have been able to secure access to additional liquidity, including through our Credit Facilities, and the Note Purchase Agreement, there is no assurance that debt or equity capital will be available to us in the future on favorable terms, or at all.
Recently Issued or Adopted Accounting Standards
See “Note B.12 – Recently Issued or Adopted Accounting Standards” in the notes to our consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of recently issued or adopted accounting standards.
From time to time, new accounting pronouncements are issued by the FASB or other standard-setting bodies that are adopted by us as of the specified effective date. We believe that the impact of recently issued standards and any that are not yet effective will not have a material impact on our consolidated financial statements upon adoption.
Inflation
Inflation has not had a significant effect on our results of operations in any of the reporting periods presented herein. However, our portfolio companies have experienced, including as a result of the COVID-19 pandemic, and may continue to experience, the impacts of inflation on their operating results, including periodic escalations in their costs for labor, raw materials, third party services and required energy consumption. Prolonged or more severe impacts of inflation to our portfolio companies could impact their ability to service their debt obligations and/or reduce their available cash for distributions which in turn could negatively affect our results of operations.
Off-Balance Sheet Arrangements
We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. These instruments include commitments to extend credit and fund equity capital and involve, to varying degrees, elements of liquidity and credit risk in excess of the amount recognized in the
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balance sheet. At September 30, 2021, we had a total of $48.7 million in outstanding commitments comprised of (i) thirty-two investments with commitments to fund revolving loans that had not been fully drawn or term loans with additional commitments not yet funded and (ii) three investments with equity capital commitments that had not been fully called.
Contractual Obligations
As of September 30, 2021, we had $413.7 million in borrowings outstanding under our Credit Facilities and Main Street Term Loan. The TIAA Credit Facility will mature on March 1, 2026. The JPM SPV Facility will mature on February 3, 2025. The Main Street Term Loan will mature on January 27, 2026 (see “ Recent Developments” below for a discussion of the repayment and termination of the Main Street Term Loan subsequent to quarter-end). See further discussion of the terms of our Credit Facilities and other debt in “Note E —Debt” in the notes to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
| | | 2021 |
| 2022 |
| 2023 |
| 2024 |
| 2025 |
| Thereafter |
| Total | |||||||
| | | (dollars in thousands) | |||||||||||||||||||
TIAA Credit Facility | | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 93,000 | | $ | 93,000 |
JPM SPV Facility | | | | — | | | — | | | — | | | — | | | 260,688 | | | — | | | 260,688 |
Main Street Term Loan | | | | — | | | — | | | — | | | — | | | — | | | 60,000 | | | 60,000 |
Interest Due on Main Street Term Loan | | | | 2,091 | | | 3,154 | | | 3,042 | | | 3,050 | | | 3,042 | | | 219 | | | 14,598 |
Total | | | $ | 2,091 | | $ | 3,154 | | $ | 3,042 | | $ | 3,050 | | $ | 263,730 | | $ | 153,219 | | $ | 428,286 |
Related Party Transactions
We have entered into agreements with HMS Adviser, MSC Adviser and the Dealer Manager, whereby we pay certain fees and reimbursements to these entities. These included payments to the Dealer Manager for selling commissions and the Dealer Manager fee and include payments to HMS Adviser and MSC Adviser for reimbursement of offering costs. In addition, we make payments for certain services that include the identification, execution, and management of our investments and also the management of our day-to-day operations provided to us by MSC Adviser, pursuant to various agreements that we have entered into. See “Note J — Related Party Transactions and Arrangements” in the notes to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information regarding related party transactions.
Recent Developments
On October 22, 2021, we and certain qualified institutional investors entered into a Master Note Purchase Agreement (the “Note Purchase Agreement”), which governs the issuance of $150.0 million in aggregate principal amount of the Company’s 4.04% Series A Senior Notes due 2026 (the “Series A Notes”). The Series A Notes bear a fixed interest rate of 4.04% per year and will mature on October 30, 2026, unless redeemed, purchased or prepaid prior to such date by us in accordance with their terms. We issued $77.5 million of Series A Notes upon entering into the Note Purchase Agreement, and will issue an additional $72.5 million in January 2022. Proceeds from the initial issuance were primarily used to fully repay the $60.0 million of the principal amount outstanding under the Main Street Term Loan plus accrued interest and fees, in connection with which the Main Street Term Loan was terminated.
Interest on the Series A Notes will be due semiannually on April 30 and October 30 each year, beginning on April 30, 2022. The Series A Notes may be redeemed in whole or in part at any time or from time to time at our option at par plus accrued interest to the prepayment date and, if applicable, a make-whole premium. In addition, we are obligated to offer to prepay the Series A Notes at par plus accrued and unpaid interest up to, but excluding, the date of prepayment, if certain change in control events occur. The Series A Notes are general unsecured obligations of ours that rank pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by us.
On November 1, 2021, we repurchased 511,026 shares of our common stock validly tendered and not withdrawn on the terms set forth in our tender offer statement on Schedule TO and Offer to Purchase filed with the SEC on September 13, 2021. The shares were repurchased at a price of $7.60 per share, which was our net asset value per share as of November 1, 2021, for an aggregate purchase price of $3.9 million (an amount equal to 90% of the proceeds
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we received from the issuance of shares under our dividend reinvestment plan from our November 1, 2021 dividend payment).
On November 11, 2021, our Board of Directors declared a quarterly cash dividend of $0.15 per share payable February 1, 2022 to stockholders of record as of December 31, 2021.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are subject to financial market risks, including changes in interest rates, and changes in interest rates may affect both our interest expense on the debt outstanding under our Credit Facilities and our interest income from portfolio investments. Our risk management systems and procedures are designed to identify and analyze our risk, to set appropriate policies and limits and to continually monitor these risks. Our investment income will be affected by changes in various interest rates, including LIBOR and prime rates, to the extent that any debt investments include floating interest rates. See “Risk Factors — Risks Relating to Our Investments — Changes relating to the LIBOR calculation process, the phase-out of LIBOR and the use of replacement rates for LIBOR may adversely affect the value of our portfolio securities.”, “Risk Factors — Risk Related to Our Investments — Changes in interest rates may affect our cost of capital, net investment income and the value of our investments.” and “Risk Factors — Risk Related to Debt Financing — Because we borrow money, the potential for gain or loss on amounts invested in us is magnified and may increase the risk of investing in us.” included in our Form 10-K for the fiscal year ended December 31, 2020 for more information regarding risks associated with our debt investments and borrowings that utilize LIBOR or other floating rates as a reference rate.
The majority of our debt investments are made with either fixed interest rates or floating rates that are subject to contractual minimum interest rates for the term of the investment. As of September 30, 2021, approximately 83% of our debt investment portfolio (at cost) bore interest at floating rates, 94% of which were subject to contractual minimum interest rates. Our interest expense will be affected by changes in the published LIBOR rate (or other floating reference rate) in connection with our Credit Facilities; however, the interest rate on our outstanding Main Street Term Loan was fixed for the life of such debt (as discussed above, the Main Street Term Loan was fully repaid and terminated on October 22, 2021 in conjunction with the Company’s issuance of new fixed rate debt). As of September 30, 2021, we had not entered into any interest rate hedging arrangements. Due to our Adviser’s limited use of derivatives, we have claimed an exclusion from the definition of the term “commodity pool operator” under the Commodity Exchange Act and, therefore, are not subject to registration or regulation as a pool operator under such Act. The following table shows the approximate annualized increase or decrease in the components of net investment income due to hypothetical base rate changes in interest rates, assuming no changes in our investments and borrowings as of September 30, 2021.
| | Increase | | (Increase) | | Increase | | Increase | ||||
| | (Decrease) | | Decrease | | (Decrease) in Net | | (Decrease) in Net | ||||
| | in Interest | | in Interest | | Investment | | Investment | ||||
Basis Point Change | | Income | | Expense | | Income | | Income per Share | ||||
| | (dollars in thousands, except per share amounts) | ||||||||||
(150) | | $ | (48) | | $ | 458 | | $ | 410 | | $ | 0.01 |
(100) | | | (48) | | | 458 | | | 410 | | | 0.01 |
(50) | | | (48) | | | 458 | | | 410 | | | 0.01 |
(25) | | | (48) | | | 458 | | | 410 | | | 0.01 |
25 | | | 106 | | | (884) | | | (778) | | | (0.01) |
50 | | | 212 | | | (1,768) | | | (1,556) | | | (0.02) |
75 | | | 389 | | | (2,653) | | | (2,264) | | | (0.03) |
100 | | | 1,238 | | | (3,537) | | | (2,299) | | | (0.03) |
125 | | | 2,777 | | | (4,421) | | | (1,644) | | | (0.02) |
150 | | | 4,414 | | | (5,305) | | | (891) | | | (0.01) |
The hypothetical results assume that all LIBOR and prime rate changes would be effective on the first day of the period. However, the contractual LIBOR and prime rate reset dates would vary throughout the period, on either a monthly or quarterly basis, for both our investments and our Credit Facilities. The hypothetical results would also be impacted by the changes in the amount of debt outstanding under our Credit Facilities (with an increase (decrease) in the debt outstanding under the Credit Facilities resulting in an (increase) decrease in the hypothetical interest expense).
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Item 4. Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer, President, Chief Financial Officer, Chief Compliance Officer and Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15 of the Exchange Act). Based on that evaluation, our Chief Executive Officer, President, Chief Financial Officer, Chief Compliance Officer and Chief Accounting Officer have concluded that our current disclosure controls and procedures are effective in timely alerting them of material information relating to us that is required to be disclosed in the reports we file or submit under the Exchange Act. There have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Neither we, MSC Adviser, nor our subsidiaries are currently subject to any material pending legal proceedings, other than ordinary routine litigation incidental to our respective businesses. However, we, MSC Adviser or our subsidiaries may in the future, from time to time, be involved in litigation arising out of our respective operations in the normal course of business or otherwise. Furthermore, third parties may seek to impose liability on us in connection with the activities of our portfolio companies. While the outcome of any current legal proceedings cannot at this time be predicted with certainty, we do not expect any current matters will materially affect our or MSC Adviser’s financial condition or results of operations; however, there can be no assurance whether any pending legal proceedings will have a material adverse effect on our or MSC Adviser’s financial condition or results of operations in any future reporting period.
In addition to the other information set forth in this report, you should carefully consider the risk factors described in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 that we filed with the SEC on March 30, 2021, which could materially affect our business, financial condition and/or operating results. There have been no material changes to the risk factors as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
The risks described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended September 30, 2021, we issued 478,309 shares of our common stock under our dividend reinvestment plan. The aggregate value of the shares of common stock issued during the three months ended September 30, 2021 under the dividend reinvestment plan was approximately $3.7 million.
The following chart summarizes repurchases of our common stock for the three months ended September 30, 2021:
Period | Total number of shares purchased |
| | Average price paid per share |
| Total number of shares purchased as part of publicly announced plans or programs |
| Approximate dollar value of shares that may yet be purchased under the plans or programs |
July 1 through July 31, 2021 | — | | | — | | — | | — |
August 1 through August 31, 2021 | 438,292 | (1) | $ | 7.57 | | 438,292 | | N/A |
September 1 through September 30, 2021 | — | | | — | | — | | — |
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| (1) | In August 2021, pursuant to our tender offer to purchase shares of our common stock on the terms set forth in our tender offer statement on Schedule TO and Offer to Purchase filed with the SEC on June 11, 2021, we purchased a total of 438,292 shares validly tendered and not withdrawn at a price of $7.57 per share, which was our net asset value per share as of August 2, 2021, for an aggregate purchase price of $3.3 million (an amount equal to 90% of the proceeds we received from the issuance of shares under our distribution reinvestment plan in connection with our August 2, 2021 dividend payment). |
Not applicable.
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Listed below are the exhibits which are filed as part of this report (according to the number assigned to them in Item 601 of Regulation S-K):
Exhibit |
| Description of Exhibit |
10.1 | | |
10.2 | | |
31.1 | | |
31.2 | | |
32.1 | | |
32.2 | | |
| | |
| | |
| | |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| MSC INCOME FUND, INC. |
| |
| /s/ DWAYNE L. HYZAK |
Date: November 12, 2021 | Dwayne L. Hyzak |
| Chief Executive Officer |
| (principal executive officer) |
| /s/ JESSE E. MORRIS |
Date: November 12, 2021 | Jesse E. Morris |
| Chief Financial Officer and Chief Operating Officer |
| (principal financial officer) |
| /s/ CORY E. GILBERT |
Date: November 12, 2021 | Cory E. Gilbert |
| Chief Accounting Officer |
| (principal accounting officer) |
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