Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following analysis of our financial condition and results of operations in conjunction with management’s discussion and analysis contained in our 2018 Annual Report on Form 10-K, as well as our consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q. The terms “we,” “us,” “our” and “OHAI” refer to OHA Investment Corporation and its consolidated subsidiaries. The term "OHA" refers to Oak Hill Advisors, L.P., our investment adviser.
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q that relate to estimates or expectations of our future performance or financial condition may constitute “forward-looking statements.” These forward-looking statements are subject to various risks and uncertainties, which could cause actual results and conditions to differ materially from those projected, including, but not limited to:
•changes in interest rates;
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•
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the future operating results of our portfolio companies and their ability to achieve their objectives;
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•
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changes in regional, national or international economic conditions and their impact on the industries in which we invest;
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•
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disruptions in the credit and capital markets;
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•
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changes in the conditions of the industries in which we have invested;
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•
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the adequacy of our cash resources and working capital;
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•
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the timing of cash flows, if any, from our portfolio companies;
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•
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our expectations regarding the timetable for completing a transaction with Portman Ridge Finance Corporation ("PTMN"), future financial and operating results, benefits of the transaction and future opportunities of the combined company;
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•
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disruption to our business as a result of the transaction with PTMN;
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•
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other factors enumerated in our filings with the SEC; and
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•
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effects of current and pending legislation.
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We may use words such as “anticipates,” “believes,” “intends,” “plans,” “expects,” “projects,” “estimates,” “will,” “should,” “may” and similar expressions to identify forward-looking statements. These forward-looking statements are subject to various risks and uncertainties. Certain factors could cause actual results and conditions to differ materially from those projected and our historical experience. You should not place undue reliance on such forward-looking statements, which speak only as of the date they are made. We undertake no obligation to update our forward-looking statements made herein, unless required by law.
On July 31, 2019, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Portman Ridge Finance Corporation (“PTMN”), Storm Acquisition Sub Inc. (“Acquisition Sub”), and Sierra Crest Investment Management LLC, the investment adviser to PTMN and an affiliate of BC Partners Advisors L.P. and LibreMax Capital LLC. (“PTMN Adviser”). The transaction is the result of OHAI’s previously announced review of strategic alternatives and has been approved by a unanimous vote of the Special Committee of the Board of Directors of OHAI, the Board of Directors of OHAI (other than directors affiliated with Oak Hill Advisors, L.P., the external adviser to OHAI, who abstained from voting) and the Board of Directors of PTMN.
Under the terms of the proposed transaction, OHAI stockholders will receive a combination of (i) a minimum of $8 million in cash (approximately $0.40 per share) from PTMN (as may be adjusted as described below); (ii) PTMN shares valued at 100% of PTMN’s net asset value per share at the time of closing of the transaction in an aggregate number equal to OHAI’s net asset value at closing minus the $8 million PTMN cash merger consideration (as may be adjusted as described below); and (iii) an additional cash payment from the PTMN Adviser, of $3 million in the aggregate, or approximately $0.15 per share.
If the aggregate number of shares of PTMN stock to be issued in connection with the merger would exceed 19.9% of the issued and outstanding shares of PTMN common stock immediately prior to the transaction closing, then the cash consideration payable by PTMN will be increased to the minimum extent necessary such that the aggregate number of shares of PTMN common stock to be issued in connection with the merger does not exceed such threshold. The exact exchange ratio for the stock component of the merger will be determined by the net asset value of OHAI and PTMN as of the closing, calculated as of 5:00 p.m. New York City time on the day prior to the closing of the transaction. In addition to approval by OHAI’s stockholders, the closing of the merger is subject to customary conditions. The parties currently expect the transaction to be completed in the fourth calendar quarter of 2019.
Overview
We are a specialty finance company with an investment objective to generate both current income and capital appreciation primarily through debt investments, some of which include equity components. We focus primarily on providing creative direct lending solutions to middle market private companies across industry sectors. Our investment activities are managed by OHA and supervised by our Board of Directors, the majority of whose members are independent of OHA and its affiliates.
We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a BDC under the 1940 Act. For federal income tax purposes, we operate so as to be treated as a RIC, under Subchapter M of the Code. As a BDC and a RIC, we are required to comply with certain investment diversification and other regulatory requirements.
On September 30, 2014, our stockholders approved the appointment of OHA as our investment advisor, replacing NGP Investment Advisor, LP, which had been our investment advisor since our inception. In connection with this change in investment advisor, we changed our name from NGP Capital Resources Company to OHA Investment Corporation. OHA is a registered investment adviser under the Advisers Act. OHA acts as our investment advisor and administrator pursuant to the Investment Advisory Agreement and the Administration Agreement.
The aggregate fair value of our investment portfolio at September 30, 2019 was $62.4 million, with such value comprised of 28 active portfolio investments. Under our previous investment advisor, we focused our investments primarily on small and mid-size companies engaged in the upstream sector of the energy industry, which includes businesses that find, develop and extract energy resources, including natural gas, crude oil and coal.
Part of OHA's investment strategy has been to reduce our historical portfolio concentration in the energy industry and to diversify our portfolio with investments in debt securities of U.S. private and small public middle market companies across industry sectors. The exposure of our investment portfolio to the energy sector was 6% at September 30, 2019 compared to 74% at September 30, 2014, on a fair value basis.
Our level of investment activity can and does vary substantially from period to period depending on many factors. Some of these factors are the amount of debt and equity capital available to middle market companies, the level of acquisition and divestiture activity for such companies, the general economic environment and the competitive environment for the types of investments we make, and our own ability to raise capital to fund our investments, both through the issuance of debt and equity securities. If a substantial portion of our investment portfolio were to be realized in the near term, OHA may not be able to source sufficient appropriate investments for us to timely replace the investment income from the realized investments.
On April 11, 2018, our Board of Directors, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) thereof, approved the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act, as amended by the Small Business Credit Availability Act. As a result, OHAI’s asset coverage requirements for senior securities was changed from 200% to 150% effective one year after the date of the Board of Directors’ approval, or April 11, 2019. Starting from April 11, 2019, under the 150% asset coverage standard, we may borrow debt or issue senior securities in the amount of $2.00 for every $1.00 of equity in OHAI. Notwithstanding the modified asset coverage requirement under the 1940 Act described above, we are separately subject to a Debt to Tangible Net Worth Ratio of not more than 1.00:1.00 (200% minimum asset coverage) with respect to certain provisions of our Credit Facility.
Portfolio and 2019 Investment Activity
In January 2019, we purchased $0.1 million of EaglePicher Technologies, or EaglePicher, adding to our $0.3 million position which was previously acquired in February 2018. The $0.1 million EaglePicher second lien term loan add-on was purchased at a 6% discount to par, earns interest payable in cash at a rate of LIBOR+7.25%, and matures in March 2026.
Also in January 2019, we sold $2.0 million of our senior unsecured notes of Avantor Performance Materials, Inc., or Avantor, at a price of 102.5% of par, resulting in a realized capital gain of $50,000 or $0.00 per share. In February 2019, we sold $3.0 million of our remaining Avantor investment at a price of 105.75% of par, resulting in a realized capital gain of $117,500 or $0.01 per share. This investment was initiated in September 2017 and generated a gross unlevered internal rate of return of 12.5% and a return on investment of 1.17x.
In February 2019, we purchased $1.1 million of second lien term loan in Caliber Collision, or Caliber, a leading provider of automobile collision repair. The Caliber second lien term loan was purchased at a 1.75% discount to par, earns interest payable in cash at a rate of LIBOR+7.25% and matures in February 2027.
Also in February 2019, we purchased $1.2 million of second lien term loan in PharMerica, a leading provider of health and pharmacy services to assisted living, skilled nursing, public health, long-term care, and post-acute care settings. The PharMerica second lien term loan was purchased at a 2.5% discount to par, earns interest payable in cash at a rate of LIBOR+8.50% with a 1% LIBOR floor and matures in March 2027.
In March 2019, we sold $0.4 million of our second lien term loan in WASH Multifamily Laundry, or WASH, at a price of 99.0% of par.
In March 2019, we sold $0.1 million of our second lien term loan in Coinamatic Canada, Inc., or Coinamatic, at a price of 99.0% of par.
In April 2019, we purchased $1.4 million of second lien term loan in Aptean, a global leader in enterprise business software. The Aptean second lien term loan was purchased at a 2.0% discount to par, included a commitment fee of 1.0%, earns interest payable in cash at a rate of LIBOR+8.50% and matures in April 2027.
Also April 2019, we purchased $1.5 million of second lien term loan in Blackboard Transact, an educational technology company. The Blackboard Transact second lien term loan was purchased at a 2.0% discount to par, included a commitment fee of 1.5%, earns interest payable in cash at a rate of LIBOR+8.50% and matures in April 2027.
Also in April 2019, we sold our remaining investment in TIBCO Software, Inc., or TIBCO at a price of 106.375% to par, resulting in a realized capital gain of $0.2 million or $0.01 per share and generated a gross internal rate of return of 18.6% and return on investment of 1.38x.
In May 2019, we purchased $0.6 million of second lien term loan in Allied Universal Holdco LLC., or Allied Universal, adding to our $1.25 million position which was previously acquired in March 2018. The $0.6 million loan was purchased at a 0.75% discount to par, earns interest payable in cash at a rate of LIBOR+8.50% with a 1% floor and matures in July 2023.
In June 2019, we purchased $0.8 million of second lien term loan and $0.2 million of delayed draw term loan in Imperial Dade (BDPE Empire Holdings), or Imperial Dade, a leading independently owned distributor of food service packaging, facilities maintenance supplies and equipment. The Imperial Dade second lien term loan was purchased at a 1% discount to par, included a commitment fee of 1.5%, earns interest payable in cash at a rate of LIBOR+8.0%, and matures in June 2027.
Also in June 2019, we purchased $1.2 million of first lien term loan, $0.4 million of delayed draw term loan, and $0.1 million of revolving loan facility in JS Held, a global consulting firm with expertise in construction, environmental health and safety equipment, forensic architecture and engineering services. The JS Held first lien term loan was purchased at a 1% discount to par, included a commitment fee of 1.5%, earns interest payable in cash at a rate of LIBOR+6.0%, and matures in July 2025.
In July 2019, Allied Universal fully repaid its second lien term loan in the amount of $1.9 million. We recorded previously unamortized discount of $5 thousand as additional interest income as a result of this repayment. This investment was initiated in March 2018 and generated a gross unlevered internal rate of return of 12.0% and a return on investment of 1.10x.
In August 2019, CVS Holdings, I, LP., or MyEyeDr., repaid its remaining second lien term loan in the amount of $5.0 million. We recorded previously unamortized discount of $22 thousand as additional interest income as a result of this repayment. This investment was initiated in February 2018 and generated a gross unlevered internal rate of return of 10.6% and a return on investment of 1.11x.
In September 2019, we purchased $4.3 million of NAVEX Global Inc., or NAVEX. adding to our $0.4 million position that was previously acquired in August 2018. The $4.3 million NAVEX second lien term loan add-on was purchased at a 0.875% discount to par, earns interest payable in cash at a rate of LIBOR +7.00%, and matures in September 2026.
The table below shows our portfolio investments by type for the periods indicated. We compute yields on investments using interest rates as of the balance sheet date and include amortization of original issue discount and market premium or discount, royalty income and other similar investment income, weighted by their respective costs when averaged. Such weighted average yields are not necessarily indicative of expected total returns on a portfolio.
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September 30, 2019
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December 31, 2018
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Weighted
Average
Yields(1)
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Weighted
Average
Yields(1)
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Percentage of Portfolio
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Percentage of Portfolio
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Cost
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Fair Value
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Cost
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Fair Value
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First lien secured debt
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8.9
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%
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1.6
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%
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2.8
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%
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9.4
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%
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0.5
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%
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0.7
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%
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Second lien debt
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10.2
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%
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47.5
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%
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81.2
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%
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10.5
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%
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42.4
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%
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71.3
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%
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Subordinated debt
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—
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%
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22.0
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%
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3.9
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%
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10.3
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%
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27.4
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%
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14.4
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%
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Revolving loan facility
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—
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%
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—
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%
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—
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%
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10.5
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%
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0.3
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%
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0.5
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%
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Unsecured term loan
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9.3
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%
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3.1
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%
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5.3
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%
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9.1
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%
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2.9
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%
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5.0
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%
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Limited term royalties
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—
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%
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|
23.0
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%
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|
5.9
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%
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|
—
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%
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|
23.8
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%
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|
7.3
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%
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Senior secured note
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11.4
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%
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0.5
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%
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0.9
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%
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9.6
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%
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|
0.5
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%
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0.8
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%
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Delayed draw term loan
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|
—
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%
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—
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%
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—
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%
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—
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%
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|
—
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%
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|
—
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%
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Equity securities
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|
|
|
|
|
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|
|
|
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Membership and partnership units
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—
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%
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|
2.3
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%
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|
—
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%
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—
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%
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|
2.2
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%
|
|
—
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%
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Total equity securities
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|
—
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%
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|
2.3
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%
|
|
—
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%
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—
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%
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2.2
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%
|
|
—
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%
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Total portfolio investments
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10.1
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%
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100.0
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%
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100.0
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%
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10.4
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%
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100.0
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%
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|
100.0
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%
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(1) Weighted average yield based on cost and excludes non-yielding assets. Yields are based on the most current interest rates in effect at the end of the period.
As of September 30, 2019 and December 31, 2018, the total fair value of our portfolio investments was $62.4 million and $65.6 million, respectively. Of those fair value totals, approximately $17.5 million, or 28.0%, as of September 30, 2019, and $13.8 million, or 21.0%, as of December 31, 2018 are determined using significant unobservable (i.e., Level 3) inputs.
Results of Operations
Investment Income
Investment income includes interest on our investments and dividend income. Other income includes prepayment fees and modification fees we receive in connection with certain of our investments. These fees are recognized as earned.
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Investment Income
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For the three months ended September 30,
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For the nine months ended September 30,
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(in thousands)
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|
2019
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|
2018
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|
2019
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2018
|
|
|
|
|
|
|
|
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Interest income
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|
$
|
1,496
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|
|
$
|
1,819
|
|
|
$
|
4,499
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|
|
$
|
6,572
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|
Other income
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|
22
|
|
|
67
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|
|
68
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|
|
224
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|
Total investment income
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|
$
|
1,518
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|
|
$
|
1,886
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|
|
$
|
4,567
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|
|
$
|
6,796
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|
For the three months ended September 30, 2019, total investment income was $1.5 million, a 20% decrease from $1.9 million of total investment income for the three months ended September 30, 2018. The decrease in investment income was primarily attributable to placing our investment in OCI subordinated notes on full non-accrual in the fourth quarter of 2018. This decrease was partially offset by an increase of $0.1 million in non-affiliate investment interest income.
For the nine months ended September 30, 2019, total investment income was $4.6 million, a 33% decrease from $6.8 million of total investment income for the nine months ended September 30, 2018. The decrease in investment income was primarily attributable to placing our investment in OCI subordinated notes on full non-accrual in the fourth quarter of 2018 and $0.1 million decrease in other income from money market income due to lower cash balances. This decrease was partially offset by an increase of $0.7 million in non-affiliate investment interest income.
Operating Expenses
Operating expenses include interest expense and our allocable portion of operating expenses incurred on our behalf by our investment advisor and our administrator. Other general and administrative expenses include our allocated share of employee, facilities, and stockholder services incurred by our administrator.
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Operating Expenses
|
|
For the three months ended September 30,
|
|
For the nine months ended September 30,
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(in thousands)
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|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
Interest expense and bank fees
|
|
$
|
620
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|
|
$
|
767
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|
|
$
|
1,860
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|
|
$
|
2,391
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|
Management fees
|
|
305
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|
|
397
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|
|
925
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|
|
1,181
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|
Incentive fees
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|
(32
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)
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|
6
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|
|
46
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|
|
6
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|
Costs related to strategic alternatives review
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|
754
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|
|
—
|
|
|
1,063
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|
|
75
|
|
Professional fees
|
|
(31
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)
|
|
260
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|
|
406
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|
|
1,120
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Allocation of administrative expenses from advisor
|
|
371
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|
|
298
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|
|
1,113
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|
|
962
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Other general and administrative expenses
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|
29
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|
|
40
|
|
|
161
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|
|
210
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|
Directors fees
|
|
62
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|
|
61
|
|
|
184
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|
|
184
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|
Operating expenses before incentive fee waiver
|
|
$
|
2,078
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|
|
$
|
1,829
|
|
|
$
|
5,758
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|
|
$
|
6,129
|
|
Incentive fee waiver
|
|
—
|
|
|
(6
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)
|
|
—
|
|
|
(6
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)
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Total operating expenses, net of incentive fee waiver
|
|
$
|
2,078
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|
|
$
|
1,823
|
|
|
$
|
5,758
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|
|
$
|
6,123
|
|
For the three months ended September 30, 2019, operating expenses increased by 13.6% to $2.1 million from $1.8 million compared to the three months ended September 30, 2018. The increase in operating expenses is due to $754 thousand of costs related to strategic alternatives review and $73 thousand in allocation of administrative expenses from advisor. This increase is partially offset by a decrease in professional fees and interest. Interest expense and bank fees decreased by 19.2% to $0.6 million from $0.8 million compared to the same period in the prior year largely due to lower amount outstanding on our Credit Facility, as well as lower amortization of debt issuance cost. Management fees decreased by 23.2% to $0.3 million from $0.4 million due to lower average asset base subject to the base management fee.
For the nine months ended September 30, 2019, operating expenses decreased by 6.1% to $5.8 million from $6.1 million compared to the nine months ended September 30, 2018. This decrease was primarily due to the decrease in professional fees which decreased by 63.8% to $0.4 million from $1.1 million primarily due to lower legal costs. Interest expense and bank fees decreased by 22.2% to $1.9 million from $2.4 million compared to the same period in the prior year largely due to lower amount outstanding on our Credit Facility and lower amortization of debt issuance cost. Management fees decreased by 21.7% to $0.9 million from $1.2 million due to lower base management fees as a result of lower average asset base subject to the base management fee. This decrease was partially offset by an increase of $1.0 million in costs related to strategic alternatives review, $151 thousand in allocation of administrative expenses from advisor, and $40 thousand in incentive fees.
Under the Investment Advisory Agreement, the investment income incentive fee is calculated quarterly at a rate of 20% of quarterly net investment income above a “hurdle rate” of 1.75% per quarter (7% annualized) with a “catch up” provision. For the three months ended September 30, 2019 and September 30, 2018, we did not incur any investment income incentive fees. For the nine months ended September 30, 2019 and September 30, 2018, we did not incur any investment income incentive fees.
The second part of the incentive fee, the capital gains incentive fee, is determined and payable in arrears as of the end of each fiscal year (or, upon termination of the Investment Advisory Agreement, as of the termination date). The capital gains incentive fee is equal to 20% of our cumulative aggregate realized capital gains from September 30, 2014 through the end of that fiscal year, computed net of our cumulative aggregate realized capital losses and cumulative aggregate unrealized depreciation on investments for the same time period. The aggregate amount of any previously paid capital gains incentive fees to OHA is subtracted from the capital gains incentive fee calculated. If such amount is negative, then there is no capital gains fee for such year. For the purposes of the capital gains fee, any gains and losses associated with our investment portfolio as of September 30, 2014 shall be excluded from the capital gains fee calculation. For the three months ended September 30, 2019 we reduced our capital gains incentive fee accrual by $32 thousand to $46 thousand and for the three months ended September 30, 2018 we accrued $6,000 in capital gains incentive fees. For the nine months ended September 30, 2019 we accrued $46 thousand in capital gains incentive fees and for the nine months ended September 30, 2018, we accrued $6,000 in capital gains incentive fees.
On November 10, 2017, we entered into an Incentive Fee Waiver Agreement with OHA whereby OHA agreed to waive any incentive fees earned relating to fiscal years 2017 and 2018. Under the Incentive Fee Waiver Agreement, any capitalized gains fees
that would have been earned and accrued during 2017 and 2018, which under our investment advisory agreement would not have been paid until 2018 and 2019, respectively, has been waived. The Incentive Fee Waiver Agreement with OHA expired on December 31, 2018.
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|
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|
|
Net Investment Income (Loss)
|
|
For the three months ended September 30,
|
|
For the nine months ended September 30,
|
(in thousands, except per share data)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
Net investment income (loss)
|
|
$
|
(560
|
)
|
|
$
|
56
|
|
|
$
|
(1,206
|
)
|
|
$
|
628
|
|
Net investment income (loss) per common share
|
|
$
|
(0.03
|
)
|
|
$
|
—
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.03
|
|
During the three month period ended September 30, 2019, the decrease to net investment loss compared to the three month period ended September 30, 2018 was primarily driven by a decrease in investment income and increased operating expense related to the strategic alternatives review.
During the nine month period ended September 30, 2019, the decrease to net investment loss compared to the nine month period ended September 30, 2018 was primarily driven by a decrease in investment income related to payment in kind income, operating expense increases in cost related to strategic alternatives, and other general and administrative expenses. This decrease was partially offset by increased interest income on non-affiliate investments, and decreases in operating expenses related to professional fees, interest expense and bank fees, as well as a decrease in management fees.
Net Realized Gains and Losses
Net realized gains and losses is the difference between the net proceeds received from dispositions of portfolio investments and their stated costs. Realized losses may also be recorded in connection with our determination that certain investments are considered worthless securities and/or meet the conditions for loss recognition per the applicable tax rules.
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|
|
|
|
|
|
|
Net Realized Gains and Losses
|
|
For the three months ended September 30,
|
|
For the nine months ended September 30,
|
(in thousands, except per share data)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
Net realized capital gain (loss) on investments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
629
|
|
|
$
|
(55,952
|
)
|
Provision for taxes on realized loss
|
|
—
|
|
|
3
|
|
|
—
|
|
|
(39
|
)
|
Net realized capital gains (losses)
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
629
|
|
|
$
|
(55,991
|
)
|
Net realized capital gains (losses) per common share
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.03
|
|
|
$
|
(2.78
|
)
|
For the three months ended September 30, 2019 and 2018, we did not realize a capital gain or loss on our investments.
For the nine months ended September 30, 2019, we realized capital gains of $0.2 million on our investment in Avantor Performance Materials, Inc.(or Avantor), $0.2 million on our investment in TIBCO, and $0.2 million related to a sales price adjustment from the 2016 disposal of a legacy investment. For the nine months ended September 30, 2018, we realized a capital loss of $56.3 million related to our investment in Castex, partially offset by realized capital gains of $0.4 million related to a sales price adjustment from the 2011 disposal of our investments in Alden Resources (or Globe BG, LLC), sale of our partial investment in MyEyeDr second lien term loan, and sale of our investment in SMG Holdings, Inc. second lien term loan.
Net Unrealized Appreciation or Depreciation on Investments
Net unrealized appreciation or depreciation is the net change in the fair value of our investments during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Unrealized Appreciation (Depreciation) on Investments
|
|
For the three months ended September 30,
|
|
For the nine months ended September 30,
|
(in thousands, except per share data)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
Affiliate investments
|
|
$
|
(110
|
)
|
|
$
|
(7,812
|
)
|
|
$
|
151
|
|
|
$
|
(10,064
|
)
|
Non-affiliate investments
|
|
(429
|
)
|
|
1,804
|
|
|
1,231
|
|
|
62,218
|
|
Net unrealized appreciation (depreciation) on investments
|
|
$
|
(539
|
)
|
|
$
|
(6,008
|
)
|
|
$
|
1,382
|
|
|
$
|
52,154
|
|
Net unrealized appreciation (depreciation) on investments per common share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.30
|
)
|
|
$
|
0.07
|
|
|
$
|
2.59
|
|
Affiliate Investments
For the three months ended September 30, 2019, the net unrealized appreciation on our affiliate investments was attributable to unrealized appreciation of our investments in OCI. For the three months ended September 30, 2018, the net unrealized depreciation on our affiliate investments was attributable to unrealized depreciation of our investments in OCI.
For the nine months ended September 30, 2019, the net unrealized appreciation on our affiliate investments was attributable to unrealized appreciation of our investments in OCI. For the nine months ended September 30, 2018, the net unrealized depreciation on our affiliate investments was attributable to unrealized depreciation of our investments in OCI.
Non-Affiliate Investments
For the three months ended September 30, 2019, the net unrealized depreciation on our non-affiliate investments was primarily attributable to the unrealized depreciation on our investments in ATP Oil & Gas Corporation in the amount of $0.2 million, CentralSquare Technologies in the amount of $79 thousand, Hayward Industries, Inc. in the amount of $75 thousand, MyEyeDr in the amount of $72 thousand, and other various investments, partially offset primarily by unrealized appreciation in Ardonagh in the amount of $12 thousand, and other various investments. For the three months ended September 30, 2018, the net unrealized appreciation on our non-affiliate investments was primarily attributable to the unrealized appreciation on our investments in ATP Oil & Gas Corporation, Ministry Brands, LLC, Dexko Global, Inc., and Ensono partially offset in unrealized depreciation in other various investments.
For the nine months ended September 30, 2019, the net unrealized appreciation on our non-affiliate investments was primarily attributable to the unrealized appreciation on our investments in ATP Oil & Gas Corporation in the amount of $0.8 million, MyEyeDr in the amount of $0.3 million, $0.1 million in Ministry Brands, LLC, and other various investments, partially offset primarily by unrealized depreciation due to the reversal of $0.2 million of our investment in TIBCO, due to realization. Additionally, we had unrealized depreciation on our investments in CentralSquare Technologies as well as other various investments. For the nine months ended September 30, 2018, the net unrealized appreciation on our non-affiliate investments was primarily attributable to $2.9 million unrealized appreciation in Talos Production, LLC, senior unsecured note upon it's maturity and repayment and the reversal of $56.3 million unrealized depreciation, due to realization of our investment in Castex as well as unrealized appreciation on our investment in ATP Oil & Gas Corporation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Net Assets Resulting from Operations
|
|
For the three months ended September 30,
|
|
For the nine months ended September 30,
|
(in thousands, except per share data)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations
|
|
$
|
(1,099
|
)
|
|
$
|
(5,949
|
)
|
|
$
|
805
|
|
|
$
|
(3,209
|
)
|
Net increase (decrease) in net assets resulting from operations per common share
|
|
$
|
(0.05
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.16
|
)
|
For the three months ended September 30, 2019, the increase in net assets resulting from operations compared to the three months ended September 30, 2018 is attributable to a decrease in net investment income of $0.6 million resulting in net investment loss, and by a decrease in net realized gain and unrealized depreciation of $5.5 million.
For the nine months ended September 30, 2019, the increase in net assets resulting from operations compared to the nine months ended September 30, 2018 primarily attributable to an increase in net realized gain and unrealized appreciation of $5.8 million, partially offset by a decrease net investment income of $1.9 million.
Financial Condition, Liquidity and Capital Resources
We expect to fund our investments and our operations in 2019 from available cash, proceeds from realizations of existing investments and from borrowings under the Credit Facility. We expect our primary use of funds to be investments in portfolio companies, cash distributions to holders of our common stock and payment of fees, debt service, and other operating expenses.
Cash Flows
At September 30, 2019 and September 30, 2018, we had cash and cash equivalents totaling $4.5 million and $3.7 million, respectively.
Our portfolio may consist of a combination of temporary investments in U.S. Treasury Bills, repurchase agreements, money market funds or repurchase agreement-like treasury securities. These temporary investments with original maturities of 90 days or less are deemed cash equivalents and are included in the Consolidated Schedule of Investments. At the end of each fiscal quarter, we may take proactive steps to preserve investment flexibility for the next quarter by investing in cash equivalents, which is dependent upon the composition of our total assets at quarter-end. We may accomplish this in several ways, including purchasing U.S. Treasury Bills and closing out positions on a net cash basis after quarter-end, or utilizing repurchase agreements or other balance sheet transactions as are deemed appropriate for this purpose. These amounts are excluded from adjusted gross assets for purposes of computing the Investment Adviser's base management fee.
During the nine months ended September 30, 2019, we experienced a net increase in cash and cash equivalents in the amount of $1.4 million. During the period, our operating activities provided $6.5 million in cash. Excluding net proceeds from redemptions of U.S. Treasury Bills in the amount of $5.0 million, our operating activities provided $1.6 million consisting of $15.2 million provided by proceeds from redemption or sale of investments in portfolio securities, partially offset by $12.0 million in purchases of new investments in portfolio securities, $3.1 million used in due to broker, and $1.4 million used in net unrealized depreciation on investments. In addition, financing activities used cash of $5.2 million which primarily related to net repayments under our repurchase agreement of $4.9 million, net borrowings under credit facilities of $1.0 million, and cash distributions paid to our stockholders in the amount of $1.2 million.
During the nine months ended September 30, 2018, we experienced a net decrease in cash and cash equivalents in the amount of $16.2 million. During the period, our operating activities used $9.8 million in cash, consisting of $21.5 million provided by proceeds from redemptions of investments in portfolio securities and $2.0 million of net proceeds from redemption of investments in U.S. Treasury bills, partially offset by $23.1 million in purchases of new investments in portfolio securities, financing activities used cash of $6.4 million, consisting of net borrowings under repurchase agreement of $(2.0) million, cash distributions paid to our stockholders in the amount of $1.2 million, and debt issuance cost paid in the amount of $0.2 million.
Distributions to Stockholders
For the three months ended September 30, 2019 and 2018, we paid cash distributions totaling $0.4 million, or $0.02 per share, to our common stockholders. For the nine months ended September 30, 2019 and 2018, we paid cash distributions totaling $1.2 million, or $0.06 per share, to our common stockholders.
We currently intend to continue to distribute, out of assets legally available for distribution and as determined by our Board of Directors, in the form of quarterly distributions, a minimum of 90% of our annual investment company taxable income to our stockholders through the closing of the Merger.
Credit Facility
We are party to a Credit Agreement (the "Credit Facility"), dated September 9, 2016, with MidCap Financial Trust, as administrative agent. The initial size of the Credit Facility was $56.5 million with a maturity date of March 9, 2018, with an option to extend for a six-month period, subject to certain conditions. The initial proceeds of $40.5 million from the Credit Facility were used to pay off the $38.5 million outstanding balance of our previous credit facility with SunTrust Bank, pay transaction expenses and provide balance sheet cash. The remaining $16.0 million consisted of a delayed draw term loan and was committed for one year.
On November 10, 2017, we entered into an amendment to the Credit Facility whereby we agreed to make a voluntary principal prepayment in the amount of $4.5 million, reducing the total principal amount outstanding to $36.0 million, and the lenders agreed not to test certain covenants at certain determination dates.
On February 2, 2018, we exercised the option to extend the Credit Facility to September 9, 2018, as permitted in our existing Credit Agreement.
On September 7, 2018 OHAI entered into an amendment to extend the maturity date of the Credit Facility to September 9, 2019, which can be extended for an additional six-month period at our option. In connection with the extension, we made a repayment of principal of $7.0 million of its Credit Facility, reducing the principal amount outstanding to $29.0 million. The $7.0 million principal repayment is available to us to be re-borrowed as a delayed draw term loan, which is committed until September 9, 2019. In addition, the interest rate for the borrowings under the Credit Facility was reduced to LIBOR plus 4.95% for Eurodollar Loans and prime plus 3.95% for Base Rate Loans. Certain financial covenants were also amended.
On January 7, 2019 we borrowed an additional $3.0 million under the Credit Facility as a delayed draw term loan. On February 11, 2019 we repaid $2.0 million on our delayed draw term loan leaving $4.0 million available to draw.
On August 5, 2019, we exercised our option to extend the Credit Facility through March 9, 2020, as permitted in our existing Credit Agreement.
As of September 30, 2019, the total amount outstanding under the Credit Facility was $30.0 million. As of December 31, 2018, the total amount outstanding under the Credit Facility was $29.0 million with $7.0 million available to draw. The total amount outstanding on the Credit Facility is shown net of unamortized debt issuance costs of $0.1 million and $0.1 million on our Consolidated Balance Sheet as of September 30, 2019 and December 31, 2018, respectively. Substantially all of our assets, except our investments in U.S. Treasury Bills, are pledged as collateral for the obligations under the Credit Facility. The Credit Facility bears an interest rate of Adjusted LIBOR plus 4.95% for Eurodollar Loans, subject to a 1% LIBOR floor, and Base Rate plus 3.95% for Base Rate Loans. As of September 30, 2019, the interest rate on our outstanding principal balance of $30.0 million was 7.05%.
The Credit Facility contains affirmative and reporting covenants and certain financial ratio and restrictive covenants. We have complied with these covenants from the date of the Credit Agreement through September 30, 2019, and had no existing defaults or events of default under the Credit Facility. The financial covenants, with terms as defined in the Credit Agreement, are:
|
|
•
|
maintain a Debt to Tangible Net Worth Ratio of not more than 1.00:1.00 as determined on the last day of each calendar month,
|
|
|
•
|
maintain at all times a minimum liquidity in the form of Cash or Cash Equivalents of at least $1.0 million,
|
|
|
•
|
maintain a Debt to Fair Market Value Ratio of not more than 0.50:1.00 at any time, and
|
|
|
•
|
maintain the Fair Market Value of Liquid Portfolio Investments as a percentage of outstanding aggregate principal balance to not be less than 100%.
|
In connection with the Merger, PTMN will pay off the outstanding principal and accrued interest under the Credit Facility.
Repurchase Agreements
At the end of each quarter, we may take proactive steps to preserve investment flexibility for the next quarter by investing in cash equivalents, which includes purchasing U.S. Treasury Bills, by utilizing repurchase agreements on a temporary basis. On September 30, 2019, we purchased $10.0 million of U.S. Treasury Bills and contemporaneously entered into a $9.8 million repurchase arrangement with a global financial institution to finance such purchase. Under the repurchase arrangement, we transferred $10.0 million of U.S. Treasury Bills and $0.2 million of cash as collateral under the repurchase agreement. We repaid the $9.8 million borrowed under the repurchase agreement, and was returned the $0.2 million cash collateral, net of a $1 thousand financing fee excluding interest earned in the amount of $1 thousand upon maturity of the U.S. Treasury Bills on October 3, 2019. We account for the transfer of the U.S. Treasury Bills under the repurchase agreement as a secured borrowing in accordance with GAAP. As a result, the U.S. Treasury Bills are recorded on our books as investments in U.S. Treasury Bills, and the amount outstanding under the repurchase agreement is recorded as a current liability at September 30, 2019.
On December 21, 2018, we purchased $15.0 million of U.S. Treasury Bills and contemporaneously entered into a $14.7 million repurchase arrangement with a global financial institution to finance such purchase. Under the repurchase arrangement, we transferred $15.0 million of U.S. Treasury Bills and $0.3 million of cash as collateral under the repurchase agreement. We repaid the $14.7 million borrowed under the repurchase agreement, and was returned the $0.3 million cash collateral, net of a $14 thousand financing fee excluding interest earned in the amount of $11 thousand upon maturity of the U.S. Treasury Bills on January 2, 2019. We account for the transfer of the U.S. Treasury Bills under the repurchase agreement as a secured borrowing in accordance with GAAP. As a result, the U.S. Treasury Bills are recorded on our books as investments in U.S. Treasury Bills, and the amount outstanding under the repurchase agreement is recorded as a current liability at December 31, 2018.
Distributions
We have elected to operate our business to be taxed as a RIC for federal income tax purposes. As a RIC, we generally are not required to pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that we distribute to our stockholders as distributions. To maintain our RIC status, we must meet specific source-of-income and asset diversification requirements and distribute annually an amount equal to at least 90% of our “investment company taxable income” (which generally consists of ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses) and net tax-exempt interest. In order to avoid certain excise taxes imposed on RICs, we generally must
distribute during each calendar year an amount at least equal to the sum of (1) 98% of our ordinary income for the calendar year (taking into account certain deferrals and elections), (2) 98.2% of our capital gain net income (i.e., realized capital gains in excess of realized capital losses) for the one-year period ended on October 31 of that calendar year, and (3) 100% of any ordinary income or capital gain net income not distributed in prior years and on which we did not pay corporate-level federal income taxes. We currently have historically made distributions in an amount sufficient to satisfy the annual distribution requirement and to avoid the excise taxes.
We determine the tax characteristics of our distributions to stockholders as of the end of the fiscal year, based on the taxable income for the full year and distributions paid during the year. Taxable income available for distribution differs from consolidated net investment income under GAAP due to (i) temporary and permanent differences in income and expense recognition, (ii) capital gains and losses, (iii) activity at taxable subsidiaries, and (iv) the timing and period of recognition regarding distributions declared in December of one year and paid in January of the following year. We (or the applicable withholding agent) report the tax characteristics of distributions paid annually to each stockholder on Form 1099-DIV after the end of the year.
The tax characteristics of distributions paid in 2018 represented $1.3 million from ordinary income, $0.3 million from return of capital and none from capital gains. For tax purposes, 100% of the $0.4 million distribution paid on January 9, 2019 was treated as arising in 2019.
We may not achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings applicable to us as a BDC under the 1940 Act and due to provisions in our Credit Facility. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of our status as a RIC. We cannot assure stockholders that they will receive any distributions or distributions at any specific level. We have established an “opt out” DRIP plan for our stockholders. As a result, if we declare a cash distribution, our plan agent automatically reinvests a stockholder’s cash distribution in additional shares of our common stock unless the stockholder, or his or her broker, specifically “opts out” of the distribution reinvestment plan and elects to receive cash distributions. No action is required on the part of a registered stockholder to have the stockholder’s dividend reinvested in shares of our common stock. The plan administrator will set up an account for shares acquired through the DRIP plan for each stockholder who has not elected to receive distributions in cash and hold such shares in non-certificated form. A registered stockholder may terminate participation in the DRIP plan at any time and elect to receive distributions in cash by notifying the plan administrator in writing so that such notice is received by the plan administrator no later than 10 days prior to the record date for distributions to stockholders. Participants may terminate participation in the plan by notifying the plan administrator via its website at www.amstock.com, by filling out the transaction request form located at the bottom of their statement and sending it to the plan administrator at American Stock Transfer & Trust Company, Operations Center, 6201 15th Avenue, Brooklyn, NY 11219 or by calling the plan administrator at 1-800-937-5449.
Within 20 days following receipt of a termination notice by the plan administrator and according to a participant’s instructions, the plan administrator will either: (a) maintain all shares held by such participant in a plan account designated to receive all future distributions in cash; (b) issue certificates for the whole shares credited to such participant’s plan account and issue a check representing the value of any fractional shares to such participant; or (c) sell the shares held in the plan account and remit the proceeds of the sale, less any brokerage commissions that may be incurred and a $15.00 transaction fee, to such participant at his or her address of record at the time of such liquidation. A stockholder who has elected to receive distributions in cash may re-enroll in the DRIP at any time by providing notice to the plan administrator.
Those stockholders whose shares are held by a broker or other financial intermediary may receive distributions in cash by notifying their broker or other financial intermediary of their election. It is customary practice for many brokers to opt out of DRIP plans on behalf of their clients unless specifically instructed otherwise.
We intend, when permitted by the DRIP plan, to primarily use newly issued shares for reinvested distributions under the DRIP plan. However, we reserve the right to purchase shares in the open market in connection with the DRIP plan. The number of newly issued shares to be issued to a stockholder is determined by dividing the total dollar amount of the distribution payable to such stockholder by the average market price per share of our common stock at the close of regular trading on the exchange or market on which our shares of common stock are listed for the five trading days preceding the valuation date for such distribution. We can not calculate the number of shares of our common stock to be outstanding after giving effect to payment of the distribution until the value per share at which additional shares will be issued has been determined and elections of our stockholders have been tabulated.
We may not use newly issued shares to satisfy our obligations under the DRIP plan if the market price of our shares is less than our net asset value per share. In such event, the cash distributions are paid to the plan administrator who purchases shares in the open market for credit to the accounts of plan participants unless the average of the closing sales prices for the shares for the five days immediately preceding the payment date exceeds 110% of the most recently reported net asset value per share. The allocation of shares to the participants’ plan accounts is based on the average cost of the shares so purchased, including brokerage commissions. The plan administrator will reinvest all distributions as soon as practicable, but no later than the next ex-dividend date, except to the extent necessary to comply with applicable provisions of the federal securities laws. The plan will not pay interest on any uninvested cash payment.
As of October 9, 2019, the date of our most recent distribution payment, holders of approximately 76,000 shares, or approximately 0.4% of the 20,172,392 outstanding shares, were participants in the DRIP plan. During 2018, we declared distributions totaling $0.08 per common share.
There are no brokerage charges on newly issued shares or other charges to stockholders who participate in the DRIP plan. We pay the plan administrator’s fees.
We may terminate the DRIP plan upon notice in writing mailed to each participant at least 30 days prior to any record date for the payment of any distribution. When a participant withdraws from the DRIP plan or when the DRIP plan is terminated, the participant will receive a cash payment for any fractional shares of our common stock based on the market price on the date of withdrawal or termination. Participants and interested stockholders should direct all correspondence concerning the DRIP plan to the plan administrator by mail at American Stock Transfer & Trust Company, Operations Center, 6201 15th Avenue, Brooklyn, NY 11219.
The automatic reinvestment of distributions will not relieve a participant of any income tax liability associated with such dividend or distribution. A U.S. stockholder participating in the DRIP plan will be treated for U.S. federal income tax purposes as having received a distribution in an equal amount to the cash that the participant could have received instead of shares. The tax basis of such shares will equal the amount of such cash. In the case of newly issued shares under the DRIP plan, the distribution and tax basis will generally be the value of the issued shares. A participant will not realize any taxable income upon receipt of a certificate for whole shares credited to the participant’s account whether upon the participant’s request for a specified number of shares or upon termination of enrollment in the DRIP plan. Each participant will receive each year from us (or the applicable withholding agent) a Form 1099-DIV with respect to the U.S. federal income tax status of all distributions during the previous year.
A copy of our DRIP plan is available on our corporate website, www.ohainvestmentcorporation.com, in the investor relations section.
Portfolio Credit Quality
At September 30, 2019, a meaningful portion of our portfolio investments were in negotiated, and often illiquid, securities of middle market businesses. As of September 30, 2019, we had certain investments related to two portfolio companies on non-accrual status with an aggregate cost and fair value of $50.6 million and $6.1 million, respectively. Our investment in OCI Holdings, LLC subordinated notes was placed on non-accrual on October 1, 2018. Effective July 1, 2015, ATP was placed on non-accrual status based on estimated future production payments additionally, income is recognized to the extent cash is received. Beginning in April 2018 all future production payments received will be applied to ATP's cost basis. Our portfolio investments at fair value were approximately 58.5% and 58.9% of the related cost basis as of September 30, 2019 and December 31, 2018, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accruing and non-income producing investments
|
|
September 30, 2019
|
|
December 31, 2018
|
(in thousands)
|
|
Cost
|
|
Fair Value
|
|
Cost
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
Non-accruing investments
|
|
|
|
|
|
|
|
|
|
|
|
|
ATP Oil & Gas Corporation/Bennu Oil & Gas, LLC (non-accrual cash basis July 2015; full non-accrual April 2018)
|
|
$
|
24,561
|
|
|
$
|
3,672
|
|
|
$
|
26,450
|
|
|
$
|
4,778
|
|
OCI Holdings, LLC (non-accrual October 2018)
|
|
23,528
|
|
|
2,422
|
|
|
23,528
|
|
|
2,271
|
|
Total non-accruing investments
|
|
$
|
48,089
|
|
|
$
|
6,094
|
|
|
$
|
49,978
|
|
|
$
|
7,049
|
|
|
|
|
|
|
|
|
|
|
Non-income producing investments
|
|
|
|
|
|
|
|
|
OHA/OCI Investments, LLC Class A Units
|
|
$
|
2,500
|
|
|
$
|
—
|
|
|
$
|
2,500
|
|
|
$
|
—
|
|
Total non-income producing investments
|
|
$
|
2,500
|
|
|
$
|
—
|
|
|
$
|
2,500
|
|
|
$
|
—
|
|
Total non-accruing and non-income producing investments
|
|
$
|
50,589
|
|
|
$
|
6,094
|
|
|
$
|
52,478
|
|
|
$
|
7,049
|
|
Contractual Obligations and Off-Balance Sheet Arrangements
The following table summarizes our contractual payment obligations at September 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit facilities(1)
|
|
Total
|
|
Less than
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More than
5 Years
|
Credit Facility(2)
|
|
$
|
30,000
|
|
|
$
|
30,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Repurchase Agreement(3)
|
|
9,800
|
|
|
9,800
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
39,800
|
|
|
$
|
39,800
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(1) Excludes accrued interest amounts.
(2) As noted elsewhere in this Quarterly Report on Form 10-Q, PTMN will be required to pay off the outstanding principal and
accrued interest under the Credit Facility in connection with the Merger.
(3) Amount outstanding under the Repurchase Agreement was repaid on October 3, 2019.
From time to time we could have unused commitments to extend credit to our portfolio companies. Generally, these commitments have fixed expiration dates, and we do not fund the entire amounts before they expire. Therefore, these commitment amounts do not necessarily represent future cash requirements, and we do not report the unused portions of these commitments on our Consolidated Balance Sheets. At September 30, 2019 we had unused credit commitments on our investments in the amount of $1.7 million of ClearChoice revolver, $0.3 million of JS Held delayed draw term loan, $0.2 million of Imperial Dade delayed draw term loan, and $0.1 million of JS Held revolver.