As filed with the Securities and Exchange Commission on May 2, 2011
x Registration Statement under the Securities Act of 1933
x Pre-Effective Amendment No. 1
o Post-Effective Amendment No.
and/or
o Registration Statement Under the Investment Company Act of 1940
o Amendment No.
(Exact Name of Registrant as Specified in its Charter)
(Address of Principal Executive Offices)
(Registrants Telephone Number, Including Area Code)
(Name and Address of Agent for Service)
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Richard T. Prins, Esq. Michael K. Hoffman, Esq. Skadden, Arps, Slate, Meagher & Flom LLP Four Times Square New York, New York 10036 212-735-3000 |
Monica J. Shilling, Esq. Proskauer Rose LLP 2049 Century Park East, 32nd Floor Los Angeles, CA 90067 310-557-2900 |
As soon as practicable after the effective date of this Registration Statement.
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Title of Securities Being Registered | Amount Being Registered |
Proposed Maximum Offering Price per Unit |
Proposed Maximum Aggregate Offering Price(1)(2) |
Amount of Registration Fee(3) |
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Common Stock, par value $0.001 per share | N/A | N/A | $ | 172,500,000 | $ | 20,027 |
(1) | Includes underwriters option to purchase additional shares. |
(2) | Estimated pursuant to Rule 457(o) under the Securities Act of 1933 solely for the purpose of determining the registration fee. |
(3) | $17,415 previously paid. |
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that the registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such dates as the commission, acting pursuant to said Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the Registration Statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
P R O S P E C T U S
This is an initial public offering of shares of common stock of TCP Capital Corp. Following the offering, we will be a holding company with no direct operations of our own, and our only business and sole asset will be our ownership of all of the limited partner interests in Special Value Continuation Partners, LP, or the Operating Company. We and the Operating Company each will be managed by Tennenbaum Capital Partners, LLC, or TCP. TCP is a leading investment manager and specialty lender to middle-market companies that had in excess of $4.5 billion of committed capital under management as of March 31, 2011, approximately 13% of which consists of our committed capital. SVOF/MM, LLC, an affiliate of TCP, will be the Operating Companys general partner and will also provide the administrative services necessary for us to operate. We and the Operating Company will elect prior to the completion of this offering to be treated as a business development company under the Investment Company Act of 1940, or the 1940 Act. Neither we nor the Operating Company has previously operated as a business development company under the 1940 Act and neither TCP nor SVCF/MM, LLC has prior experience managing or providing administrative services to a business development company under the 1940 Act.
Our and the Operating Companys investment objective is to seek to achieve high total returns while minimizing losses. Both we and the Operating Company seek to achieve this investment objective primarily through investments in debt securities of middle-market companies. The primary investment focus will be the investment in and origination of leveraged loans to performing middle-market companies.
All of the shares of common stock sold in this offering will be sold by us. The net asset value of our common stock on , 2011 (the last date prior to the date of this prospectus on which net asset value was determined) was approximately $ per share. Prior to this offering, there has been no public market for our common stock. We currently estimate that the initial public offering price per share will be between $ and $ . Subject to completion of this offering, we anticipate that our common stock will have been approved for listing on The NASDAQ Global Select Market under the symbol TCPC.
This prospectus contains important information you should know before investing in our common stock. Please read it carefully before you invest and keep it for future reference. Upon completion of this offering, we will file annual, quarterly and current reports, proxy statements and other information about us with the Securities and Exchange Commission. TCP maintains a website at http://www.tennenbaumcapital.com and we intend to make all of our annual, quarterly and current reports, proxy statements and other publicly filed information available, free of charge, on or through this website. You may also obtain such information and make stockholder inquiries by contacting us at Tennenbaum Capital Partners, LLC, c/o Investor Relations, 2951 28th Street, Suite 1000, Santa Monica, California 90405 or by calling us at (310) 566-1094. The Securities and Exchange Commission maintains a website at http://www.sec.gov where such information is available without charge upon request. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider information contained on our website to be part of this prospectus.
Assuming an initial public offering price of $ per share (the mid-point of the range set forth on this cover), purchasers in this offering will experience immediate dilution of approximately $ per share on a fully diluted basis. SeeDilution on page 47.
Our shares have no history of public trading. Shares of closed-end investment companies, including business development companies, frequently trade at a discount from their net asset value. This risk of loss applies to our shares of common stock as well and may be greater for investors expecting to sell their shares in a relatively short period after completion of the public offering.
Investing in our common stock involves a high degree of risk, including credit risk and the risk of the use of leverage. Before buying any shares of our common stock, you should read the discussion of the material risks of investing in our common stock in Risks beginning on page 22 of this prospectus.
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Per Share | Total | |||||||
Public offering price | $ | $ | ||||||
Sales load (underwriting discount and commissions) | $ | $ | ||||||
Proceeds, before expenses, to the Company(1) | $ | $ |
(1) | We estimate that we will incur expenses of approximately $ ($ per share) in connection with this offering. Such expenses will be borne by us. Stockholders will indirectly bear such expenses, which will reduce the net asset value per share of the shares purchased by investors in this offering. Net proceeds, after expenses and sales load, will be approximately $ ($ per share). |
We have granted the underwriters an option to purchase up to additional shares of our common stock at the public offering price, less the sales load, within 30 days of the date of this prospectus solely to cover overallotments, if any. If the underwriters exercise this option in full, the total price to the public, sales load and net proceeds will be $ , $ , and $ , respectively. See Underwriting.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The shares will be ready for delivery on or about , 2011.
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BofA Merrill Lynch | Wells Fargo Securities | J.P. Morgan |
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Natixis Bleichroeder LLC | Rabo Securities USA, Inc. |
The date of this prospectus is , 2011.
Statistical and market data used in this prospectus has been obtained from governmental and independent industry sources and publications. We have not independently verified the data obtained from these sources. Forward-looking information obtained from these sources is subject to the same qualifications and the additional uncertainties regarding the other forward-looking statements contained in this prospectus.
You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information in this prospectus is accurate only as of the date on the front of this prospectus. Our business, financial condition and prospects may have changed since that date. To the extent required by applicable law, we will update this prospectus during the offering period to reflect material changes to the disclosure herein.
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This summary highlights some of the information in this prospectus. It is not complete and may not contain all of the information that you may want to consider before investing in our common stock. You should read the entire prospectus carefully, including Risks.
Throughout this prospectus, unless the context otherwise requires, references to:
Holding Company refers to Special Value Continuation Fund, LLC, a Delaware limited liability company, for the periods prior to the consummation of the Conversion described elsewhere in this prospectus and to TCP Capital Corp. for the periods after the consummation of the Conversion;
Operating Company refers to Special Value Continuation Partners, LP, a Delaware limited partnership;
TCP and Advisor refer to Tennenbaum Capital Partners, LLC, a Delaware limited liability company and the investment manager; and
General Partner and Administrator refer to SVOF/MM, LLC, a Delaware limited liability company, the general partner of the Operating Company and an affiliate of the Advisor and administrator of the Holding Company and the Operating Company.
For simplicity, this prospectus generally uses the term Company, we, us and our to include the Holding Company and, where appropriate in the context, the Operating Company, on a consolidated basis. For example, (i) although all or substantially all of the net proceeds from this offering will be invested in the Operating Company and all or substantially all of the Holding Companys investments will be made through the Operating Company, this prospectus generally refers to the Holding Companys investments through the Operating Company as investments by the Company, and (ii) although the Operating Company and not the Holding Company has entered into the Leverage Program (defined below), this prospectus generally refers to the Operating Companys use of the Leverage Program as borrowings by the Company, in all instances in order to make the operations and investment strategy easier to understand. The Holding Company and the Operating Company have the same investment objective and policies and the assets, liabilities and results of operations of the Holding Company will be consolidated with those of the Operating Company as described below under Operating and Regulatory Tax Structure.
Prior to the completion of this offering and our election to be treated as a business development company, we will complete a conversion under which TCP Capital Corp. will succeed to the business of Special Value Continuation Fund, LLC and its consolidated subsidiaries, and the members of Special Value Continuation Fund, LLC will become stockholders of TCP Capital Corp. In this prospectus, we refer to such transactions as the Conversion. Unless otherwise indicated, the disclosure in this prospectus gives effect to the Conversion.
We are an externally managed, non-diversified closed-end management investment company that will, prior to the completion of this offering, file an election to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. See Company History and BDC Conversion. Our investment objective is to seek to achieve high total returns while minimizing losses. We seek to achieve our investment objective primarily through investments in debt securities of middle-market companies, which we define as those with enterprise values between $100 million and $3 billion. While we intend to primarily focus on privately negotiated investments in debt of middle-market companies, we may make investments of all kinds and at all levels of the capital structure, including in equity interests such as preferred or common stock and warrants or options received in connection with our debt investments. Our investment activities will benefit from what we believe are the competitive advantages of our Advisor, including its diverse in-house skills, proprietary deal flow, and consistent and rigorous investment process focused on established, middle-market companies. We expect to generate returns through a combination of the receipt of contractual interest payments on debt investments and origination and similar fees, and, to a lesser extent, equity appreciation through options, warrants, conversion rights or direct equity investments.
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As described in more detail below under Company History and BDC Conversion, we have no employees of our own and for so long as the Operating Company exists, our only business and sole asset will continue to be the ownership of all of the common limited partner interests of the Operating Company. We expect to continue to conduct all of our investment activities through the Operating Company and our investment activities will continue to be externally managed by our Advisor, a leading investment manager with in excess of $4.5 billion in committed capital, approximately 13% of which consists of the Holding Companys committed capital under management as of March 31, 2011, and a primary focus on providing financing to middle-market companies. Additionally, the Holding Company will continue to qualify as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code, or the Code, following the conversion so long as it continues to satisfy the RIC requirements.
At March 31, 2011, our existing investment portfolio consisted of debt and equity positions in 44 portfolio companies valued at approximately $427.3 million. Debt positions represented approximately 74% of the total portfolio fair value and had a weighted-average current yield and yield to maturity of approximately 11.0% and 12.0%, respectively. For purposes of this prospectus, references to yield to maturity assume that debt investments in our portfolio as of a certain date are purchased at fair value on that date and held until their respective maturities with no prepayments or losses and are exited at par upon maturity. At March 31, 2011, the average investment size for the debt investments in our existing portfolio was $5.3 million, with a weighted average remaining term of approximately 4.0 years. Equity positions in 17 companies represented approximately 26% of the total fair value of our existing investment portfolio. The Operating Company obtained or invested in its existing investment portfolio while it was a registered investment company and not a BDC. The main differences between BDCs and registered closed-end companies relate to the more specialized investments a BDC must make. As BDCs, we will be required to invest at least 70% of our assets in private or thinly traded domestic companies as well as in cash items, U.S. Government securities and high quality short term debt securities (and will be required to offer managerial assistance to companies in which we invest). However, as BDCs we will not be subject to industry concentration limits or certain restrictions on investing in real estate or commodities or making loans and our leverage restrictions are more relaxed than if we were a registered closed-end company. Our current portfolio satisfies these requirements and we will not be required to sell any assets to conform to such requirements.
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The following charts summarize our portfolio mix by industry and type based on the fair value of our investments as of March 31, 2011.
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* | Industries in aggregate less than 2.5% of the portfolio |
At March 31, 2011, our portfolio had a higher concentration of equity investments than we anticipate our investment strategy will target in the future, with our four largest equity positions aggregating to approximately $86 million of fair value at March 31, 2011, representing approximately 20.1% of total portfolio fair value. Our investment portfolio as of March 31, 2011 included holdings that stem from the Companys historical allocation of a portion of our investment strategy towards distressed investments. This component of our investment strategy included a number of debt positions that were largely acquired through secondary market purchases of credit positions and often led to the receipt of additional equity positions as part of in- or out-of-court debt-for-equity exchanges. We do not intend to focus on these types of investments going forward and therefore expect to hold a smaller percentage of equity investments in our post-initial public offering, or IPO, portfolio. See Investment Strategy for more information. Additionally, our existing equity portfolio is expected to serve as a source of liquidity as we opportunistically monetize these investments.
Our investment activities are managed by TCP. TCP is a leading investment manager (including specialty lending to middle-market companies). TCP is a Delaware limited liability company and is registered as an investment advisor under the Investment Advisers Act of 1940. As of March 31, 2011, TCP had in excess of $4.5 billion in committed capital under management, approximately 13% of which consists of the Holding Companys committed capital, and a team of approximately 30 investment professionals supported by approximately 40 administrative and back office personnel that focus on operations, finance, legal and compliance, accounting and reporting, investor relations, and information technology. TCP was founded in 1999 by Michael E. Tennenbaum, Mark K. Holdsworth and Howard M. Levkowitz and its predecessor entity, formed by the same individuals, commenced operations in 1996. The three founders along with David A. Hollander, Michael E. Leitner, Eric R. Pagel, Philip M. Tseng, Rajneesh Vig, and Hugh Steven Wilson constitute TCPs partners, or the TCP Partners. The TCP Partners have significant industry experience, including experience investing in middle-market companies. Together, the TCP Partners have invested approximately $9.4 billion in over 180 companies since TCPs inception, through multiple business and credit cycles, across all segments of the capital structure through a broad set of credit-oriented strategies including leveraged loan origination, secondary investments of discounted debt securities, and distressed and control opportunities. We refer to the products that employ these strategies within the TCP platform as the
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Opportunity Funds. We believe the TCP Partners investment perspectives, complementary skills, and collective investment experience provides TCP with a strategic and competitive advantage in middle-market investing.
As our investment advisor, TCP is responsible for sourcing potential investments, conducting research, analyzing investment opportunities and structuring our investments and monitoring our portfolio companies on an ongoing basis. We believe that TCP has a proven track record of sourcing deals, originating loans and successfully investing in middle-market companies and that the relationships of its investment professionals are integral to TCPs success. TCPs investment professionals have long-term working relationships with key sources of investment opportunities and industry expertise, including investment bankers, financial advisors, attorneys, private equity sponsors, other senior lenders, high-yield bond specialists, research analysts, accountants, and senior management teams. Additionally, TCPs structure includes both a board of advisors and a group of Senior Executive Advisors, a team comprised of approximately 20 current and former executives from a variety of industries, which extends the reach of TCPs relationships through a group of seasoned industry leaders and that can enhance our deal sourcing and due diligence activities.
We also benefit from the existing infrastructure and administrative capabilities of an established investment manager. The General Partner, an affiliate of TCP, serves as our Administrator and provides us with office space, equipment and office services. The tasks of our Administrator include overseeing our financial records, preparing reports to our stockholders and reports filed with the SEC and generally monitoring the payment of our expenses and the performance of administrative and professional services rendered to us by others.
During 2010 and the first quarter of 2011, TCP executed in its Opportunity Funds over $425 million in direct origination leveraged loans primarily to middle-market companies with average current yields of 15%, and average yields to maturity of 18% across its platform. TCP reviewed but did not approve an additional $2.3 billion in middle-market loan origination opportunities in that period. There can be no assurance that similar deal flow or terms will be available in the future for loans in which we may invest.
To achieve our investment objectives, we intend to focus on a subset of the broader investment strategies historically pursued by TCP. Our primary investment focus will be the ongoing origination of and investments in leveraged loans of performing middle-market companies, building on TCPs established track record of origination and participation in the original syndication of over $3.3 billion of leveraged loans to over 40 companies since 1999. For the purposes of this prospectus, the term leveraged loans refers to senior debt investments that rank ahead of subordinated debt and that generally have the benefit of security interests in the assets of the borrower.
We anticipate our investments will generally range from $10 million to $50 million per company, the size of which may grow over time in proportion with our capital base. We expect to generate current returns through a combination of the receipt of contractual interest payments on debt investments and origination and similar fees, and, to a lesser extent, equity appreciation through options, warrants, conversion rights or direct equity investments. We often receive equity interests such as preferred or common stock and warrants or options in connection with our debt investments. From time to time we may also use other investment strategies, which are not our primary focus, to attempt to enhance the overall return of our portfolio. These investment strategies may include, but are not limited to, the purchase of discounted debt, opportunistic investments, and financial instruments to hedge currency or interest rate risk associated with our portfolio.
Typical investments will be in performing middle-market companies. We believe that middle-market companies are generally less able to secure financing than larger companies and thus offer better return opportunities for those able to conduct the necessary diligence to appropriately evaluate these companies. We will focus primarily on U.S. companies where we believe our Advisors perspective, complementary skills and investment experience provides us with a competitive advantage and in industries where our Advisor sees an attractive risk reward profile due to macroeconomic trends and existing TCP industry expertise.
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We believe that we possess the following competitive advantages over other capital providers to middle-market companies:
Focus on minimizing the risk of loss and achieving attractive risk-adjusted returns. We primarily structure investments to attempt to achieve high cash yields, cash origination fees, conservative leverage, and strong contractual protections that reduce the risk of principal loss. Contractual protections may include default premiums, information rights, board governance rights, and affirmative, negative and financial covenants, such as lien protection and prohibitions against change of control. While we do not expect to undertake a material focus on distressed investments, we believe that TCPs experience in distressed investing from managing other funds helps us negotiate more favorable terms and provides greater opportunity to achieve principal protection. See Investment Strategy.
Diverse in-house skills and experience of our Advisor. The principals and professionals of TCP have diverse and complementary backgrounds, including prior experience at private investment funds, investment banks, other financial services firms, and managing companies. We believe that the diverse professional experience of TCPs principals and professionals gives us an advantage in sourcing, evaluating, structuring, negotiating, closing, and profitably exiting investments. TCPs advantages include:
| Significant investment expertise in over 15 different industry sectors; |
| Track record of leveraged loan originations or participations in original syndications of over $3.3 billion to over 40 companies; |
| Extensive workout and restructuring capabilities honed in multiple in- and out-of-court transactions which allows us to maximize our investment returns and minimize the risk of loss; |
| In-house legal expertise with significant experience protecting creditor rights; |
| Complementary bottom-up and top-down (macro economic) expertise; and |
| Expertise in analyzing highly complex companies and investments. |
Consistent, proactive and rigorous investment and monitoring processes. We believe that TCP employs a proven investment process that integrates intensive bottom-up company-level research and analysis with a proactive top-down view of macroeconomic and industry risks and opportunities. The heart of the process is a thorough analysis of the underlying issuers business, end markets, competitors, suppliers, revenues, costs, financial statements, and the terms of the issuers existing obligations, including contingent liabilities (if any). TCPs professionals supplement in-house expertise with industry experts, including TCPs Board of Advisors and Senior Executive Advisors, as well as other CEO/CFO-level executives, with direct management experience in the industries under consideration. These company level analyses are undertaken in the context of and supplemented by TCPs views on and understanding of industry trends and broader economic conditions. These views are formulated and refined through TCPs systematic quarterly macroeconomic reviews and quarterly industry reviews, where long-term and immediate macroeconomic trends and their impact on industry risk/reward characteristics are determined. These views flow through to TCPs proactive deployment of research and capital resources in the investment process. Quarterly portfolio reviews and the TCP Portfolio Company Business Conditions Survey also help to inform TCPs macroeconomic and industry views as well as to inform reporting of deal teams frequent monitoring of portfolio company progress, risk assessment, and refinement of exit plans. The survey is a proprietary survey of all portfolio companies in which TCP has a sizeable influence and includes a standardized set of questions in order to obtain insight into general business activity, pricing power, costs, margins, financing conditions and expansion plans.
Focus on established middle-market companies. We generally invest in companies with established market positions, seasoned management teams, proven and differentiated products and services and strong regional or national operations. We believe that these companies possess better risk-adjusted return profiles than newer companies that are building management or in early stages of building a revenue base. As a specialty middle-market lender, through TCP we have proven experience structuring financing for middle-market companies and meeting their specialized needs. We believe that there are fewer experienced finance companies focused on transactions involving small and middle-market companies than larger
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companies, allowing us to negotiate favorable investment terms, including higher yields, more significant covenant protection, and greater equity grants than typical of transactions involving larger companies. Additionally, we believe that middle-market companies offer significant risk-adjusted return advantages over larger companies as they are generally less able to secure financing compared to larger companies and, we believe, are more likely as borrowers to be subject to upfront fees, prepayment premiums and higher interest rates.
Debt platform with multiple deal sourcing channels. The employees of TCP have developed extensive networks among investment bankers, financial advisors, attorneys, private equity sponsors, other senior lenders, high-yield bond specialists, research analysts, accountants, and senior management teams. These networks are a valuable source of directly originated deals and are further supplemented by the networks and experiences of TCPs Board of Advisors and Senior Executive Advisors. Additionally, TCPs track record as a provider of middle-market financing means that it is often the first or early call on new deal opportunities. Since inception, TCP has originated or participated in the original syndication of $3.3 billion of newly issued loans in over 40 companies, of which we invested $440 million in 21 companies. TCP has closed transactions with more than 35 different private equity sponsors, over 15 of which have been involved in transactions involving the Holding Company and the Operating Company, and more than a dozen credit focused co-lenders. TCP is well known as a lender to middle-market companies in a variety of contexts including stressed, distressed, and complex and special situations. TCPs in-depth industry knowledge and ability to diligence complex situations thoroughly and in a timely fashion helps to attract deal opportunities from multiple channels.
Attractively priced leverage program. We believe that the Leverage Program (defined below), combined with capital from recent monetizations, will provide us with a substantial amount of capital for deployment into new investment opportunities on relatively favorable terms. The Operating Company has an existing $250 million leverage program comprised of: (i) a $116 million senior secured credit facility that matures on July 31, 2014, subject to extension by the lenders at the request of the Operating Company for one 12-month period, which we refer to as the Revolving Facility; and (ii) $134 million in liquidation preference of preferred interests, which mature on July 31, 2016, which we refer to as the Preferred Interests. The Revolving Facility was entered into on July 31, 2006 with certain lenders and in conjunction with entering into such agreement, the Operating Company also issued the Preferred Interests to such lenders on the same date. We refer to the Revolving Facility and the Preferred Interests collectively as the Leverage Program. Advances under the Revolving Facility generally bear interest at LIBOR plus 0.375%, subject to certain limitations. The lenders also own all of the Operating Companys preferred interests, which is an aggregate of 6,700 Preferred Interests, each of which has a liquidation preference of $20,000 per interest, with dividends generally accruing at an annual rate equal to LIBOR plus 0.75%, subject to certain limitations. The weighted-average financing rate on the Leverage Program at March 31, 2011 was 0.91%. As preferred shareholders the lenders have the right under the 1940 Act to elect two directors of the Operating Company. After this offering, we will have an increased amount of borrowing available to us of $ under the Revolving Facility.
We believe that TCP has a consistent, non-cyclical track record of finding profitable opportunities to lend its managed assets to middle-market companies under most market conditions. However, there can be no assurances that such opportunities will be sourced, and we have no record operating as a BDC. We believe that the current environment for direct lending to middle-market companies is especially attractive for several reasons that include:
Reduced lending to middle-market companies by commercial banks. Recent regulatory changes, including the Dodd-Frank Financial Reform Act, or the Dodd-Frank Act, and the introduction of new international capital and liquidity requirements under the Basel III Accords, or Basel III, and the continued ownership of legacy non-performing assets have significantly curtailed banks lending capacity. In response, we believe that many commercial lenders have de-emphasized their service and product offerings to middle-market companies in favor of lending, managing capital markets transactions and providing other non-credit services to their larger customers. We expect bank lending to middle-market companies to continue to be constrained for several years as Basel III rules phase in and rules and regulations are promulgated and interpreted under the Dodd-Frank Act.
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Reduced credit supply to middle-market companies from non-bank lenders. We believe credit to middle-market companies from non-bank lenders will also be constrained as many of those lenders have either gone out of business, exited the market, or are winding down. Numerous hedge funds previously active in leveraged loans disappeared or contracted during the recent financial market crises, while others exited the lending market due to asset-liability mismatches. Other non-bank lenders exited lending due to balance sheet pressures. Furthermore, new collateralized loan obligation, or CLO, formation has been very limited in recent years and existing CLOs authority to reinvest falls off sharply in coming years. Along with the constraints in bank lending, this situation provides a promising environment in which to originate loans to middle-market companies. We cannot, however, provide any assurance as to the length of time this tight credit supply will persist.
Middle-market companies are increasingly seeking lenders with access to permanent capital for debt and equity capital. We believe that many middle-market companies prefer to borrow from capital providers like us, rather than execute high-yield bond or equity transactions in the public markets that may necessitate increased financial and regulatory compliance and reporting obligations. Further, we believe many middle-market companies are inclined to seek capital from a small number of providers with access to permanent capital that can satisfy their specific needs and can serve as value-added, long-term financial partners with an understanding of the companies growth needs.
Large Amount of Uninvested Private Equity Capital. Private equity firms raised significant amounts of equity commitments over the period 2006 to 2008, far in excess of the amount of equity they invested. According to the 2011 Preqin Global Private Equity Report, there was, as of December 31, 2010, approximately $559 billion of committed private equity capital available and uninvested in the United States. We believe the large amount of undeployed private equity capital will drive demand for leveraged buyouts over the next several years, which we believe will, in turn, create significant leveraged lending opportunities for us.
Significant Refinancing Requirements. A significant portion of the debt associated with a large number of middle-market leveraged mergers and acquisitions completed from 2005 to 2008 matures in the 2011 to 2015 time period. Much of this debt will need to be refinanced as it matures. When combined with the decreased availability of debt financing for middle-market companies generally, we believe these factors should increase lending opportunities for us.
Attractive Pricing and Conservative Deal Structures. We believe that reduced access to, and availability of, debt capital has improved available loan pricing for middle-market lenders. Deals since the recent credit crisis occurred, which began in 2008 and included a period of disruption in the capital markets as evidenced by a lack of liquidity in the debt capital markets, significant write-offs in the financial services sector, the re-pricing of credit risk in the broadly syndicated credit market and the failure of certain major financial institutions, have included meaningful upfront fees, prepayment protections and, in some cases, warrants, all of which should enhance profitability to lenders. Furthermore, since the credit crisis, lenders generally have required lower leverage levels, increased equity contributions and more comprehensive loan covenants than was customary in the years leading up to the credit crisis. Lower debt multiples on purchase prices suggest that the cash flow of borrowing companies should enable them to service their debt more readily, creating stronger protections against a subsequent downturn.
We were organized on July 17, 2006 and commenced operations on July 31, 2006. We were formed as a limited liability company under the laws of the State of Delaware and will convert to a Delaware corporation and elect BDC status prior to the completion of this offering as described in more detail under Conversion below. On August 1, 2006, the Holding Company registered as a non-diversified closed-end management investment company under the 1940 Act.
The Holding Company was formed by the combination of two TCP managed funds, Special Value Bond Fund II, LLC, or SVBF II, and Special Value Absolute Return Fund, LLC, or SVAR. In August 2006, investors holding interests totaling approximately 76% and 92% of the net asset value of SVBF II and SVAR respectively, combined and extended their investments into the Holding Company resulting in proceeds to the
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Holding Company of approximately $419 million. The Holding Company also issued $23,500 liquidation preference of preferred interests to various investors, all of which will be redeemed prior to the completion of this offering.
The Operating Company was formed as a limited partnership under the laws of the State of Delaware. On July 31, 2006, the Operating Company registered as a non-diversified closed-end management investment company under the 1940 Act. The Operating Company issued common limited partner interests to the Holding Company and also issued preferred limited partner interests to the lenders under the Leverage Program. The Operating Company will elect to convert from a closed-end fund to a BDC prior to the completion of this offering. Upon the completion of this offering, the Holding Company will conduct its investment operations as a BDC through the Operating Company. In this regard, the Holding Company will invest substantially all of the net proceeds from this offering in the common limited partner interests of the Operating Company and the Operating Company, in turn, will invest the proceeds in portfolio companies. See Use of Proceeds. Following termination of the Revolving Facility, which is scheduled to mature on July 31, 2014, subject to a one-year extension at the request of the Operating Company, it is possible that the Operating Company will elect to terminate its existence, in which case it will redeem any Preferred Interests then outstanding and transfer its remaining assets to the Holding Company, and the Holding Company will continue operations as a stand-alone BDC and will make investments directly, rather than solely through the Operating Company, in accordance with the investment objective and policies described herein.
Prior to the completion of our public offering, we will convert from a Delaware limited liability company to a Delaware corporation and make an election to be treated as a BDC under the 1940 Act. Upon conversion from a limited liability company to a corporation, owners of our common limited liability company interests will receive shares of our new common stock with an aggregate net asset value equal to the aggregate net asset value of the limited liability company interests owned by the stockholder on the conversion date, less the costs of the Conversion and less the amount of any cash distributed for fractional common shares. Each of our outstanding limited liability company interests is expected to be converted into shares of common stock based upon a net asset value at , 2011 of $ , which would cause us to have a total of shares of common stock outstanding immediately after the Conversion without giving effect to any shares sold in our public offering. Our preferred limited liability company interests have been called for redemption and will be redeemed prior to our conversion to a corporation. Preferred limited partnership interests in the Operating Company, which were issued to the lenders under the Leverage Program, are expected to remain outstanding. The Holding Company will continue to qualify as a RIC following the conversion so long as it continues to satisfy RIC requirements.
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An organizational structure diagram showing our organizational structure immediately after the initial public offering is set forth below:
The Holding Companys management consists of TCP and its board of directors. The Operating Companys management consists of TCP, the General Partner and its board of directors. The board of directors of the Holding Company and the Operating Company are comprised of the same individuals, the majority of whom are independent of TCP and the General Partner. TCP directs and executes the day-to-day operations of the Holding Company, and TCP directs and executes the day-to-day investment operations and the General Partner directs and executes the day-to-day operational activities of the Operating Company, in each case subject to oversight from the respective board of directors, which sets the broad policies of the Holding Company and performs certain functions required by the 1940 Act for the Operating Company. The board of directors of the Operating Company has delegated investment management of the Operating Companys assets to TCP, subject to oversight by the board of directors. The managing member of the General Partner is TCP, which serves as the investment advisor of both the Holding Company and the Operating Company. Substantially all of the equity interests in the General Partner are owned directly or indirectly by TCP, employees of TCP and Babson Capital Management, LLC. The Holding Company currently owns all of the common interests in the Operating Company and will have the ability to maintain that status. While the Operating Company is permitted to issue securities to persons other than the Holding Company, under the Operating Companys limited partnership agreement, board approval is required to issue equity interests of the Operating Company, which approval the Holding Company and its shareholders are able to control through ownership of all of the common interests in the Operating Company.
Babson Capital Management, LLC, or Babson, has historically served as our co-advisor and has participated with the Advisor in making investment decisions. However, prior to the completion of this offering, Babson will cease serving as a co-advisor although it will retain an interest in the General Partner. We do not expect this change to have an adverse impact on performance.
The Holding Company elected to be treated for U.S. federal income tax purposes as a RIC under the Code and it is expected that treatment will continue after it converts from a limited liability company to a corporation. As a RIC, the Holding Company generally does not have to pay corporate-level federal income taxes on any net ordinary income or capital gain that we distribute to our stockholders as dividends if we meet certain source-of-income, distribution and asset diversification requirements. The Operating Company is not a RIC nor will it seek RIC status and instead is intended to be treated as a partnership for tax purposes. In connection with the completion of this offering both the Holding Company and the Operating Company will
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elect to be treated as BDCs under the 1940 Act. As a BDC we are required to invest at least 70% of our total assets primarily in securities of private and certain U.S. public companies (other than certain financial institutions), cash, cash equivalents, U.S. Government securities, and other high-quality debt investments that mature in one year or less and to comply with other regulatory requirements, including limitations on our use of debt. Because the Holding Company and the Operating Company will each be BDCs after the completion of this offering, their assets, liabilities and results of operations will be consolidated for purposes of this 70% requirement.
TCP and the General Partner currently do, and in the future may, manage funds and accounts other than the Company, which we refer to as the Other Advisor Accounts, with similar investment objectives as the Company. The investment policies, advisor compensation arrangements and other circumstances of the Company may vary from those of Other Advisor Accounts. Accordingly, conflicts may arise regarding the allocation of investments or opportunities among the Company and Other Advisor Accounts. Investments that are suitable for the Company may not be suitable for the Other Advisor Accounts and investments that are suitable for the Other Advisor Accounts may not be suitable for the Company. In certain cases, investment opportunities may be made other than on a pro rata basis. For example, we may desire to retain an asset at the same time that one or more Other Advisor Accounts desire to sell it or we may not have additional capital to invest at a time Other Advisor Accounts do. TCP and its affiliates intend to allocate investment opportunities to us and Other Advisor Accounts in a manner that they believe in their judgment and based upon their fiduciary duties to be appropriate considering a variety of factors such as the investment objectives, size of transaction, investable assets, alternative investments potentially available, prior allocations, liquidity, maturity, expected holding period, diversification, lender covenants and other limitations of ours and the Other Advisor Accounts. To the extent that investment opportunities are suitable for the Company and one or more Other Advisor Accounts, TCP and the General Partner will allocate investment opportunities pro rata among the Company and Other Advisor Accounts based on the amount of funds each then has available for such investment taking into account these factors. Investment opportunities in certain privately placed securities will be subject to allocation pursuant to the terms of a co-investment exemptive order under the 1940 Act applicable to funds and accounts managed by TCP and its affiliates.
Our administrative and executive offices are located at 2951 28th Street, Suite 1000, Santa Monica, CA 90405, and our telephone number is (310) 566-1094. TCP maintains a website at http://www.tennenbaumcapital.com. Information contained on this website is not incorporated by reference into this prospectus, and you should not consider information contained on TCPs website to be part of this prospectus.
Investing in the Company and the shares of common stock offered by this prospectus involves a high degree of risk. These risks, among others, include:
| capital markets currently remain in a period of disruption and instability, which could have a negative impact on our business and operations and the value of our common stock; |
| the risk of credit losses on our investments; |
| the risk of loss associated with leverage, illiquidity and valuation uncertainties in our investments, lower amounts of income per share while we are investing the proceeds from this offering; |
| the possible lack of appropriate investments; |
| the risk of an inability to renew, extend or replace the Leverage Program, the lack of experience of our investment advisor in managing a BDC and our dependence on such investment advisor; |
| the risky nature of the securities in which we invest; |
| our potential lack of control over our portfolio companies and our limited ability to invest in public or foreign companies; |
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| the potential incentives to our investment advisor to invest more speculatively than it would if it did not have an opportunity to earn incentive compensation; |
| our limitations on raising additional capital; |
| failure to qualify as a BDC or the risk of loss of tax status as a RIC; |
| the risk of volatility in our stock price; |
| the dilution resulting from this offering; and |
| the anti-takeover effect of certain provisions in our charter and in the Amended and Restated Limited Partnership Agreement of the Operating Company, or the Amended and Restated Limited Partnership Agreement. |
See Risks beginning on page 22 of this prospectus for a more detailed discussion of these and other material risks you should carefully consider before deciding to invest in our common stock.
Unless otherwise indicated, historical references contained in this prospectus in Selected Financial and Other Date, Capitalization, Managements Discussion and Analysis of Financial Condition and Results of Operations, Senior Securities and Portfolio Companies relate to the Holding Company and the Operating Company on a consolidated basis.
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The Offering |
We are offering shares of our common stock through a group of underwriters. We have granted to the underwriters an overallotment option to purchase up to additional shares of our common stock to cover overallotments, if any. |
Common Stock Outstanding After this Offering |
shares, including shares initially acquired as limited liability company interests in Special Value Continuation Fund, LLC and issued in the conversion to our current stockholders and excluding shares of common stock issuable pursuant to the overallotment option granted to the underwriters. |
Proposed NASDAQ Global Select Market Symbol |
TCPC |
Use of Proceeds |
The net proceeds of the offering are estimated to be approximately $ million (approximately $ million if the underwriters exercise their overallotment option to purchase additional shares in full) after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use approximately $ million of the net proceeds to reduce our borrowings outstanding under the Revolving Facility and the remainder of the net proceeds to make investments in portfolio companies in accordance with our investment objective and for other general corporate purposes, including payment of operating expenses. Pending investment, we may invest the remaining net proceeds of this offering primarily in cash, cash equivalents, U.S. Government securities and other high-quality debt investments that mature in one year or less. These securities may have lower yields than our other investments and accordingly may result in lower distributions, if any, during such period. Affiliates of each of Wells Fargo Securities, LLC, Natixis Bleichroeder LLC and Rabo Securities USA, Inc. are lenders under the Revolving Facility and are each expected to receive in excess of five percent of the proceeds of this offering pending re-borrowing by us to make long-term investments. Subject to re-borrowing, we will temporarily repay affiliates of the underwriters out of the proceeds of the offering. Such amounts will depend on the amount of debt outstanding under the Revolving Facility, but assuming the total outstanding as of May , 2011, would be as follows: Wells Fargo Securities LLC $ ; Natixis Bleichroeder LLC $ ; and Rabo Securities USA, Inc. $ . Nonetheless, the appointment of a qualified independent underwriter is not necessary in connection with this offering because this offering is subject to the provisions of Financial Industry Regulatory Authority Rule 2310 and is not subject to the conflict of |
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interest provisions of Financial Industry Regulatory Authority Rule 5121. |
Investment Management Arrangements |
The Holding Company and the Operating Company have entered into separate but substantially identical investment management agreements with TCP, under which TCP, subject to the overall supervision of our respective boards of directors, will manage the day-to-day operations and provide investment advisory services to the Holding Company and the Operating Company. For providing these services, TCP will receive a base management fee calculated at an annual rate of 1.5% of our total assets (excluding cash and cash equivalents) payable quarterly in arrears. For purposes of calculating the base management fee, total assets is determined without deduction for any borrowings or liabilities. |
The investment management agreements also provide for performance based returns to TCP or the General Partner (referred to herein as incentive compensation). Under the investment management agreements and the Amended and Restated Limited Partnership Agreement, no incentive compensation will be incurred until after January 1, 2013. |
Beginning January 1, 2013, the incentive compensation will equal the sum of (1) 20% of all ordinary income since that date and (2) 20% of all net realized capital gains (net of any net unrealized capital depreciation) since that date, with each component being subject to a total return limitation of 8% of contributed common equity. The incentive compensation initially will be an equity allocation to the General Partner under the Operating Companys Amended and Restated Limited Partnership Agreement. If the Operating Company is terminated or for any other reason incentive compensation is not distributed by the Operating Company, it would be paid pursuant to the investment management agreement between the Holding Company and TCP. |
The incentive compensation will have two components, ordinary income and capital gains. Each of the two components of incentive compensation is separately subject to a total return limitation. Thus, we will not be obligated to pay or distribute any ordinary income incentive compensation or any capital gains incentive compensation if the cumulative total return does not exceed an 8% annual return on daily weighted average contributed common equity. If such cumulative total return does exceed 8%, we will not be obligated to pay or distribute any ordinary income incentive compensation or any capital gains incentive compensation to the extent such amount would exceed 20% of the cumulative total return of the Company that exceeds a 10% annual return on daily weighted average contributed common equity, plus all of the cumulative total return that exceeds an 8% annual return on daily weighted average contributed |
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common equity but is not more than a 10% annual return on daily weighted average contributed common equity, less cumulative incentive compensation previously paid or distributed (whether on ordinary income or capital gains). |
Subject to the above limitation, the ordinary income component of incentive compensation will be the amount, if positive, equal to 20% of the cumulative ordinary income before incentive compensation, less cumulative ordinary income incentive compensation previously paid or distributed. |
Subject to the above limitation, the capital gains component of the incentive compensation will be the amount, if positive, equal to 20% of the cumulative realized capital gains (computed net of cumulative realized losses and cumulative unrealized capital depreciation), less cumulative capital gains incentive compensation previously paid or distributed. |
For purposes of the foregoing computations and the total return limitation, the relevant terms are defined in detail in the section entitled The Advisor Investment Management Agreements. |
The base management fee will be paid by the Operating Company to TCP and the incentive compensation, if any, will be distributed by the Operating Company to the General Partner. The Holding Company, therefore, will indirectly bear these amounts, which will be reflected in our consolidated financial statements. If the Operating Company is terminated or for any other reason incentive compensation is not paid by the Operating Company, such compensation would be paid to TCP directly by the Holding Company pursuant to its investment management agreement with TCP to ensure that the appropriate aggregate amount of incentive compensation is paid. On a consolidated basis, the aggregate compensation is limited to 1.5% of total assets and 20% of the relevant components of income and realized capital gains. See The Advisor Investment Management Agreement for a more detailed description of the investment management arrangements. |
Distributions |
We intend to make quarterly distributions to our stockholders commencing at the end of the quarter in which this offering is completed. The timing and amount of our quarterly distributions, if any, will be determined by our board of directors. Any distributions to our stockholders will be declared out of assets legally available for distribution. In addition, because we will invest substantially all of our assets in the Operating Company, we will only be able to pay distributions on our common stock from distributions received from the Operating Company. The Operating Company intends to make distributions that will be sufficient to enable us to |
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pay quarterly distributions to our stockholders and maintain our status as a regulated investment company, or RIC, under the Code. While it is intended that the distributions made by the Operating Company will be sufficient to enable us to pay quarterly distributions to our stockholders and maintain our status as a RIC, there can be no assurances that the distributions from the Operating Company will be sufficient to pay distributions to our stockholders in the future. |
Taxation |
The Holding Company currently is a RIC for U.S. federal income tax purposes and intends to continue to qualify each year as a RIC. In order to qualify as a RIC, the Holding Company generally must satisfy income, asset diversification and distribution requirements. As long as it so qualifies, the Holding Company will not be subject to U.S. federal income tax to the extent that it distributes its investment company taxable income and net capital gain on a timely basis. The Holding Company will invest substantially all of the net proceeds from this offering in the Operating Company, which is treated as a partnership for U.S. federal income tax purposes. Consequently, any references to, and description of the U.S. federal income tax aspects of, the Holding Companys investment practices and activities, in effect, take into account the investment practices and activities of the Operating Company. See Distributions and Tax Matters. |
Custodian |
Wells Fargo Bank, National Association, or the Custodian, serves as our custodian. See Custodian. |
Transfer and Dividend Paying Agent |
, or , serves as our Transfer and Dividend Paying Agent. See Transfer Agent. |
Borrowings and Preferred Stock |
We expect to use leverage, including through the Revolving Facility, to make investments. We will be exposed to the risks of leverage, which include that leverage may be considered a speculative investment technique. The use of leverage magnifies the potential for gain and loss on amounts invested by us and therefore increases the risks associated with investing in shares of our common stock. The Holding Company and the Operating Company will, on a consolidated basis, comply with the asset coverage and other requirements relating to the issuance of senior securities under the 1940 Act. See Risk Factors. |
Trading at a Discount |
Shares of closed-end investment companies, including business development companies, frequently trade at a discount from their net asset value. This risk of loss applies to our shares of common stock as well and may be greater for investors expecting to sell their shares in a relatively short period of time after completion of the public offering. Assuming an initial public offering price of $ per share (the mid-point of the range set forth on the cover page of this prospectus), purchasers in this |
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offering will experience immediate dilution of approximately $ per share. |
The possibility that our shares may trade at a discount to our net asset value is separate and distinct from the risk that our net asset value per share may decline. Our net asset value immediately following this offering will reflect reductions resulting from the sales load and the amount of the organization and offering expenses paid by us. This risk may have a greater effect on investors expecting to sell their shares soon after completion of the public offering, and our shares may be more appropriate for long-term investors than for investors with shorter investment horizons. We cannot predict whether our shares will trade above, at or below net asset value. |
Dividend Reinvestment Plan |
We have a dividend reinvestment plan for our stockholders. This is an opt out dividend reinvestment plan. As a result, if we declare a dividend, then stockholders cash dividends will be automatically reinvested in additional shares of our common stock, unless they specifically opt out of the dividend reinvestment plan so as to receive cash dividends. Stockholders who receive distributions in the form of stock will be subject to the same federal, state and local tax consequences as stockholders who elect to receive their distributions in cash. See Dividend Reinvestment Plan. |
Anti-Takeover Provisions |
Our certificate of incorporation and the Amended and Restated Limited Partnership Agreement as well as certain statutory and regulatory requirements, contain certain provisions that may have the effect of discouraging a third party from making an acquisition proposal for us. These anti-takeover provisions may inhibit a change in control in circumstances that could give the holders of our common stock the opportunity to realize a premium over the market price for our common stock. See Description of Shares. |
Administrator |
Under a separate administration agreement, the General Partner will also serve as our Administrator. As Administrator, the General Partner will oversee our financial records, prepare reports to our stockholders and reports filed with the SEC, lease office space to us, provide us with equipment and office services and generally monitor the payment of our expenses and provide or supervise the performance of administrative and professional services used by us. We will reimburse the Administrator for its costs in providing these services without paying any separate administration fee, markup or other profit in excess of fully allocated costs. Although there is no predetermined limit on such expenses, our Board of Directors will monitor the propriety of such expenses. |
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License Agreement |
We have entered into a royalty-free license agreement with TCP, pursuant to which TCP has agreed to grant us a non-exclusive license to use the name TCP. |
Available Information |
We have filed with the SEC a registration statement on Form N-2 under the Securities Act of 1933, as amended, or the Securities Act, which contains additional information about us and the shares of our common stock being offered by this prospectus. After completion of this offering, we will be obligated to file annual, quarterly and current reports, proxy statements and other information with the SEC. This information will be available at the SECs public reference room in Washington, D.C. and on the SECs website at http://www.sec.gov. See Additional Information. |
TCP maintains a website at http://www.tennenbaumcapital.com and we intend to make all of our annual, quarterly and current reports, proxy statements and other publicly filed information available, free of charge, on or through this website. You may also obtain such information by contacting us at 2951 28th Street, Suite 1000, Santa Monica, CA 90405, or by calling us at (310) 566-1094. Information contained on TCPs website is not incorporated by reference into this prospectus, and you should not consider information contained on TCPs website to be part of this prospectus. |
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The following table is intended to assist you in understanding the costs and expenses that an investor in this offering will bear directly or indirectly. However, we caution you that some of the percentages indicated in the table below are estimates and may vary. The following table and example should not be considered a representation of our future expenses. Actual expenses may be greater or less than shown. Except where the context suggests otherwise, whenever this prospectus contains a reference to fees or expenses paid by you, the Company, the Holding Company, the Operating Company or us, stockholders will indirectly bear such fees or expenses, including through the Companys investment in the Operating Company.
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Stockholder Transaction Expenses |
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Sales Load (as a percentage of offering price) | %(1) | |||
Offering Expenses (as a percentage of offering price) | %(2) | |||
Dividend Reinvestment Plan Fees | None | (3) | ||
Total Stockholder Transaction Expenses (as a percentage of offering price) | % | |||
Annual Expenses (as a Percentage of Net Assets Attributable to Common Stock) |
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Base Management Fees | %(4) | |||
Incentive Compensation Payable Under the Investment Management Agreement (20% of ordinary income and capital gains) | 0 | %(5) | ||
Interest Payments on Borrowed Funds | %(6) | |||
Preferred Dividends | %(7) | |||
Other Expenses (estimated) | %(8) | |||
Total Annual Expenses | % |
(1) | The underwriting discount and commission with respect to shares sold in this offering, which are one-time fees to the underwriters in connection with this offering, are the only sales load being paid in connection with this offering. |
(2) | Amount reflects estimated offering expenses of approximately $ and an offering size of $ . |
(3) | The expenses of the dividend reinvestment plan are included in other expenses. See Dividend Reinvestment Plan. |
(4) | Base management fees will be paid quarterly in arrears. For the first calendar quarter (or portion thereof) of our operations as a BDC, the base management fee will be calculated based on the initial value of our total assets (excluding cash and cash equivalents) as of a date as close as practicable to the Conversion. Beginning with our second calendar quarter of operations as a BDC, the base management fee will be calculated based on the value of our total assets (excluding cash and cash equivalents) at the end of the most recently completed calendar quarter. The percentage shown in the table is calculated by determining the ratio that the aggregate base management fee bears to our net assets attributable to common stock. Because the base management fee is based on our consolidated total assets, when we use leverage to increase our total assets, the base management fee as a percentage of net assets attributable to common stock increases. The base management fee for any partial quarter will be appropriately pro rated. See The Advisor Investment Management Agreements. |
(5) | Under the investment management agreement and the Amended and Restated Limited Partnership Agreement, no incentive compensation will be incurred until after January 1, 2013. Upon commencement, the incentive compensation will have two components, ordinary income and capital gains. Each component will be payable quarterly in arrears (or upon termination of TCP as the investment manager or the General Partner as of the termination date) and will be calculated based on the cumulative return for periods beginning January 1, 2013 and ending on the relevant calculation date. |
Each of the two components of incentive compensation is separately subject to a total return limitation. Thus, notwithstanding the following provisions, we will not be obligated to pay or distribute any ordinary income incentive compensation or any capital gains incentive compensation if our cumulative total return does not exceed an 8% annual return on daily weighted average contributed common equity. The incentive compensation we would pay under the new arrangements will be subject to a total return limitation. That is, no incentive compensation will be paid if our cumulative annual total return is less
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than 8% of our average contributed common equity. If our cumulative annual total return is above 8%, the total cumulative incentive compensation we pay will not be more than 20% of our cumulative total return, or, if lower, the amount of our cumulative total return that exceeds the 8% annual rate.
Subject to the above limitation, the ordinary income component will be the amount, if positive, equal to 20% of the cumulative ordinary income before incentive compensation, less cumulative ordinary income incentive compensation previously paid or distributed.
Subject to the above limitation, the capital gains component will be the amount, if positive, equal to 20% of the cumulative realized capital gains (computed net of cumulative realized losses and cumulative net unrealized capital depreciation), less cumulative capital gains incentive compensation previously paid or distributed. For assets held on January 1, 2013, capital gain, loss and depreciation will be measured on an asset by asset basis against the value thereof as of December 31, 2012. The capital gains component will be paid or distributed in full prior to payment or distribution of the ordinary income component.
(6) | Interest Payments on Borrowed Funds represents dividends, interest and fees estimated to be accrued on the Revolving Facility and amortization of debt issuance costs, and assumes the Revolving Facility is fully drawn (subject to asset coverage limitations under the 1940 Act) and that the interest rate on the debt issued under the Revolving Facility is the rate in effect as of March 31, 2010. |
(7) | Preferred Dividends represents dividends estimated to be accrued on the Preferred Interests and assumes that the dividend rate on the Preferred Interests is the rate in effect as of March 31, 2011. |
(8) | Other Expenses includes our estimated overhead expenses, including expenses of the Advisor reimbursable under the investment management agreement and of the Administrator reimbursable under the administration agreement except for certain administration overhead costs which are not currently contemplated to be charged to us. Such expense estimate, other than the Administrator expenses, is based on actual other expenses for the year-ended December 31, 2010, plus an estimate of additional other expenses we expect to incur as a company with common stock listed on a national securities market following completion of this offering. |
The following example demonstrates the projected dollar amount of total cumulative expenses (including stockholder transaction expenses and annual expenses) that would be incurred over various periods with respect to a hypothetical investment in our common stock. In calculating the following expense amounts, we have assumed that we have no indebtedness and our annual operating expenses remain at the levels set forth in the table above.
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1 Year | 3 Years | 5 Years | 10 Years | |||||||||||||
You would pay the following expenses on a $1,000 investment, assuming a 5% annual return | $ | $ | $ | $ |
While the example assumes, as required by the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. There will be no incentive compensation under our investment management agreement and the Amended and Restated Limited Partnership Agreement assuming a 5% annual return and therefore it is not included in the example. If we achieve sufficient returns on our investments, including through the realization of capital gains, to trigger an incentive compensation of a material amount, our distributions to our common stockholders and our expenses would likely be higher. In addition, while the example assumes reinvestment of all dividends and distributions at net asset value, participants in our dividend reinvestment plan will receive a number of shares of our common stock, determined by dividing the total dollar amount of the dividend or distribution payable to a participant by the market price per share of our common stock at the close of trading on the valuation date for the dividend. See Dividend Reinvestment Plan for additional information regarding our dividend reinvestment plan.
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The selected consolidated financial and other data below reflects the consolidated historical operations of the Holding Company and the Operating Company. This consolidated financial and other data is the Holding Companys historical financial and other data. The Operating Company will continue to be the Holding Companys sole investment following the completion of this offering.
Financial information below for the years ended December 31, 2010, 2009, 2008, 2007 and 2006 has been derived from the consolidated financial statements that were audited by our independent registered public accounting firm. The selected consolidated financial data at and for the three months ended March 31, 2011 and 2010 have been derived from unaudited financial data, but in the opinion of our management, reflects all adjustments (consisting only of normal recurring adjustments) that are necessary to present fairly the results for such interim periods. Interim results at and for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. This selected financial data should be read in conjunction with our financial statements and related notes thereto and Managements Discussion and Analysis of Financial Condition and Results of Operations and Senior Securities included elsewhere in this prospectus.
The historical and future financial information may not be representative of the Companys financial information in future periods.
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For the Three Months Ended March 31, |
For the Year Ended December 31, | |||||||||||||||||||||||||||
2011 | 2010 | 2010 | 2009 | 2008 | 2007 | 2006 (commenced operations on July 16) |
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Performance Data: |
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Interest income | $ | 10,653,781 | $ | 6,032,965 | $ | 32,410,819 | $ | 26,678,140 | $ | 34,719,010 | $ | 59,657,948 | $ | 28,433,717 | ||||||||||||||
Dividend income | 6,629,899 | 1,845,028 | 13,547,924 | | 2,250,032 | 14,811,181 | | |||||||||||||||||||||
Other income | 703,698 | 404,262 | 1,842,469 | 417,533 | 238,994 | 15,596,152 | 796,634 | |||||||||||||||||||||
Total investment income | 17,987,378 | 8,282,255 | 47,801,212 | 27,095,673 | 37,208,036 | 90,065,281 | 29,230,351 | |||||||||||||||||||||
Interest and credit agreement expenses | 244,748 | 206,564 | 893,806 | 949,554 | 5,314,342 | 10,070,501 | 4,362,240 | |||||||||||||||||||||
Investment advisory expense | 1,696,797 | 1,696,797 | 6,787,188 | 6,787,188 | 8,287,188 | 8,287,188 | 3,452,995 | |||||||||||||||||||||
Other expenses | 288,320 | 358,346 | 1,213,685 | 1,426,099 | 1,086,533 | 1,934,956 | 1,247,508 | |||||||||||||||||||||
Total expenses | 2,229,865 | 2,261,707 | 8,894,679 | 9,162,841 | 14,688,063 | 20,292,645 | 9,062,743 | |||||||||||||||||||||
Net investment income | 15,757,513 | 6,020,548 | 38,906,533 | 17,932,832 | 22,519,973 | 69,772,636 | 20,167,608 | |||||||||||||||||||||
Realized and unrealized gains (losses) | (6,327,388 | ) | 6,173,309 | 31,621,019 | 36,142,346 | (209,274,336 | ) | (12,036,911 | ) | 26,088,629 | ||||||||||||||||||
Dividends to preferred interest holders | (373,612 | ) | (355,835 | ) | (1,519,759 | ) | (1,740,964 | ) | (5,190,988 | ) | (8,217,040 | ) | (3,505,754 | ) | ||||||||||||||
Minority Interest | | | | | 3,149,915 | (10,013,581 | ) | (8,573,351 | ) | |||||||||||||||||||
Net increase in net assets from operations | $ | 9,056,513 | $ | 11,838,022 | $ | 69,007,793 | $ | 52,334,214 | $ | (188,795,436 | ) | $ | 39,505,104 | $ | 34,177,132 | |||||||||||||
Per Share Data (at the end of the period): |
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Net increase in net assets from operations | $ | 21.62 | $ | 28.26 | $ | 164.72 | $ | 124.92 | $ | (450.63 | ) | $ | 94.29 | $ | 81.58 | |||||||||||||
Distributions declared per share | (17.90 | ) | (7.16 | ) | (89.99 | ) | (36.28 | ) | (19.10 | ) | (193.47 | ) | (45.45 | ) | ||||||||||||||
Average weighted shares outstanding for the period | 418,956 | 418,956 | 418,956 | 418,956 | 418,956 | 418,956 | 418,956 |
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For the Three Months Ended March 31, |
For the Year Ended December 31, | |||||||||||||||||||||||||||
Assets and Liabilities Data: |
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Investments | $ | 427,330,852 | $ | 392,141,486 | $ | 453,034,872 | $ | 343,062,967 | $ | 348,504,225 | $ | 638,410,205 | $ | 654,631,534 | ||||||||||||||
Other assets | 22,389,713 | 80,208,597 | 20,604,286 | 119,642,507 | 19,677,567 | 124,167,393 | 217,784,948 | |||||||||||||||||||||
Total assets | 449,720,565 | 472,350,083 | 473,639,158 | 462,705,474 | 368,181,792 | 762,577,598 | 872,416,482 | |||||||||||||||||||||
Amount drawn on credit facility |
39,000,000 | 72,000,000 | 50,000,000 | 75,000,000 | 34,000,000 | 207,000,000 | 266,000,000 | |||||||||||||||||||||
Other liabilities | 10,581,400 | 24,252,924 | 25,050,178 | 20,431,955 | 3,239,231 | 23,922,294 | 22,635,770 | |||||||||||||||||||||
Total liabilities | 49,581,400 | 96,252,924 | 75,050,178 | 95,431,955 | 37,239,231 | 230,922,294 | 288,635,770 | |||||||||||||||||||||
Preferred stock | 23,991 | 23,980 | 23,527 | 25,391 | 23,516 | 26,173 | 24,267 | |||||||||||||||||||||
Preferred limited partnership interest | 134,371,077 | 134,355,366 | 134,377,869 | 134,368,337 | 135,173,468 | 135,938,203 | 136,087,202 | |||||||||||||||||||||
Minority Interest | | | | | | 3,149,915 | 13,576,334 | |||||||||||||||||||||
Net assets | $ | 265,744,097 | $ | 241,717,813 | $ | 264,187,584 | $ | 232,879,791 | $ | 195,745,577 | $ | 392,541,013 | $ | 434,092,909 | ||||||||||||||
Investment Activity Data: |
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No. of portfolio companies at period end | 44 | 43 | 44 | 40 | 27 | 32 | 18 | |||||||||||||||||||||
Acquisitions | $ | 37,014,532 | $ | 86,177,640 | $ | 262,837,727 | $ | 144,313,178 | $ | 169,262,403 | $ | 432,268,238 | $ | 112,339,174 | ||||||||||||||
Sales, repayments, and other disposals | $ | 60,412,775 | $ | 43,357,229 | $ | 192,419,667 | $ | 195,383,341 | $ | 257,415,641 | $ | 467,261,652 | $ | 147,892,017 | ||||||||||||||
Weighted-Average Yield at end of period | 12.0 | % | 12.8 | % | 13.1 | % | 12.5 | % | 18.5 | % | 14.6 | % | 13.4 | % |
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Before you invest in our common stock, you should be aware of various risks, including those described below. You should carefully consider these risk factors, together with all of the other information included in this prospectus, including our consolidated financial statements and the related notes thereto, before you decide whether to make an investment in our common stock. The risks set out below are not the only risks we face, but they are the principal risks associated with an investment in the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. If any of the following events occur, our business, financial condition and results of operations could be materially adversely affected. In such case, our net asset value and the trading price of our common stock could decline, and you may lose all or part of your investment.
We believe that beginning in 2007, and continuing through 2010, the global capital markets were in a period of disruption as evidenced by a lack of liquidity in the debt capital markets, significant write-offs in the financial services sector, the re-pricing of credit risk in the broadly syndicated credit market and the failure of certain major financial institutions. Despite actions of the United States federal government and foreign governments, these events contributed to worsening general economic conditions that materially and adversely impacted the broader financial and credit markets and reduced the availability of debt and equity capital for the market as a whole and financial services firms in particular. These conditions have ameliorated to some degree in past months but could continue for a prolonged period of time or worsen in the future. While these conditions persist, we and other companies in the financial services sector may be required to, or may choose to, seek access to alternative markets for debt and equity capital. Equity capital may be difficult to raise because, subject to some limited exceptions, as a BDC we are not generally able to issue and sell our common stock at a price below net asset value per share without first obtaining approval for such issuance from our stockholders and independent directors. In addition, the debt capital that will be available, if at all, may be at a higher cost, and on less favorable terms and conditions in the future. In addition, the portfolio companies in which we will invest may not be able to service or refinance their debt, which could materially and adversely affect our financial condition as we could experience reduced income or even losses. The inability to raise capital and the risk of portfolio company defaults may have a negative effect on our business, financial condition and results of operations.
Moreover, recent market conditions have made, and may in the future make, it difficult to extend the maturity of or refinance our existing indebtedness and any failure to do so could have a material adverse effect on our business. The illiquidity of our investments may make it difficult for us to sell such investments if required. As a result, we may realize significantly less than the value at which we have recorded our investments.
Capital markets volatility also affects our investment valuations. While most of our investments are not publicly traded, applicable accounting standards require us to assume as part of our valuation process that our investments are sold in a principal market to market participants (even if we plan on holding an investment through its maturity). As a result, volatility in the capital markets can adversely affect our valuations.
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We may not be able to replicate the Companys historical performance or the historical performance of TCPs investments, and our investment returns may be substantially lower than the returns achieved by the Company in the past. We can offer no assurance that TCP will be able to continue to implement our investment objective with the same degree of success as it has had in the past. At March 31, 2011, equity investments represented approximately 26% of the total fair value of our existing investment portfolio. Following completion of this offering, we expect that equity securities will be a smaller percentage of our portfolio, which may affect our ability to replicate past performance. In addition, Babson historically served as our co-advisor and has been responsible for assisting the Advisor in making investment decisions. Prior to the completion of this offering, Babson will cease serving as a co-advisor, which may affect our ability to replicate our past performance. Investors in the Company are not acquiring an interest in other TCP managed funds.
Investment in middle-market companies is highly speculative and involves a high degree of risk of credit loss, and therefore our securities may not be suitable for someone with a low tolerance for risk. These risks are likely to increase during an economic recession, such as the U.S. and many other economies recently experienced.
The Operating Company borrows money and has the Preferred Interests outstanding through the Leverage Program. As a result:
| our common stock is exposed to incremental risk of loss and a decrease in the value of our investments would have a greater negative impact on the value of our common stock than if we did not use leverage; |
| adverse changes in interest rates could reduce or eliminate the incremental income we make with the proceeds of any leverage; |
| we, and indirectly our common stockholders, bear the entire cost of issuing and paying interest or dividends on any senior securities issued by us or the Operating Company; |
| our ability to pay dividends on our common stock will be restricted if our asset coverage ratio is not at least 200% and any amounts used to service indebtedness or preferred stock would not be available for such dividends; and |
| our ability to amend the Operating Company organizational documents or investment management agreement may be restricted if such amendment could have a material adverse impact on the lenders under our Leverage Program. |
The Preferred Interests have similar risks to our common stockholders as borrowings. The Preferred Interests rank senior to common stock in our capital structure, resulting in the Preferred Interests having certain separate voting rights, dividend and liquidation rights, and possibly other rights, preferences or privileges more favorable than those granted to holders of our common stock. For example, payment of dividends and repayment of the liquidation preference of the Preferred Interests takes preference over any dividends or other payments to our common stockholders, and preferred holders are not subject to any of our expenses or losses. Furthermore, our Preferred Interests and the issuance of any additional preferred securities could delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stockholders or otherwise be in your best interest.
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The use of leverage creates increased risk of loss and is considered a speculative investment technique. The use of leverage magnifies the potential gains and losses from an investment and increases the risk of loss of capital. To the extent that income derived by us from investments purchased with borrowed funds or the issuances of preferred stock is greater than the cost of borrowing or issuing and servicing the preferred stock, our net income will be greater than if borrowing had not been used. Conversely, if the income from investments purchased from these sources is not sufficient to cover the cost of the leverage, our net investment income will be less than if leverage had not been used, and the amount available for ultimate distribution to the holders of common stock will be reduced. The extent to which the gains and losses associated with leveraged investing are increased will generally depend on the degree of leverage employed. We may, under some circumstances, be required to dispose of investments under unfavorable market conditions in order to maintain our leverage, thus causing us to recognize a loss that might not otherwise have occurred. In the event of a sale of investments upon default under our borrowing arrangements, secured creditors will be contractually entitled to direct such sales and may be expected to do so in their interest, rather than in the interests of the holders of common stock. Holders of common stock will incur losses if the proceeds from a sale in any of the foregoing circumstances are insufficient, after payment in full of amounts due and payable on leverage, including administrative expenses, to repay such holders investments in our common stock. As a result, you could experience a total loss of your investment. Any decrease in our revenue would cause our net income to decline more than it would have had we not borrowed funds and could negatively affect our ability to make distributions on our common stock. The ability to service any debt or the Preferred Interests that we have or may have outstanding depends largely on our financial performance and is subject to prevailing economic conditions and competitive pressures. The amount of leverage that we employ at any particular time will depend on our Advisors and our board of directors assessments of market and other factors at the time of any proposed borrowing.
Under the Leverage Program, we must comply with certain financial and operational covenants. These covenants include:
| restrictions on the level of indebtedness that we are permitted to incur and the number of Preferred Interests we are permitted to have outstanding in relation to the value of our assets; |
| restrictions on our ability to make distributions and other restricted payments under certain circumstances; |
| restrictions on extraordinary events, such as mergers, consolidation and sales of assets; |
| restrictions on our ability to incur liens and incur indebtedness; and |
| maintenance of a minimum level of stockholders equity. |
In addition, by limiting the circumstances in which borrowings may occur under the Revolving Facility, the credit agreement related to the Revolving Facility, or the Credit Agreement, in effect provides for various asset coverage, credit quality and diversification limitations on our investments. Such limitations may cause us to be unable to make or retain certain potentially attractive investments or to be forced to sell investments at an inappropriate time and consequently impair our profitability or increase losses or result in adverse tax consequences. As of March 31, 2011, we were in compliance with these covenants. However our continued compliance with these covenants depends on many factors, some of which are beyond our control. Accordingly, there are no assurances that we will continue to comply with the covenants in the Credit Agreement. Failure to comply with these covenants would result in a default under the Credit Agreement which, if we were unable to obtain a waiver from the lenders thereunder, could result in an acceleration of repayments under the Credit Agreement. In addition, a default under the Credit Agreement will, in certain circumstances, require the Preferred Interests to be redeemed. As such, failure to comply with these covenants could have a material adverse impact on our business, financial condition and results of operations.
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The Revolving Facility also has certain key man provisions. For example, it is an event of default if any of Michael E. Tennenbaum, Howard M. Levkowitz or Mark K. Holdsworth ceases to be actively involved in the management of the Advisor and is not replaced with someone with comparable skills within 180 days. Further, if any two of the individuals cease to be actively involved in management of the Advisor, the administrative agent under the Credit Agreement may veto a proposed replacement for one of such individuals and may veto any of the Operating Companys portfolio transactions that are in excess of 15% of its total assets until a replacement has been appointed to fill one of such positions.
The Revolving Facility matures July 31, 2014, subject to extension by the lenders at our request for one 12-month period. Advances under the Revolving Facility generally bear interest at LIBOR plus 0.375%, subject to certain limitations. The Preferred Interests will be subject to mandatory redemption on July 31, 2016. We do not currently know whether we will renew, extend or replace the Revolving Facility upon its maturity or replace the Preferred Interests, or if we do either or both, whether we will be able to do so on terms that are as favorable as the Revolving Facility or Preferred Interests, respectively.
Upon the termination of the Revolving Facility, there can be no assurance that we will be able to enter into a replacement facility on terms that are favorable to us, if at all. We expect that any facility we enter into will likely be on terms less favorable than currently contained in the Revolving Facility. Our ability to replace the Revolving Facility may be constrained by then-current economic conditions affecting the credit markets. In the event that we are not able to replace the Revolving Facility at the time of its maturity, this could have a material adverse effect on our liquidity and ability to fund new investments, our ability to make distributions to our stockholders and our ability to qualify as a RIC.
Lenders have fixed dollar claims on our assets that are superior to the claims of our common stockholders or any preferred holders. A substantial portion of our current assets have been pledged as collateral under the Revolving Facility. If an event of default occurs under the Revolving Facility, the lenders would be permitted to accelerate amounts due under the Revolving Facility and liquidate our assets to pay off amounts owed under the Revolving Facility and limitations would be imposed on us with respect to the purchase or sale of investments. Such limitations may cause us to be unable to make or retain certain potentially attractive investments or to be forced to sell investments at an inappropriate time and consequently impair our profitability or increase our losses or result in adverse tax consequences.
In the event of the dissolution of the Operating Company or otherwise, if the proceeds of the Operating Companys assets (after payment in full of obligations to any such debtors and of any liquidation preference to any holders of preferred stock) are insufficient to repay capital invested in us by the holders of the common stock, no other assets will be available for the payment of any deficiency. None of our board of directors, TCP, the General Partner or any of their respective affiliates, have any liability for the repayment of capital contributions made to the Company by the holders of common stock. Holders of common stock could experience a total loss of their investment in the Company.
The Company has indebtedness and the Preferred Interests outstanding pursuant to the Leverage Program and expects, in the future, to borrow additional amounts under the Revolving Facility and may increase the size of the Revolving Facility or enter into other borrowing arrangements.
Illustration. The following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns, net of expenses and preferred dividends. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing below. The calculation is based on our level of leverage at March 31, 2011, which represented borrowings and preferred
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stock equal to 38.5% of our total assets. On such date, we also had $449.7 million in total assets; an average cost of funds of 0.91%; $173.0 million aggregate principal amount of debt and liquidation preference of the Preferred Interests outstanding; and $265.7 million of total net assets. In order to compute the Corresponding Return to Common Stockholders, the Assumed Return on Portfolio (Net of Expenses Other than Interest) is multiplied by the total value of our investment portfolio at March 31, 2011 to obtain an assumed return to us. From this amount, the interest expense and preferred dividends calculated by multiplying the interest rate and dividends of 0.91% by the $173.0 million debt and preferred stock is subtracted to determine the return available to stockholders. The return available to stockholders is then divided by the total value of our net assets at March 31, 2011 to determine the Corresponding Return to Common Stockholders. Actual interest payments and preferred dividends may be different.
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Assumed Return on Portfolio (Net of Expenses Other than Interest and Preferred Dividends) |
-10% | -5% | 0% | 5% | 10% | |||||||||||||||
Corresponding Return to Common Stockholders | -17% | -9% | -1% | 7% | 15% |
The assumed portfolio return in the table is based on SEC regulations and is not a prediction of, and does not represent, our projected or actual performance. The table also assumes that we will maintain a constant level of leverage. The amount of leverage that we use will vary from time to time.
Our investments generally are made and will continue to be made in private companies. Substantially all of these securities will be subject to legal and other restrictions on resale or will be otherwise less liquid than publicly traded securities. The illiquidity of our investments may make it difficult for us to sell such investments if the need arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recorded our investments. Further, we may face other restrictions on our ability to liquidate an investment in a portfolio company to the extent that we or an affiliated manager has material non-public information regarding such portfolio company.
The debt and equity investments that we make for which market quotations are not readily available will be valued at fair value as determined in good faith by or under the direction of our board of directors. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material. Our net asset value could be adversely affected if determinations regarding the fair value of these investments were materially higher than the values ultimately realized upon the disposal of such investments.
General interest rate fluctuations may have a substantial negative impact on our investments, the value of our common stock and our rate of return on invested capital. A reduction in the interest rates on new investments relative to interest rates on current investments could also have an adverse impact on our net investment income. An increase in interest rates could decrease the value of any investments we hold that earn fixed interest rates, including subordinated loans, senior and junior secured and unsecured debt securities and loans and high-yield bonds, and also could increase our interest expense, thereby decreasing our net income. Also, an increase in interest rates available to investors could make investment in our common stock less attractive if we are not able to increase our dividend rate, which could reduce the value of our common stock.
Our ability to achieve our investment objective will depend on our ability to manage our business, which will depend, in turn, on the ability of TCP to identify, invest in and monitor companies that meet our investment criteria. Accomplishing this result largely will be a function of TCPs investment process. In
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addition, although TCP manages closed-end funds with similar restrictions, the 1940 Act imposes numerous constraints on the operations of BDCs. TCPs lack of experience in operating under these constraints may hinder TCPs ability to help us take advantage of attractive investment opportunities and to achieve our investment objectives. For example, BDCs are prohibited from making any nonqualifying investment unless at least 70% of their total assets are primarily in qualifying investments, which are primarily securities of private or thinly-traded U.S. companies (excluding certain financial companies), cash, cash equivalents, U.S. Government securities and other high quality debt investments that mature in one year or less. TCP does not have experience investing under these constraints.
TCP and its affiliates, employees and associates currently do and in the future may manage other funds and accounts, including for other accounts in which certain holders of our common stock have investments, which we refer to as Other Advisor Accounts. Other Advisor Accounts invest in assets that are also eligible for purchase by us. Our investment policies, fee arrangements and other circumstances may vary from those of Other Advisor Accounts. Accordingly, conflicts may arise regarding the allocation of investments or opportunities among us and Other Advisor Accounts. In general, TCP and its affiliates will allocate investment opportunities pro rata among us and Other Advisor Accounts (assuming the investment satisfies the objectives of each) based on the amount of committed capital each then has available. The allocation of certain investment opportunities in private placements is subject to independent director approval pursuant to the terms of the co-investment exemptive order applicable to us and described below. In certain cases, investment opportunities may be made other than on a pro rata basis. For example, we may desire to retain an asset at the same time that one or more Other Advisor Accounts desire to sell it or we may not have additional capital to invest at a time Other Advisor Accounts do. When our investment allocations are made on a basis other than pro rata our investment performance may be less favorable when compared to the investment performance of Other Advisor Accounts with respect to those investments. TCP intends to allocate investment opportunities to us and Other Advisor Accounts in a manner that they believe in their judgment and based upon their fiduciary duties to be appropriate given the investment objectives, size of transaction, investable assets, alternative investments potentially available, prior allocations, liquidity, maturity, expected holding period, diversification, lender covenants and other limitations of ours and the Other Advisor Accounts. See Risks related to our operations as a BDC While our ability to enter into transactions with our affiliates will be restricted under the 1940 Act, we have received an exemptive order from the SEC permitting certain affiliated investments subject to certain conditions. As a result, we may face conflict of interests and investments made pursuant to the exemptive order conditions could in certain circumstances affect adversely the price paid or received by the Company or the availability or size of the position purchased or sold by the Company.
Moreover, TCPs investment professionals, its Investment Committee (as defined below), its senior management and employees serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business. Accordingly, these individuals may have obligations to investors in those entities or funds, the fulfillment of which might not be in our best interests or the best interests of our stockholders. In addition, certain of the personnel employed by TCP or focused on our business may change in ways that are detrimental to our business.
TCP and its affiliates may spend substantial time on other business activities, including investment management and advisory activities for entities with the same or overlapping investment objectives, investing for their own account, financial advisory services (including services for entities in which we invest), and acting as directors, officers, creditor committee members or in similar capacities. Subject to the requirements of the 1940 Act and other applicable laws, TCP and its affiliates and associates intend to engage in such activities and may receive compensation from third parties for their services. Subject to the same requirements, such compensation may be payable by entities in which we invest in connection with actual or contemplated investments, and TCP may receive fees and other compensation in connection with structuring investments which they will share.
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The incentive compensation payable by us to TCP and the General Partner may create an incentive for TCP to make investments on our behalf that are risky or more speculative than would be the case in the absence of such compensation arrangement. The way in which the incentive compensation payable to TCP is determined may encourage TCP to increase the use of leverage or take additional risk to increase the return on our investments. Under certain circumstances, the use of leverage may increase the likelihood of default, which would disfavor the holders of our common stock, including investors in this offering, or of securities convertible into our common stock or warrants representing rights to purchase our common stock or securities convertible into our common stock. A rise in the general level of interest rates can be expected to lead to higher interest rates applicable to certain of our debt investments and may accordingly result in a substantial increase in the amount of incentive compensation payable to the Advisor with respect to our cumulative investment income. Although the incentive compensation payable to the General Partner or TCP is subject to a total return limitation, TCP may have some ability to accelerate the realization of gains to obtain incentive compensation earlier than it otherwise would when it may be in our best interests to not yet realize gains. Our directors will monitor our use of leverage and TCPs management of our investment program in the interests of our common stockholders.
We may invest, to the extent permitted by law, in the securities and instruments of other investment companies, including private funds, and, to the extent we so invest, we will bear our ratable share of any such investment companys expenses, including management and performance fees. We will also remain obligated to pay management and incentive compensation to TCP with respect to the assets invested in the securities and instruments of other investment companies. With respect to each of these investments, each of our common stockholders will bear his or her share of our management and incentive compensation as well as indirectly bear the management and performance fees and other expenses of any investment companies in which we invest.
TCP or the General Partner will be entitled to incentive compensation for each fiscal quarter after January 1, 2013 in an amount equal to a percentage of our ordinary income (before deducting incentive compensation) since that date and, separately, a percentage of our realized capital gains (net of realized capital losses and unrealized depreciation) since that date, in each case subject to a cumulative total return requirement. If we pay incentive compensation and thereafter experience additional realized capital losses or unrealized capital depreciation such that we would no longer have been required to provide incentive compensation, we will not be able to recover any portion of the incentive compensation previously paid or distributed because our incentive compensation arrangements do not contain any clawback provisions. As a result, the incentive compensation could exceed 20% of our cumulative total return, depending on the timing of unrealized appreciation, net unrealized depreciation and net realized capital losses. For example, part of the incentive compensation payable or distributable by us that relates to our ordinary income is computed on income that may include interest that has been accrued but not yet received in cash. If a portfolio company defaults on a loan, it is possible that accrued interest previously used in the calculation of the incentive compensation will become uncollectible. Similarly, the income component is measured against a total return limitation that includes unrealized gains. Such gains may not be realized or may be realized at a lower amount. Consequently, we may have paid incentive compensation on income in circumstances where we otherwise would not have done so and with respect to which we do not have a clawback right against the Advisor or the General Partner.
The General Partner, an affiliate of our Advisor, is responsible for the day-to-day operations of the Operating Company subject to the general supervision of the board of directors including various significant matters such as the issuance of additional classes of securities of the Operating Company and the determination of the timing and amounts of distributions payable by the Operating Company. The decisions of
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the General Partner with respect to these and other matters may be subject to various conflicts of interest arising out of its relationship with us and its affiliates. The General Partner could be confronted with decisions where it will, directly or indirectly, have an economic incentive to place its interests or the interests of its affiliates above ours.
The procedures for the appointment and removal of directors from the board of directors of the Operating Company differ from those of the Holding Company, which may result in the boards of directors of the Operating Company and the Holding Company consisting of different members. If the boards of directors of the Operating Company and the Holding Company consist of different members, the objectives of the board of directors may differ and decisions regarding the management of the Operating Company may adversely affect the Holding Company.
The success of the Company will be highly dependent on the financial and managerial expertise of TCP. The loss of one or more of the voting members of the Investment Committee could have a material adverse effect on the performance of the Company. Although TCP and the voting members of the Investment Committee will devote a significant amount of their respective efforts to the Company, they actively manage investments for other clients and are not required to (and will not) devote all of their time to the Companys affairs.
The Advisors investment professionals, Investment Committee or their respective affiliates may serve as directors of, or in a similar capacity with, companies in which we invest. In the event that material non-public information is obtained with respect to such companies, or we became subject to trading restrictions under the internal trading policies of those companies or as a result of applicable law or regulations, we could be prohibited for a period of time from purchasing or selling the securities of such companies, and this prohibition may have an adverse effect on us and, consequently, your interests as a stockholder.
Our Advisor has the right, under our investment management agreement, to resign at any time upon not more than 60 days written notice, whether we have found a replacement or not. If our Advisor resigns, we may not be able to find a new investment advisor or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 60 days, or at all. If we are unable to do so quickly, our operations are likely to experience a disruption, our financial condition, business and results of operations as well as our ability to pay distributions are likely to be adversely affected and the market price of our shares may decline. In addition, the coordination of our internal management and investment activities is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed by our Advisor and its affiliates. Even if we are able to retain comparable management, whether internal or external, the integration of such management and their lack of familiarity with our investment objective may result in additional costs and time delays that may adversely affect our financial condition, business and results of operations.
We could experience fluctuations in our periodic operating results due to a number of factors, including the interest rates payable on the debt securities we acquire, the default rate on such securities, the level of our expenses (including the interest rates payable on our borrowings), the dividend rates payable on preferred
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stock we issue, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.
We will qualify as business development companies under the 1940 Act prior to the completion of this offering. The 1940 Act imposes numerous constraints on the operations of business development companies. For example, BDCs are prohibited from making any unqualifying investments unless at least 70% of their total assets are invested in qualifying investments which are primarily securities of private or thinly-traded U.S. companies, cash, cash equivalents, U.S. government securities and other high quality debt investments that mature in one year or less. Failure to comply with the requirements imposed on business development companies by the 1940 Act could cause the SEC to bring an enforcement action against us and/or expose us to claims of private litigants. Failure to qualify as a BDC would also mean that we would continue to be regulated as a closed-end investment company under the 1940 Act, which subjects us to a different, and in some cases more restrictive, regulatory regime under the 1940 Act and would correspondingly decrease our operating flexibility and could increase our costs of doing business. In addition, any such failure could cause an event of default under the Leverage Program, which could have a materially adverse effect on our business, financial conditions or results of operations. See Regulation.
In order for the Company to qualify for the tax benefits available to RICs and to avoid payment of excise taxes, we intend to distribute to our stockholders substantially all of our annual taxable income, except that we may retain certain net capital gains for reinvestment in common interests of the Operating Company, and treat such amounts as deemed distributions to its stockholders. If we elect to treat any amounts as deemed distributions, we must pay income taxes at the corporate rate on such deemed distributions on behalf of our stockholders and our stockholders will receive a tax credit for such amounts and an increase in basis. A stockholder that is not subject to U.S. federal income tax or otherwise is not required to file a U.S. federal income tax return would be required to file a U.S. federal income tax return on the appropriate form in order to claim a refund for the taxes we paid. As a result of these requirements, we will likely need to raise capital from other sources to grow our business. Unfavorable economic or capital market conditions may increase our funding costs, limit our access to the capital markets or could result in a decision by lenders not to extend credit to us. An inability to successfully access the capital markets could limit our ability to grow our business and fully execute our business strategy and could decrease our earnings, if any.
As a BDC, we will not be able to incur senior securities unless after giving effect thereto we meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities, to total senior securities, which includes all of our borrowings and any outstanding preferred interests, of at least 200%. These requirements limit the amount that we may borrow. Because we will continue to need capital to grow our investment portfolio, these limitations may prevent us from incurring debt and require us to raise additional equity at a time when it may be disadvantageous to do so. While we expect we will be able to borrow and to issue additional debt securities and expect that we will be able to issue additional equity securities, we cannot assure you that debt and equity financing will be available to us on favorable terms, or at all. In addition, as a business development company, we generally will not be permitted to issue equity securities priced below net asset value without stockholder approval. If additional funds are not available to us, we could be forced to curtail or cease new investment activities and our net asset value or common stock price could decline.
A number of entities compete with us to make the types of investments that we make. We compete with other BDCs, public and private funds, commercial and investment banks, commercial financing companies, and, to the extent they provide an alternative form of financing, private equity funds. Additionally, because
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competition for investment opportunities generally has increased among alternative investment vehicles, such as hedge funds, those entities now invest in areas in which they have not traditionally invested. As a result of these new entrants, competition for investment opportunities intensified in recent years and may intensify further in the future. Some of our existing and potential competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions and valuation requirements that the 1940 Act imposes on us as a BDC. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this existing and potentially increasing competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we can offer no assurance that we will be able to identify and make investments that are consistent with our investment objective.
We do not seek to compete primarily based on the interest rates we offer, and we believe that some of our competitors make loans with interest rates that are comparable to or lower than the rates we offer.
We may lose investment opportunities if we do not match our competitors pricing, terms and structure. If we match our competitors pricing, terms and structure, we may experience decreased net interest income and increased risk of credit loss. As a result of operating in such a competitive environment, we may make investments that are on better terms to our portfolio companies than what we may have originally anticipated, which may impact our return on these investments.
Our board of directors has the authority to modify or waive our operating policies and strategies without prior notice and without stockholder approval. We cannot predict the effect any changes to our current operating policies and strategies would have on our business, operating results or value of our stock. Nevertheless, the effects could adversely affect our business and impact our ability to make distributions and cause you to lose all or part of your investment.
We currently anticipate that a portion of the net proceeds of this offering will be invested in accordance with our investment objective within six to twelve months following completion of our initial public offering. We cannot assure you, however, that we will be able to locate a sufficient number of suitable investment opportunities to allow us to successfully deploy in that timeframe that portion of net proceeds of this offering. To the extent we are unable to invest within our contemplated timeframe after the completion of our initial public offering, our investment income, and in turn our results of operations, will likely be adversely affected.
We have not yet identified the potential investments for our portfolio that we will purchase following this offering. Our Advisor will select our investments subsequent to the closing of this offering, and our stockholders will have no input with respect to such investment decisions. These factors increase the uncertainty, and thus the risk, of investing in our common stock.
We invest mostly in middle-market companies primarily through leveraged loans.
Risks Associated with middle-market companies. Investing in private middle-market companies involves a number of significant risks, including:
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| these companies may have limited financial resources and may be unable to meet their obligations under their debt securities that we hold, which may be accompanied by a deterioration in the value of any collateral; |
| they typically have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors actions and market conditions, as well as general economic downturns; |
| they are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on the portfolio company and, in turn, on us; and |
| they generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position. |
Little public information exists about private middle-market companies, and we expect to rely on TCPs investment professionals to obtain adequate information to evaluate the potential returns from investing in these companies. These companies and their financial information are not subject to the Sarbanes-Oxley Act of 2002 and other rules that govern disclosures and financial controls of public companies. If we are unable to uncover all material information about these companies, we may not make a fully informed investment decision, and we may lose money on our investment.
Lower Credit Quality Obligations. Most of our debt investments are likely to be in lower grade obligations. The lower grade investments in which we invest may be rated below investment grade by one or more nationally-recognized statistical rating agencies at the time of investment or may be unrated but determined by the Advisor to be of comparable quality. Debt securities rated below investment grade are commonly referred to as junk bonds and are considered speculative with respect to the issuers capacity to pay interest and repay principal. The debt that we invest in typically is not initially rated by any rating agency, but we believe that if such investments were rated, they would be below investment grade (rated lower than Baa3 by Moodys Investors Service, lower than BBB- by Fitch Ratings or lower than BBB- by Standard & Poors). We may invest without limit in debt of any rating, as well as debt that has not been rated by any nationally recognized statistical rating organization.
Investment in lower grade investments involves a substantial risk of loss. Lower grade securities or comparable unrated securities are considered predominantly speculative with respect to the issuers ability to pay interest and principal and are susceptible to default or decline in market value due to adverse economic and business developments. The market values for lower grade debt tend to be very volatile and are less liquid than investment grade securities. For these reasons, your investment in our company is subject to the following specific risks:
| increased price sensitivity to a deteriorating economic environment; |
| greater risk of loss due to default or declining credit quality; |
| adverse company specific events are more likely to render the issuer unable to make interest and/or principal payments; and |
| if a negative perception of the lower grade debt market develops, the price and liquidity of lower grade securities may be depressed. This negative perception could last for a significant period of time. |
Adverse changes in economic conditions are more likely to lead to a weakened capacity of a lower grade issuer to make principal payments and interest payments than an investment grade issuer. The principal amount of lower grade securities outstanding has proliferated in the past decade as an increasing number of issuers have used lower grade securities for corporate financing. An economic downturn could severely affect the ability of highly leveraged issuers to service their debt obligations or to repay their obligations upon maturity. Similarly, downturns in profitability in specific industries could adversely affect the ability of lower
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grade issuers in that industry to meet their obligations. The market values of lower grade debt tend to reflect individual developments of the issuer to a greater extent than do higher quality investments, which react primarily to fluctuations in the general level of interest rates. Factors having an adverse impact on the market value of lower grade debt may have an adverse effect on our net asset value and the market value of our common stock. In addition, we may incur additional expenses to the extent we are required to seek recovery upon a default in payment of principal of or interest on our portfolio holdings. In certain circumstances, we may be required to foreclose on an issuers assets and take possession of its property or operations. In such circumstances, we would incur additional costs in disposing of such assets and potential liabilities from operating any business acquired.
The secondary market for lower grade debt is unlikely to be as liquid as the secondary market for more highly rated debt, a factor which may have an adverse effect on our ability to dispose of a particular instrument. There are fewer dealers in the market for lower grade securities than investment grade obligations. The prices quoted by different dealers may vary significantly and the spread between the bid and asked price is generally larger than for higher quality instruments. Under adverse market or economic conditions, the secondary market for lower grade debt could contract further, independent of any specific adverse changes in the condition of a particular issuer, and these instruments may become highly illiquid. As a result, we could find it more difficult to sell these instruments or may be able to sell the securities only at prices lower than if such instruments were widely traded. Prices realized upon the sale of such lower rated or unrated securities, under these circumstances, may be less than the prices used in calculating our net asset value.
Since investors generally perceive that there are greater risks associated with lower grade debt of the type in which we may invest a portion of our assets, the yields and prices of such debt may tend to fluctuate more than those for higher rated instruments. In the lower quality segments of the fixed income markets, changes in perceptions of issuers creditworthiness tend to occur more frequently and in a more pronounced manner than do changes in higher quality segments of the income securities market, resulting in greater yield and price volatility.
Distressed Debt Securities Risk. At times, distressed debt obligations may not produce income and may require us to bear certain extraordinary expenses (including legal, accounting, valuation and transaction expenses) in order to protect and recover our investment. Therefore, our ability to achieve current income for our stockholders may be diminished. We also will be subject to significant uncertainty as to when and in what manner and for what value the distressed debt we invest in will eventually be satisfied (e.g., through a liquidation of the obligors assets, an exchange offer or plan of reorganization involving the distressed debt securities or a payment of some amount in satisfaction of the obligation). In addition, even if an exchange offer is made or plan of reorganization is adopted with respect to distressed debt we hold, there can be no assurance that the securities or other assets received by us in connection with such exchange offer or plan of reorganization will not have a lower value or income potential than may have been anticipated when the investment was made. Moreover, any securities received by us upon completion of an exchange offer or plan of reorganization may be restricted as to resale. As a result of our participation in negotiations with respect to any exchange offer or plan of reorganization with respect to an issuer of distressed debt, we may be restricted from disposing of such securities.
Payment-in-kind Interest Risk. Our loans may contain a payment-in-kind, or PIK, interest provision. PIK investments carry additional risk as holders of these types of securities receive no cash until the cash payment date unless a portion of such securities is sold. If the issuer defaults the Company may obtain no return on its investment. The PIK interest, computed at the contractual rate specified in each loan agreement, is added to the principal balance of the loan and recorded as interest income. To avoid the imposition of corporate-level tax on us, this non-cash source of income needs to be paid out to stockholders in cash distributions or, in the event that we determine to do so and in certain cases, in shares of our common stock, even though we have not yet collected and may never collect the cash relating to the PIK interest. As a result, if we distribute taxable dividends in the form of our common stock, we may have to distribute a stock dividend to account for PIK interest even though we have not yet collected the cash.
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Preferred Stock Risk. To the extent we invest in preferred securities, there are special risks, including:
Deferral. Preferred securities may include provisions that permit the issuer, at its discretion, to defer distributions for a stated period without any adverse consequences to the issuer. If we own a preferred security that is deferring its distributions, we may be required to report income for tax purposes although we have not yet received such income.
Subordination. Preferred securities are subordinated to bonds and other debt instruments in a companys capital structure in terms of priority to corporate income and liquidation payments, and therefore will be subject to greater credit risk than more senior debt instruments.
Liquidity. Preferred securities may be substantially less liquid than many other securities, such as common stocks or U.S. Government securities.
Limited Voting Rights. Generally, preferred security holders have no voting rights with respect to the issuing company unless preferred dividends have been in arrears for a specified number of periods, at which time the preferred security holders may elect a number of directors to the issuers board. Generally, once all the arrearages have been paid, the preferred security holders no longer have voting rights.
Equity Security Risk. We may have exposure to equity securities. Although equity securities have historically generated higher average total returns than fixed-income securities over the long term, equity securities also have experienced significantly more volatility in those returns. The equity securities that we acquire may fail to appreciate and may decline in value or become worthless.
Hedging Transactions. We may employ hedging techniques to minimize currency exchange rate risks or interest rate risks, but we can offer no assurance that such strategies will be effective. If we engage in hedging transactions, we may expose ourselves to risks associated with such transactions. Hedging against a decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. Moreover, it may not be possible to hedge against an exchange rate or interest rate fluctuation that is so generally anticipated that we are not able to enter into a hedging transaction at an acceptable price. Additionally, engaging in certain hedging transactions could result in adverse tax consequences, e.g. giving rise to income that does not qualify for the 90% annual gross income requirement applicable to RICs.
The U.S. and most other economies were recently in a prolonged recessionary period. These conditions have ameliorated to some degree in past months but could continue for a prolonged period of time or worsen in the future. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing investments and harm our operating results.
A portfolio companys failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of its loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize our portfolio companys ability to meet its obligations under the debt securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company. In addition, if one of our portfolio companies were to go bankrupt, even though we or one of our affiliates may have structured our interest in such portfolio company as senior debt, depending on the facts and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might re-characterize our debt holding as equity and subordinate all or a portion of our claim to claims of other creditors.
We do not generally intend to take controlling equity positions in our portfolio companies. To the extent that we do not hold a controlling equity interest in a portfolio company, we are subject to the risk that such
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portfolio company may make business decisions with which we disagree, and the stockholders and management of such portfolio company may take risks or otherwise act in ways that are adverse to our interests. Due to the lack of liquidity for the debt and equity investments that we typically hold in our portfolio companies, we may not be able to dispose of our investments in the event we disagree with the actions of a portfolio company, and may therefore suffer a decrease in the value of our investments.
In addition, we may not be in a position to control any portfolio company by investing in its debt securities. As a result, we are subject to the risk that a portfolio company in which we invest may make business decisions with which we disagree and the management of such company, as representatives of the holders of their common equity, may take risks or otherwise act in ways that do not serve our interests as debt investors.
The portfolio companies we invest in usually have, or may be permitted to incur, other debt that ranks equally with, or senior to, the debt securities in which we invest. By their terms, such debt instruments may provide that the holders are entitled to receive payment of interest or principal on or before the dates on which we are entitled to receive payments in respect of the debt securities in which we invest. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution in respect of our investment. After repaying such senior creditors, such portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of debt ranking equally with debt securities in which we invest, we would have to share any distributions on an equal and ratable basis with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.
Additionally, certain loans that we make to portfolio companies may be secured on a second priority basis by the same collateral securing senior secured debt of such companies. The first priority liens on the collateral will secure the portfolio companys obligations under any outstanding senior debt and may secure certain other future debt that may be permitted to be incurred by the portfolio company under the agreements governing the loans. The holders of obligations secured by the first priority liens on the collateral will generally control the liquidation of and be entitled to receive proceeds from any realization of the collateral to repay their obligations in full before us. In addition, the value of the collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from the sale or sales of all of the collateral would be sufficient to satisfy the loan obligations secured by the second priority liens after payment in full of all obligations secured by the first priority liens on the collateral. If such proceeds are not sufficient to repay amounts outstanding under the loan obligations secured by the second priority liens, then we, to the extent not repaid from the proceeds of the sale of the collateral, will only have an unsecured claim against the portfolio companys remaining assets, if any.
The rights we may have with respect to the collateral securing the loans we make to our portfolio companies with senior debt outstanding may also be limited pursuant to the terms of one or more intercreditor agreements that we enter into with the holders of senior debt. Under such an intercreditor agreement, at any time that obligations that have the benefit of the first priority liens are outstanding, any of the following actions that may be taken in respect of the collateral will be at the direction of the holders of the obligations secured by the first priority liens: the ability to cause the commencement of enforcement proceedings against the collateral; the ability to control the conduct of such proceedings; the approval of amendments to collateral documents; releases of liens on the collateral; and waivers of past defaults under collateral documents. We may not have the ability to control or direct such actions, even if our rights are adversely affected.
We may also make unsecured loans to portfolio companies, meaning that such loans will not benefit from any interest in collateral of such companies. Liens on such portfolio companies collateral, if any, will secure the portfolio companys obligations under its outstanding secured debt and may secure certain future debt that is permitted to be incurred by the portfolio company under its secured loan agreements. The holders of obligations secured by such liens will generally control the liquidation of, and be entitled to receive proceeds
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from, any realization of such collateral to repay their obligations in full before us. In addition, the value of such collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from sales of such collateral would be sufficient to satisfy our unsecured loan obligations after payment in full of all secured loan obligations. If such proceeds were not sufficient to repay the outstanding secured loan obligations, then our unsecured claims would rank equally with the unpaid portion of such secured creditors claims against the portfolio companys remaining assets, if any.
Certain of the loans we make are prepayable at any time, some of them of them at no premium to par. We cannot predict when such loans may be prepaid. Whether a loan is prepaid will depend both on the continued positive performance of the portfolio company and the existence of favorable financing market conditions that permit such company to replace existing financing with less expensive capital. As market conditions change frequently, it is unknown when, and if, this may be possible for each portfolio company. In the case of some of these loans, having the loan prepaid early may reduce the achievable yield for the Company in the future below the current yield disclosed for our portfolio if the capital returned cannot be invested in transactions with equal or greater expected yields.
Following an initial investment in a portfolio company, we may make additional investments in that portfolio company as follow-on investments in order to: (1) increase or maintain in whole or in part our equity ownership percentage; (2) exercise warrants, options or convertible securities that were acquired in the original or subsequent financing; or (3) attempt to preserve or enhance the value of our initial investment.
We may elect not to make follow-on investments or otherwise lack sufficient funds to make those investments. Our failure to make follow-on investments may, in some circumstances, jeopardize the continued viability of a portfolio company and our initial investment, or may result in a missed opportunity for us to increase our participation in a successful operation. Even if we have sufficient capital to make a desired follow-on investment, we may elect not to make such follow-on investment because we may not want to increase our concentration of risk, because we prefer other opportunities, because we are inhibited by compliance with BDC requirements or because we desire to maintain our tax status.
Our investment strategy contemplates that a portion of our investments may be in securities of foreign companies in order to provide diversification or to complement our U.S. investments, although we are required generally to invest at least 70% of our assets in companies organized and having their principal place of business within the U.S. and its possessions. Investing in foreign companies may expose us to additional risks not typically associated with investing in U.S. companies. These risks include changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the United States, higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility. These risks many be more pronounced for portfolio companies located or operating primarily in emerging markets, whose economies, markets and legal systems may be less developed.
Although it is anticipated that most of our investments will be denominated in U.S. dollars, our investments that are denominated in a foreign currency will be subject to the risk that the value of a particular currency may change in relation to the U.S. dollar. Among the factors that may affect currency values are trade balances, the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation and political developments. We may employ hedging techniques to minimize these risks, but we can offer no assurance that we will, in fact,
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hedge currency risk or, that if we do, such strategies will be effective. As a result, a change in currency exchange rates may adversely affect our profitability.
We are prohibited under the 1940 Act from participating in certain transactions with certain of our affiliates without the prior approval of our independent directors and, in some cases, of the SEC. Any person that owns, directly or indirectly, 5% or more of our outstanding voting securities will be our affiliate for purposes of the 1940 Act and we are generally prohibited from buying or selling any security from or to such affiliate, absent the prior approval of our independent directors. The 1940 Act also prohibits certain joint transactions with certain of our affiliates, which could include investments in the same portfolio company (whether at the same or different times), without prior approval of our independent directors and, in some cases, of the SEC. We are prohibited from buying or selling any security from or to any person who owns more than 25% of our voting securities and from or to certain of that persons affiliates, or entering into prohibited joint transactions with such persons, absent the prior approval of the SEC. Similar restrictions limit our ability to transact business with our officers or directors or their affiliates.
TCP and the funds managed by TCP have received an exemption from certain SEC regulations prohibiting transactions with affiliates. See Management of the Company Exemptive Order for a description of the exemption order received by TCP. The exemptive order requires that certain procedures be followed prior to making an investment and such procedures could in certain circumstances adversely affect the price paid or received by us or the availability or size of the position purchased or sold by us. In addition, TCP may face conflicts of interests in making investments pursuant to the exemptive order. See If TCP is unable to manage our investments effectively, we may be unable to achieve our investment objective. In addition, TCP may face conflicts in allocating investment opportunities between us and certain other entities that could impact our investment returns and Management of the Company Exemptive Order.
Our business may in the future require a substantial amount of capital in addition to the proceeds of this offering. We may acquire additional capital from the issuance of additional shares of our common stock or from the additional issuance of senior securities (including debt and preferred stock). However, we may not be able to raise additional capital in the future on favorable terms or at all.
Our board of directors may decide to issue common stock to finance our operations rather than issuing debt or other senior securities. As a BDC, we are generally not able to issue our common stock at a price below net asset value without first obtaining required approvals from our stockholders and our independent directors. If our common stock trades at a discount to net asset value, those restrictions could adversely affect our ability to raise equity capital. Except in connection with the exercise of warrants or the conversion of convertible securities, in any such case the price at which our securities are to be issued and sold may not be less than a price, that in the determination of our board of directors, closely approximates the market value of such securities at the relevant time. We may also make rights offerings to our stockholders at prices per share less than the net asset value per share, subject to the requirements of the 1940 Act. If we raise additional funds by issuing more common stock or senior securities convertible into, or exchangeable for, our common stock, the percentage ownership of our stockholders at that time would decrease, and such stockholders may experience dilution.
We may only issue senior securities up to the maximum amount permitted by the 1940 Act. The 1940 Act permits us to issue senior securities only in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such issuance or incurrence. If our assets decline in value and we fail to
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satisfy this test or any stricter test under the terms of our leverage instruments, we may be required to liquidate a portion of our investments and repay a portion of our indebtedness at a time when such sales or repayment may be disadvantageous, which could have a material adverse impact on our liquidity, financial condition and results of operations.
Changes in the laws or regulations or the interpretations of the laws and regulations that govern BDCs, RICs or non-depository commercial lenders could significantly affect our operations and our cost of doing business. We are subject to federal, state and local laws and regulations and are subject to judicial and administrative decisions that affect our operations, including our loan originations, maximum interest rates, fees and other charges, disclosures to portfolio companies, the terms of secured transactions, collection and foreclosure procedures and other trade practices. If these laws, regulations or decisions change, or if we expand our business into jurisdictions that have adopted more stringent requirements than those in which we currently conduct business, we may have to incur significant expenses in order to comply, or we might have to restrict our operations. In addition, if we do not comply with applicable laws, regulations and decisions, we may lose licenses needed for the conduct of our business and may be subject to civil fines and criminal penalties.
On July 21, 2010, President Obama signed into law the Dodd-Frank Act. Many of the provisions of the Dodd-Frank Act have extended implementation periods and delayed effective dates and will require extensive rulemaking by regulatory authorities. While the impact of the Dodd-Frank Act on us and our portfolio companies may not be known for an extended period of time, the Dodd-Frank Act, including future rules implementing its provisions and the interpretation of those rules, along with other legislative and regulatory proposals directed at the financial services industry or affecting taxation that are proposed or pending in the U.S. Congress, may negatively impact the operations, cash flows or financial condition of us or our portfolio companies, impose additional costs on us or our portfolio companies, intensify the regulatory supervision of us or our portfolio companies or otherwise adversely affect our business or the business of our portfolio companies.
As a BDC, we will be prohibited from acquiring any assets other than qualifying assets unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets. As of March 31, 2011, approximately $68.4 million, or approximately 15.3%, of our total assets were not qualifying assets. If we do not invest a sufficient portion of our assets in qualifying assets, we will be prohibited from investing in additional non-qualifying assets, which could have a material adverse effect on our business, financial condition and results of operations. Similarly, these rules could prevent us from making follow-on investments in existing portfolio companies (which could result in the dilution of our position) or could require us to dispose of investments at inopportune times in order to come into compliance with the 1940 Act. If we need to dispose of these investments quickly, it may be difficult to dispose of such investments on favorable terms. For example, we may have difficulty in finding a buyer and, even if a buyer is found, we may have to sell the investments at a substantial loss.
Although we are currently qualified as a RIC, and we intend to so qualify after the conversion, no assurance can be given that we will be able to maintain RIC status. To obtain and maintain RIC status and be relieved of U.S. federal income taxes on income and gains distributed to its stockholders, we generally must meet the annual distribution, source-of-income and asset diversification requirements described below. In
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addition, our Leverage Program prohibit us from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or the Leverage Program.
To qualify as a RIC under the Code, we generally must meet certain source-of-income, asset diversification and annual distribution requirements. The annual distribution requirement for a RIC is satisfied if we distribute at least 90% of our ordinary income and net short-term capital gain in excess of net long-term capital loss, if any, to our stockholders on an annual basis. Since we use debt financing and have Preferred Interests outstanding, we are subject to certain asset coverage ratio requirements and other financial covenants under the terms of the Leverage Program, and we are, in some circumstances, also subject to similar requirements under the 1940 Act. The requirements could, under certain circumstances, restrict us from making distributions necessary to qualify as a RIC. If we are unable to obtain cash from other sources, we may fail to qualify as a RIC and, thus, may be subject to corporate-level income tax. To qualify as a RIC, we generally must also meet certain asset diversification requirements at the end of each calendar quarter. Failure to meet these tests may result in our having to dispose of certain investments quickly in order to prevent the loss of RIC status. Because we anticipate that most of our investments will be in private companies, any such dispositions could be made at disadvantageous prices and may result in substantial losses.
If we fail to qualify as a RIC for any reason and become subject to corporate-level income tax, the resulting corporate-level income taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions. For additional discussion regarding the tax implications of a RIC, see Material U.S. Federal Income Tax Matters.
For U.S. federal income tax purposes, we may include in income certain amounts that we have not yet received in cash, such as original issue discount, which may arise if we receive warrants in connection with the making of a loan or possibly in other circumstances, or PIK interest, which represents contractual interest added to the loan balance and due in the future, often only at the end of the loan. Such original issue discount, which could be significant relative to our overall investment activities, or increases in loan balances as a result of PIK arrangements are included in our taxable income before we receive any corresponding cash payments. We also may be required to include in income certain other amounts that we do not receive in cash.
Since we may recognize taxable income before or without receiving cash representing such income, if we invest to a substantial extent in non-cash paying debt instruments we may have difficulty meeting the tax requirement to distribute at least 90% of our ordinary income and net short-term capital gain in excess of net long-term capital loss, if any, to maintain our status as a RIC. Accordingly, we may have to sell some of our investments at times we would not consider advantageous, raise additional debt or equity capital or reduce new investment originations to meet these distribution requirements.
We intend to make distributions on a quarterly basis to our stockholders out of assets legally available for distribution. We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. Our ability to pay distributions might be adversely affected by the impact of one or more of the risk factors described in this prospectus. Due to the asset coverage test applicable to us under the 1940 Act as a BDC, we may be limited in our ability to make distributions.
Under current SEC rules, after completion of this offering we will be required to report on our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act and related rules and regulations of the SEC. We will be required to review on an annual basis our internal control over financial reporting, and on a quarterly and annual basis to evaluate and disclose changes in our internal control over
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financial reporting. As a result, we expect to incur additional expenses in the near term that may negatively impact our financial performance and our ability to make distributions. This process also will result in a diversion of managements time and attention. We cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations, and we may not be able to ensure that the process is effective or that our internal control over financial reporting is or will be effective in a timely manner. In the event that we are unable to maintain or achieve compliance with Section 404 of the Sarbanes-Oxley Act and related rules, we and the market price of our common stock may be adversely affected.
Prior to this offering, there has been no public trading market for our common stock, and we cannot assure you that one will develop or be sustained after this offering. We cannot predict the prices at which our common stock will trade. The initial public offering price for our common stock was determined through negotiations among us and the underwriters, and may not bear any relationship to the market price at which it will trade after this offering or to any other established criteria of our value. Shares of companies offered in an initial public offering often trade at a discount to the initial offering price due to sales loads, underwriting discounts and related offering expenses. Therefore, our common stock may be more appropriate for long-term investors than for investors with shorter term investment horizons and should not be treated as a trading vehicle. Our shares may trade at a price that is less than the offering price.
If you purchase shares of our common stock in this offering, you may experience immediate dilution because the price that you pay may be greater than the pro forma net asset value per share of the shares you acquire. This dilution is due to the expenses incurred by us in connection with the consummation of this offering. Accordingly, investors in this offering may pay a price per share that exceeds the tangible book value per share after the closing of the offering. Assuming an initial public offering price of $ per share (the mid-point of the range set forth on the cover page of this prospectus), purchasers in this offering will experience immediate dilution of approximately $ per share on a fully diluted basis. SeeDilution on page 47.
We will have significant flexibility in applying the proceeds of this offering and may use the net proceeds from this offering in ways with which you may not agree, or for purposes other than those contemplated at the time of this offering. We will also pay operating expenses, and may pay other expenses such as due diligence expenses of potential new investments, from the net proceeds of this offering. Our ability to achieve our investment objective may be limited to the extent that net proceeds of this offering, pending full investment, are used to pay expenses rather than to make investments.
As with any stock, the price of our common stock will fluctuate with market conditions and other factors. If you sell shares, the price received may be more or less than the original investment. Net asset value will be reduced immediately following our initial offering by the amount of the sales load and selling expenses paid by us. Our common stock is intended for long-term investors and should not be treated as a trading vehicle. Shares of BDCs and closed-end management investment companies, which are structured similarly to us, frequently trade at a discount from their net asset value. This characteristic of closed-end investment companies is separate and distinct from the risk that our net asset value per share of common stock may decline. We cannot predict whether our common stock will trade at, above or below net asset value. This risk of loss associated with this characteristic of BDCs and closed-end management investment companies may be greater for investors who sell their shares in a relatively short period of time after completion of the offering.
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The market price and liquidity of the market for our common stock may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include:
| significant volatility in the market price and trading volume of securities of BDCs or other companies in the sector in which we operate, which are not necessarily related to the operating performance of these companies; |
| changes in regulatory policies or tax guidelines, particularly with respect to RICs or BDCs; |
| loss of RIC status; |
| changes in earnings or variations in operating results; |
| changes in the value of our portfolio of investments; |
| any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts; |
| departure of key personnel from our investment advisor; |
| operating performance of companies comparable to us; |
| general economic trends and other external factors; and |
| loss of a major funding source. |
The Delaware General Corporation Law, our certificate of incorporation and our bylaws contain provisions that may have the effect of discouraging a third party from making an acquisition proposal for us. These anti-takeover provisions may inhibit a change in control in circumstances that could give the holders of our common stock the opportunity to realize a premium over the market price of our common stock.
For example, to convert us to a closed-end or open-end investment company, to merge or consolidate us with any entity or sell all or substantially all of our assets to any entity in a transaction as a result of which the governing documents of the surviving entity do not contain substantially the same anti-takeover provisions as are provided in our certificate of incorporation or to liquidate and dissolve us other than in connection with a qualifying merger, consolidation or sale of assets or to amend certain of the provisions relating to these matters, our certificate of incorporation requires either (i) the favorable vote of a majority of our continuing directors followed by the favorable vote of the holders of a majority of our then outstanding shares of each affected class or series of our shares, voting separately as a class or series or (ii) the favorable vote of at least 80% of the then outstanding shares of our capital stock, voting together as a single class.
In addition, the board of directors of the Operating Company is appointed by different procedures than the board of the Holding Company, which could lead to the boards of directors of the Operating Company and the Holding Company having different compositions. Such a difference in composition may further hinder or delay an acquisition proposal.
In order to satisfy the annual distribution requirement applicable to RICs, we have the ability to declare a large portion of a dividend in shares of our common stock instead of in cash. As long as a portion of such dividend is paid in cash (which portion can be as low as 10% for our taxable years ending on or before December 31, 2011) and certain requirements are met, the entire distribution would be treated as a dividend for U.S. federal income tax purposes. As a result, a stockholder would be taxed on 100% of the dividend in the same manner as a cash dividend, even though most of the dividend was paid in shares of our common stock.
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Approximately million shares of our common stock outstanding prior to completion of this offering are subject to a lock-up period of 180 days and our Advisor and its affiliates will be subject to a lock-up period of three years. Upon expiration of each such lock-up period, or earlier upon the written consent of a representative of the underwriters, such shares will generally be freely tradable in the public market, subject to the provisions of Rule 144 promulgated under the 1933 Act. Sales of substantial amounts of our common stock, or the availability of such common stock for sale, could adversely affect the prevailing market prices for our common stock. If this occurs and continues, it could impair our ability to raise additional capital through the sale of securities should we desire to do so.
We have capital loss carryforwards for U.S. federal income tax purposes. Subject to certain limitations, capital loss carryforwards may be used to offset future recognized capital gains until they expire (generally after 8 years for our existing capital loss carryforwards). Section 382 of the Code imposes an annual limitation on the ability of a corporation, including a RIC, that undergoes an ownership change to use its capital loss carryforwards. We do not expect that this offering will result in an ownership change for Section 382 purposes. However, this offering will make it more likely that future transactions involving our common stock, including transfers by existing shareholders, could result in such an ownership change. Accordingly, there can be no assurance that an ownership change limiting our ability to use our capital loss carryforwards (and built-in, unrecognized losses, if any) will not occur in the future. Such a limitation would, for any given year, have the effect of potentially increasing the amount of our U.S. federal net capital gains for such year and, hence, the amount of capital gains dividends we would need to distribute to remain a RIC and to avoid U.S. income and excise tax liability.
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In addition to factors previously identified elsewhere in this prospectus, including the Risks section of this prospectus, the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance:
| the introduction, withdrawal, success and timing of business initiatives and strategies; |
| changes in political, economic or industry conditions, the interest rate environment or financial and capital markets, which could result in changes in the value of our assets; |
| the relative and absolute investment performance and operations of our investment advisor; |
| the impact of increased competition; |
| the impact of future acquisitions and divestitures; |
| the unfavorable resolution of legal proceedings; |
| our business prospects and the prospects of our portfolio companies; |
| the impact of legislative and regulatory actions and reforms and regulatory, supervisory or enforcement actions of government agencies relating to us or TCP; |
| the ability of TCP to identify suitable investments for us and to monitor and administer our investments; |
| our contractual arrangements and relationships with third parties; |
| any future financings by us; |
| the ability of TCP to attract and retain highly talented professionals; |
| fluctuations in foreign currency exchange rates; and |
| the impact of changes to tax legislation and, generally, our tax position. |
This prospectus contains, and other statements that we may make may contain, forward-looking statements with respect to future financial or business performance, strategies or expectations. Forward-looking statements are typically identified by words or phrases such as trend, opportunity, pipeline, believe, comfortable, expect, anticipate, current, intention, estimate, position, assume, potential, outlook, continue, remain, maintain, sustain, seek, achieve and similar expressions, or future or conditional verbs such as will, would, should, could, may or similar expressions.
Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made, and we assume no duty to and do not undertake to update forward-looking statements. These forward-looking statements do not meet the safe harbor for forward-looking statements pursuant to Section 27A of the Securities Act or Section 21E of the Securities Exchange Act. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance.
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The net proceeds of the offering are estimated to be approximately $ million (approximately $ million if the underwriters exercise their overallotment option to purchase additional shares in full) after deducting the underwriting discounts and commissions and estimated offering expenses of approximately $ million payable by us.
We intend to use approximately $ million of the net proceeds to repay amounts outstanding under the Revolving Facility and to use the remainder to make investments in portfolio companies in accordance with our investment objective and for other general corporate purposes, including payment of operating expenses. We anticipate that substantially all of such remainder of the net proceeds of this offering will be invested in accordance with our investment objective within six to twelve months following completion of this offering, depending on the availability of appropriate investment opportunities consistent with our investment objective and market conditions. We cannot assure you that we will achieve our targeted investment pace.
As of March 31, 2011, we had $39 million outstanding under the Revolving Facility with advances generally bearing interest at LIBOR plus 0.375%, subject to certain limitations. The Revolving Facility matures July 31, 2014, subject to extension by the lenders at our request for one 12-month period.
Affiliates of Wells Fargo Securities, LLC, Natixis Bleichroeder LLC and Rabo Securities USA, Inc. are lenders under the Revolving Facility and are each expected to receive in excess of five percent of the proceeds of this offering. See Underwriting Certain Relationships.
Pending investments in portfolio companies by the Company, the Company will invest the remaining net proceeds of this offering primarily in cash, cash equivalents, U.S. Government securities and other high-quality debt investments that mature in one year or less. These securities may have lower yields than our other investments and accordingly may result in lower distributions, if any, during such period. See Regulation Temporary Investments and The Advisor Investment Management Agreement.
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The following table sets forth (1) our actual capitalization at March 31, 2011, (2) our capitalization on a pro forma basis giving effect to the Conversion and the redemption of the Series Z Preferred Interests and (3) our capitalization on a pro forma as adjusted basis giving effect to the sale of our common stock in this offering at the assumed public offering price of $ per share, the midpoint of the range on the cover page of this prospectus, after deducting the underwriting discounts and commissions and offering expenses payable by us and the application of the estimated net proceeds of this offering. You should read this table together with Use of Proceeds.
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As of March 31, 2011 | ||||||||||||
Actual | Pro forma | Pro forma as adjusted |
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Assets: |
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Cash and cash equivalents | $ | 14,005,779 | ||||||||||
Total assets | $ | 449,720,565 | $ | $ | ||||||||
Liabilities: |
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Revolving Facility | $ | 39,000,000 | $ | $ | ||||||||
Distributions payable | 7,500,000 | |||||||||||
Other liabilities | 3,081,400 | |||||||||||
Total Liabilities | $ | 49,581,400 | $ | $ | ||||||||
Stockholders equity: |
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Preferred Interests;(1) $20,000/share liquidation preference; 6,700 shares authorized, 6,700 preferred interests issued and outstanding, actual; 6,700 preferred interests outstanding, pro forma; 6,700 interests outstanding, pro forma as adjusted | $ | 134,000,000 | $ | 134,000,000 | $ | 134,000,000 | ||||||
Accumulated dividends on Preferred Interests | 371,077 | 371,077 | 371,077 | |||||||||
Common interests, $0.001 par value; unlimited common interests authorized, 418,955.777 common interests issued and outstanding, actual; no common interests outstanding, pro forma; no common interests outstanding, pro forma as adjusted(2) | 419 | | | |||||||||
Series Z preferred interests; $500/share liquidation preference; 400 shares authorized, 47 interests issued and outstanding, actual; no interests outstanding, pro forma; no interests outstanding, pro forma as adjusted(3) | 23,500 | | | |||||||||
Accumulated dividends on Series Z preferred interests | 491 | | | |||||||||
Common stock, par value $0.001 per share; 200,000,000 shares of common stock authorized; no common stock issued and outstanding, actual; common stock outstanding, pro forma; common stock outstanding, pro forma as adjusted | | |||||||||||
Preferred stock, par value $0.001 per share; 100,000,000 shares of preferred stock authorized; no shares issued and outstanding, actual; no preferred stock issued and outstanding, pro forma; no shares issued and outstanding, pro forma as adjusted | | | | |||||||||
Capital in excess of par value | 364,742,957 | |||||||||||
Accumulated net investment income | 8,191,631 | |||||||||||
Accumulated net realized losses | (60,258,905 | ) | ||||||||||
Accumulated net unrealized depreciation | (46,931,514 | ) | ||||||||||
Accumulated dividends to Series Z preferred interests | (491 | ) | | | ||||||||
Net assets applicable to common shareholders | $ | 265,744,097 | $ | $ | ||||||||
Total capitalization | $ | 449,720,565 | $ | $ |
(1) | Preferred Interests are a component of the $250 million Leverage Program of the Operating Company. |
(2) | Upon completion of the Conversion, the common interests of the Holding Company, as a limited liability company, will be converted to shares of common stock. |
(3) | All Series Z preferred interests have been called for redemption and will be redeemed prior to the Conversion. |
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Information about our senior securities is shown in the following table as of the end of each fiscal year ended since the Company commenced operations and as of March 31, 2011. The report of our independent registered accounting firm on our Financial Statements and Financial Highlights at December 31, 2010 includes the senior securities table below.
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Class and Year | Total Amount Outstanding(3) |
Asset Coverage Per Unit(4) |
Involuntary Liquidating Preference Per Unit(5) |
Average Market Value Per Unit(6) | ||||||||||||
Revolving Facility(1) |
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Fiscal 2011 (as of March 31, 2011, unaudited) | $ | 39,000 | $ | 11,233 | $ | | N/A | |||||||||
Fiscal 2010 | 50,000 | 8,958 | | N/A | ||||||||||||
Fiscal 2009 | 75,000 | 5,893 | | N/A | ||||||||||||
Fiscal 2008 | 34,000 | 10,525 | | N/A | ||||||||||||
Fiscal 2007 | 207,000 | 3,534 | | N/A | ||||||||||||
Fiscal 2006 | 266,000 | 3,080 | | N/A | ||||||||||||
Preferred Interests(2) |
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Fiscal 2011 (as of March 31, 2011, unaudited) | $ | 134,000 | $ | 50,765 | $ | 20,055 | N/A | |||||||||
Fiscal 2010 | 134,000 | 48,770 | 20,056 | N/A | ||||||||||||
Fiscal 2009 | 134,000 | 42,350 | 20,055 | N/A | ||||||||||||
Fiscal 2008 | 134,000 | 43,343 | 20,175 | N/A | ||||||||||||
Fiscal 2007 | 134,000 | 43,443 | 20,289 | N/A | ||||||||||||
Fiscal 2006 | 134,000 | 41,521 | 20,312 | N/A |
(1) | The Operating Company entered into the Revolving Facility, pursuant to which amounts may currently be drawn up to $116 million. The Revolving Facility matures July 31, 2014, subject to extension by the lenders at our request for one 12-month period. |
(2) | At March 31, 2011, the Operating Company had 6,700 Preferred Interests issued and outstanding with a liquidation preference of $20,000 per interest. The Preferred Interests will be subject to mandatory redemption on July 31, 2016. |
(3) | Total amount of each class of senior securities outstanding at the end of the period presented (in 000s). |
(4) | The asset coverage ratio for a class of senior securities representing indebtedness is calculated as our consolidated total assets, less all liabilities and indebtedness not represented by senior securities, divided by senior securities representing indebtedness. This asset coverage ratio is multiplied by $1,000 to determine the Asset Coverage Per Unit. |
(5) | The amount to which such class of senior security would be entitled upon the voluntary liquidation of the issuer in preference to any security junior to it. The in this column indicates that the SEC expressly does not require this information to be disclosed for certain types of senior securities. |
(6) | Not applicable because senior securities are not registered for public trading. |
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If you invest in our common stock, your interest will be diluted to the extent of any shortfall of the net proceeds per share from our initial public offering compared to the as-adjusted pro forma net asset value per share of our common stock immediately after the completion of this offering.
The net asset value of our common stock as of March 31, 2011, was approximately $ million, or $ per share. After giving effect to the sale of our common stock in this offering at an assumed initial public offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, the application of the net proceeds from this offering as set forth in Use of Proceeds and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our as-adjusted pro forma net asset value as of March 31, 2011, would have been approximately $ million, or $ per share. This represents an immediate decrease in our net asset value per share of $ to existing stockholders and dilution in net asset value per share of $ to new investors who purchase shares in this offering. The following table illustrates this per share dilution:
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Assumed initial public offering price per share, the mid-point of the range on the cover page of this prospectus | $ | |||
NAV before this offering | $ | |||
Decrease in net asset value per share attributable to new investors in this offering | $ | |||
As adjusted pro forma net asset value per share after this offering | $ | |||
Dilution per share to new investors(1) | $ |
(1) | To the extent the underwriters option is exercised, there will be further dilution to new investors. |
The following table summarizes, as of March 31, 2011, the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders and to be paid by new investors purchasing shares of common stock in this offering assuming the initial public offering price set forth above, before deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
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Shares Purchased | Total Consideration | Average Price | ||||||||||||||||||
Number | Percent | Amount (in thousands) |
Percent | per share | ||||||||||||||||
Existing stockholders | % | $ | % | $ | ||||||||||||||||
New investors | % | $ | % | $ | ||||||||||||||||
Total | % | $ | % | $ |
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We intend to make distributions on a quarterly basis to our stockholders commencing at the end of the quarter in which this offering is completed. The timing and amount of our quarterly distributions, if any, will be determined by our board of directors. Any distributions to our stockholders will be declared out of assets legally available for distribution. We intend to pay quarterly distributions to our stockholders in an amount, and on a timely basis, sufficient to obtain and maintain our status as a RIC. There can be no assurances that the Holding Company will have sufficient funds to pay distributions to our stockholders in the future to maintain our status as a RIC.
We are a RIC under Subchapter M of the Code. To continue to obtain RIC tax benefits, we generally must distribute at least 90% of our ordinary income and net short-term capital gain in excess of net long-term capital loss, if any, out of the assets legally available for distribution. In order to avoid certain excise taxes imposed on RICs, we currently intend to distribute during each calendar year an amount at least equal to the sum of (1) 98% of our ordinary income (not taking into account any capital gains or losses) for the calendar year, (2) 98.2% of the amount by which our capital gains exceed our capital losses (adjusted for certain ordinary losses) for the one-year period generally ending on October 31 of the calendar year and (3) certain undistributed amounts from previous years on which we paid no U.S. federal income tax. In addition, although we currently intend to distribute net capital gain (i.e., net long-term capital gain in excess of short-term capital loss), if any, at least annually, out of the assets legally available for such distributions, we may in the future decide to retain such capital gain for investment. In such event, the consequences of our retention of net capital gain are as described under Material U.S. Federal Income Tax Matters. We can offer no assurance that the Operating Company will achieve results that will permit the payment of any cash distributions to our stockholders. In addition, the Leverage Program prohibits us from making distributions if doing so would cause us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or the Leverage Program. See Regulation, Material Federal Income Tax Considerations and Senior Securities.
We maintain an opt out dividend reinvestment plan for our common stockholders. As a result, if we declare a dividend, then stockholders cash dividends will be automatically reinvested in additional shares of our common stock, unless they specifically opt out of the dividend reinvestment plan so as to receive cash dividends. Stockholders who receive distributions in the form of additional shares of common stock will nonetheless be required to pay applicable federal, state or local taxes on the reinvested dividends but will not receive a corresponding cash distribution with which to pay any applicable tax. Further, reinvested dividends will increase the gross assets of the Holding Company and the Operating Company on which a management fee and an incentive management fee are payable to TCP and the General Partner. See Dividend Reinvestment Plan.
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We are an externally managed, non-diversified closed-end management investment company that will, prior to the completion of this offering, file an election to be regulated as a BDC under the 1940 Act. See Prospectus Summary Company History and BDC Conversion above. Our investment objective is to seek to achieve high total returns while minimizing losses. We seek to achieve our investment objective primarily through investments in debt securities of middle-market companies, which we define as those with enterprise values between $100 million and $3 billion. While we intend to primarily focus on privately negotiated investments in debt of middle-market companies, we may make investments of all kinds and at all levels of the capital structure, including in equity interests such as preferred or common stock and warrants or options received in connection with our debt investments. Our investment activities will benefit from what we believe are the competitive advantages of our Advisor, including its diverse in-house skills, proprietary deal flow, and consistent and rigorous investment process focused on established, middle-market companies. We expect to generate returns through a combination of the receipt of contractual interest payments on debt investments and origination and similar fees, and, to a lesser extent, equity appreciation through options, warrants, conversion rights or direct equity investments.
We have no employees of our own and for so long as the Operating Company exists, our only business and sole asset will continue to be the ownership of all of the common limited partner interests of the Operating Company. We expect to continue to conduct all of our investment activities through the Operating Company and our investment activities will continue to be externally managed by our Advisor, a leading investment manager with in excess of $4.5 billion in committed capital, approximately 13% of which consists of the Holding Companys committed capital under management as of March 31, 2011, and a primary focus on providing financing to middle-market companies. Additionally, the Holding Company will continue to qualify as a RIC following the conversion so long as it continues to satisfy the RIC requirements.
At March 31, 2011, our existing investment portfolio consisted of debt and equity positions in 44 portfolio companies valued at approximately $427.3 million. Debt positions represented approximately 74% of the total portfolio fair value and had a weighted-average current yield and yield to maturity of approximately 11.0% and 12.0%, respectively. For purposes of this prospectus, references to yield to maturity assume that debt investments in our portfolio as of a certain date are purchased at fair value on that date and held until their respective maturities with no prepayments or losses and are exited at par upon maturity. At March 31, 2011, the average investment size for the debt investments in our existing portfolio was $5.3 million, with a weighted average remaining term of approximately 4.0 years. Equity positions in 17 companies represented approximately 26% of the total fair value of our existing investment portfolio.
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The following charts summarize our portfolio mix by industry and type based on the fair value of our investments as of March 31, 2011.
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* | Industries in aggregate less than 2.5% of the portfolio |
At March 31, 2011, our portfolio had a higher concentration of equity investments than we anticipate our investment strategy will target in the future, with our four largest equity positions aggregating to approximately $86 million of fair value at March 31, 2011, representing approximately 20.1% of total portfolio fair value. Our investment portfolio as of March 31, 2011 included holdings that stem from the Companys historical allocation of a portion of our investment strategy towards distressed investments. As of March 31, 2011, approximately 3.3% of the Operating Companys total assets consisted of distressed investments, all of which consisted of investments in default. This component of our investment strategy included a number of debt positions that were largely acquired through secondary market purchases of credit positions and often led to the receipt of additional equity positions as part of in- or out-of-court debt-for-equity exchanges. We do not intend to materially participate in these types of investments going forward and therefore expect to hold a smaller percentage of equity investments in our post-initial public offering, or IPO, portfolio. See Investment Strategy for more information. Additionally, our existing equity portfolio is expected to serve as a source of liquidity as we opportunistically monetize these investments.
Our investment activities are managed by TCP. TCP is a leading investment manager (including specialty lending to middle-market companies). TCP is a Delaware limited liability company and is registered as an investment advisor under the Investment Advisers Act of 1940. As of March 31, 2011, TCP had in excess of $4.5 billion in committed capital under management, approximately 13% of which consists of the Holding Companys committed capital, and a team of approximately 30 investment professionals supported by approximately 40 administrative and back office personnel that focus on operations, finance, legal and compliance, accounting and reporting, investor relations, and information technology. TCP was founded in 1999 by Michael E. Tennenbaum, Mark K. Holdsworth and Howard M. Levkowitz and its predecessor entity, formed by the same individuals, commenced operations in 1996. The three founders along with David A. Hollander, Michael E. Leitner, Eric R. Pagel, Philip M. Tseng, Rajneesh Vig, and Hugh Steven Wilson constitute TCPs partners, or the TCP Partners. The TCP Partners have significant industry experience, including experience investing in middle-market companies. Together, the TCP Partners have invested approximately $9.4 billion in over 180 companies since TCPs inception, through multiple business and credit cycles, across all segments of the capital structure through a broad set of credit-oriented strategies including
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leveraged loan origination, secondary investments of discounted debt securities, and distressed and control opportunities. We believe the TCP Partners investment perspectives, complementary skills, and collective investment experience provides TCP with a strategic and competitive advantage in middle-market investing.
As our investment advisor, TCP is responsible for sourcing potential investments, conducting research, analyzing investment opportunities and structuring our investments and monitoring our portfolio companies on an ongoing basis. We believe that TCP has a proven track record of sourcing deals, originating loans and successfully investing in middle-market companies and that the relationships of its investment professionals are integral to TCPs success. TCPs investment professionals have long-term working relationships with key sources of investment opportunities and industry expertise, including investment bankers, financial advisors, attorneys, private equity sponsors, other senior lenders, high-yield bond specialists, research analysts, accountants, and senior management teams. Additionally, TCPs structure includes both a board of advisors and a group of Senior Executive Advisors a team comprised of approximately 20 current and former executives from a variety of industries, which extends the reach of TCPs relationships through a group of seasoned industry leaders and that can enhance our deal sourcing and due diligence activities.
We also benefit from the existing infrastructure and administrative capabilities of an established investment manager. The General Partner, an affiliate of TCP, serves as our Administrator and provides us with office space, equipment and office services. The tasks of our Administrator include overseeing our financial records, preparing reports to our stockholders and reports filed with the SEC and generally monitoring the payment of our expenses and the performance of administrative and professional services rendered to us by others.
During 2010 and the first quarter of 2011, TCP executed over $425 million in direct origination leveraged loans primarily to middle-market companies with average current yields of 15%, and average yields to maturity of 18% across its platform during 2010. TCP reviewed but did not approve an additional $2.3 billion in middle-market loan origination opportunities in that period. There can be no assurance that similar deal flow or terms will be available in the future for loans in which we may invest.
To achieve our investment objectives, we intend to focus on a subset of the broader investment strategies historically pursued by TCP. Our primary investment focus will be the ongoing origination of and investments in leveraged loans of performing middle-market companies, building on TCPs established track record of origination and participation in the original syndication of over $3.3 billion of leveraged loans to over 40 companies since 1999. For the purposes of this prospectus, the term leveraged loans refers to senior debt investments that rank ahead of subordinated debt and that generally have the benefit of security interests on the assets of the borrower.
We anticipate our investments will generally range from $10 million to $50 million per company, the size of which may grow over time in proportion with our capital base. We expect to generate current returns through a combination of the receipt of contractual interest payments on debt investments and origination and similar fees, and, to a lesser extent, equity appreciation through options, warrants, conversion rights or direct equity investments. We often receive equity interests such as preferred or common stock and warrants or options in connection with our debt investments. From time to time we may also use other investment strategies, which are not our primary focus, to attempt to enhance the overall return of our portfolio. These investment strategies may include, but are not limited to, the purchase of discounted debt, opportunistic investments, and financial instruments to hedge currency or interest rate risk associated with our portfolio.
Typical investments will be in performing middle-market companies. We believe that middle-market companies are generally less able to secure financing than larger companies and thus offer better return opportunities for those able to conduct the necessary diligence to appropriately evaluate these companies. We will focus primarily on U.S. companies where we believe our Advisors perspective, complementary skills and investment experience provides us with a competitive advantage and in industries where our Advisor sees an attractive risk reward profile due to macroeconomic trends and existing TCP industry expertise.
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We believe that we possess the following competitive advantages over other capital providers to middle-market companies:
Focus on minimizing the risk of loss and achieving attractive risk-adjusted returns. We primarily structure investments to attempt to achieve high cash yields, cash origination fees, conservative leverage, and strong contractual protections that reduce the risk of principal loss. Contractual protections may include default premiums, information rights, board observation rights, and affirmative, negative and financial covenants, such as lien protection and prohibitions against change of control. While the Company is not expected to undertake a material focus on distressed investments, we believe that TCPs experience in distressed investing from managing other funds helps us negotiate more favorable terms and provides greater opportunity to achieve principal protection. See Investment Strategy.
Diverse in-house skills and experience of our Advisor. The principals and professionals of TCP have diverse and complementary backgrounds, including prior experience at private investment funds, investment banks, other financial services firms, and managing companies. We believe that the diverse professional experience of TCPs principals and professionals gives us an advantage in sourcing, evaluating, structuring, negotiating, closing, and profitably exiting investments. TCPs advantages include:
| Significant investment expertise in over 15 different industries; |
| Track record of leveraged loan originations or participations in original syndications of over $3.3 billion to over 40 companies; |
| Extensive workout and restructuring capabilities honed in multiple in- and out-of-court transactions which allows us to maximize our investment returns and minimize the risk of loss; |
| In-house legal expertise that has significant experience protecting creditor rights; |
| Complementary bottom-up and top-down (macro economic) expertise; and |
| Expertise in analyzing highly complex companies and investments. |
Consistent, proactive and rigorous investment and monitoring processes. We believe that TCP employs a proven investment process that integrates intensive bottom-up company-level research and analysis with a proactive top-down view of macroeconomic and industry risks and opportunities. The heart of the process is a thorough analysis of the underlying issuers business, end markets, suppliers, revenues, costs, financial statements, and the terms of the issuers existing obligations, including contingent liabilities (if any). TCPs professionals supplement in-house expertise with industry experts, including TCPs Board of Advisors and Senior Executive Advisors, as well as other CEO/CFO-level executives, with direct management experience in the industries under consideration. These company level analyses are undertaken in the context of and supplemented by TCPs views on and understanding of industry trends and broader economic conditions. These views are formulated and refined through TCPs systematic quarterly macroeconomic reviews and quarterly industry reviews, where long-term and immediate macroeconomic trends and their impact on industry risk/reward characteristics are determined. These views flow through to TCPs proactive deployment of research and capital resources in the investment process. Quarterly portfolio reviews and the TCP Portfolio Company Business Conditions Survey also help to inform TCPs macroeconomic and industry views as well as to inform reporting of deal teams frequent monitoring of portfolio company progress, risk assessment, and refinement of exit plans. The survey is a proprietary survey of all portfolio companies in which TCP has a sizeable influence and includes a standardized set of questions in order to obtain insight into general business activity, pricing power, costs, margins, financing conditions, and expansion plans.
Focus on established middle-market companies. We generally invest in companies with established market positions, seasoned management teams, proven and differentiated products and services and strong regional or national operations. We believe that these companies possess better risk-adjusted return profiles than newer companies that are building management or in early stages of building a revenue base. As a specialty middle-market lender, through TCP we have proven experience structuring financing for middle-market companies and meeting their specialized needs. We believe that there are fewer experienced finance companies focused on transactions involving small and middle-market companies than larger
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companies, allowing us to negotiate favorable investment terms, including higher yields, more significant covenant protection, and greater equity grants than typical of transactions involving larger companies. Additionally, we believe that middle-market companies offer significant risk-adjusted return advantages over larger companies as they are generally less able to secure financing compared to larger companies and, we believe, are more likely as borrowers to be subject to upfront fees, prepayment premiums and higher interest rates.
Debt platform with multiple deal sourcing channels. The employees of TCP have developed extensive networks among investment bankers, financial advisors, attorneys, private equity sponsors, other senior lenders, high-yield bond specialists, research analysts, accountants, and senior management teams. These networks are a valuable source of directly originated deals and are further supplemented by the networks and experiences of TCPs Board of Advisors and Senior Executive Advisors. Additionally, TCPs track record as a provider of middle-market financing means that it is often the first or early call on new deal opportunities. Since inception, TCP has originated or participated in the original syndication of $3.3 billion of newly issued loans in over 40 companies, of which we invested $440 million in 21 companies. TCP has closed transactions with more than 35 different private equity sponsors, over 15 of which have been involved in transactions involving the Holding Company and the Operating Company, and more than a dozen credit focused co-lenders. TCP is well known as a lender to middle-market companies in a variety of contexts including stressed, distressed, and complex and special situations. TCPs in-depth industry knowledge and ability to diligence thoroughly but in a timely fashion in complex situations helps to attract deal opportunities from multiple channels.
Attractively priced leverage program. We believe that the Leverage Program, combined with capital from recent monetizations, will provide us with a substantial amount of capital for deployment into new investment opportunities on relatively favorable terms. The Leverage Program is comprised of: (i) a $116 million senior secured credit facility that matures on July 31, 2014, subject to extension by the lenders at the request of the Operating Company for one 12-month period, which we refer to as the Revolving Facility; and (ii) $134 million in liquidation preference of preferred interests, which mature on July 31, 2016, which we refer to as the Preferred Interests. The Revolving Facility was entered into on July 31, 2006 with certain lenders and in conjunction with entering into such agreement, the Operating Company also issued the Preferred Interests to such lenders on the same date. Advances under the Revolving Facility generally bear interest at LIBOR plus 0.375%, subject to certain limitations. The lenders also own all of the Operating Companys preferred interests, which is an aggregate of 6,700 Preferred Interests, each of which has a liquidation preference of $20,000 per interest, with dividends generally accruing at an annual rate equal to LIBOR plus 0.75%, subject to certain limitations. The weighted-average financing rate on the Leverage Program at March 31, 2011 was 0.91%. As preferred shareholders, the lenders have the right under the 1940 Act to elect two directors of the Operating Company. After this offering, we will have an increased amount of borrowing available to us under the Revolving Facility.
We believe that TCP has a consistent, non-cyclical track record of finding profitable opportunities to lend its managed assets to middle-market companies under most market conditions. However, we believe that the current environment for direct lending to middle-market companies is especially attractive for several reasons that include:
Reduced lending to middle-market companies by commercial banks. Recent regulatory changes, including the Dodd-Frank Financial Reform Act, or the Dodd-Frank Act, and the introduction of new international capital and liquidity requirements under the Basel III Accords, or Basel III, in addition to the continued ownership of legacy non-performing assets have significantly curtailed banks lending capacity. In response, we believe that many commercial lenders have de-emphasized their service and product offerings to middle-market companies in favor of lending, managing capital markets transactions and providing other non-credit services to their larger customers. We expect bank lending to middle-market companies to continue to be constrained for several years as Basel III rules phase in and rules and regulations are promulgated and interpreted under the Dodd-Frank Act.
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Reduced credit supply to middle-market companies from non-bank lenders. We believe credit to middle-market companies from non-bank lenders will also be constrained as many of those lenders have either gone out of business, exited the market, or are winding down. Numerous hedge funds previously active in leveraged loans disappeared or contracted during the recent financial market crises, while others exited the lending market due to asset-liability mismatches. Other non-bank lenders exited lending due to balance sheet pressures. Furthermore, new collateralized loan obligation, or CLO, formation has been very limited in recent years and existing CLOs authority to reinvest falls off sharply in coming years. Along with the constraints in bank lending, this situation provides a promising environment in which to originate loans to middle-market companies. We cannot, however, provide any assurance as to the length of time this tight credit supply will persist.
Middle-market companies are increasingly seeking lenders with access to permanent capital for debt and equity capital. We believe that many middle-market companies prefer to borrow from capital providers like us, rather than execute high-yield bond or equity transactions in the public markets that may necessitate increased financial and regulatory compliance and reporting obligations. Further, we believe many middle-market companies are inclined to seek capital from a small number of providers with access to permanent capital that can satisfy their specific needs and can serve as value-added, long-term financial partners with an understanding of the companies growth needs.
Large Amount of Uninvested Private Equity Capital. Private equity firms raised significant amounts of equity commitments over the period of 2006 to 2008, far in excess of the amount of equity they invested. According to the 2011 Preqin Global Private Equity Report, there was, as of December 31, 2010, approximately $559 billion of committed private equity capital available and uninvested in the United States. We believe the large amount of undeployed private equity capital will drive demand for leveraged buyouts over the next several years, which we believe will, in turn, create significant leveraged lending opportunities for us.
Significant Refinancing Requirements. A significant portion of the debt associated with a large number of middle-market leveraged mergers and acquisitions completed from 2005 to 2008 matures in the 2011 to 2015 time period. Much of this debt will need to be refinanced as it matures. When combined with the decreased availability of debt financing for middle-market companies generally, we believe these factors should increase lending opportunities for us.
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Attractive Pricing and Conservative Deal Structures. We believe that reduced access to, and availability of, debt capital has improved available loan pricing for middle-market lenders. Deals since the recent credit crisis occurred, which began in 2008 and included a period of disruption in the capital markets as evidenced by a lack of liquidity in the debt capital markets, significant write-offs in the financial services sector, the re-pricing of credit risk in the broadly syndicated credit market and the failure of certain major financial institutions, have included meaningful upfront fees, prepayment protections and, in some cases, warrants, all of which should enhance profitability to lenders.
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Furthermore, since the credit crisis, lenders generally have required lower leverage levels, increased equity contributions and more comprehensive loan covenants than was customary in the years leading up to the credit crisis. Lower debt multiples on purchase prices suggest that the cash flow of borrowing companies should enable them to service their debt more readily, creating stronger protections against a subsequent downturn.
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TCPs investment process is designed to maximize its strategic advantages: a strong brand name as a specialty lender to the middle-market, and diverse in-house expertise and skills. TCP seeks out opportunities by conducting a rigorous and disciplined investment process that combines the following characteristics:
As a leading middle-market corporate debt investment manager with a 14-year history and in excess of $4.5 billion in capital commitments as of March 31, 2011, approximately 13% of which consists of the Holding Companys committed capital, TCP is active in new deal financing opportunities in the middle-market segment. However, we believe that TCPs real deal flow advantage comes from the proprietary network of
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established relationships of its investment professionals and synergies among its professionals and portfolio companies. Members of TCPs Investment Committee for the Company, or the Investment Committee, have long-term relationships with deal sources including investment bankers, restructuring professionals, bankruptcy attorneys, senior lenders, high yield bond specialists, research analysts, accountants, fund management teams, TCPs Advisory Board, Senior Executive Advisors, board members of former clients, former colleagues and other operating professionals to facilitate deal flow. The Investment Committee is currently comprised of six voting members (Mark K. Holdsworth, Howard M. Levkowitz, Michael Leitner, Michael E. Tennenbaum and Rajneesh Vig and a person designated by Babson with approval of TCP (currently Richard E. Spencer II)) and approximately 25 non-voting members from TCP. The number of voting and non-voting members of the Investment Committee is subject to increase or decrease in the sole discretion of TCP. Upon completion of this offering, Mr. Spencer will no longer be a voting member. All members of the Investment Committee attend investment meetings and are encouraged to participate in discussions. In addition, members of the Investment Committee have relationships with other investors, including insurance companies, bond funds, mezzanine funds, private equity funds, hedge funds and other funds which invest in similar assets. Further, TCP regularly calls on both active and recently retired senior executives from the relevant industries to assist with the due diligence of potential investments. Historically, these relationships with retired senior executives have also been a valuable source of transactions and information. TCP anticipates that they will continue to provide future opportunities. We believe TCPs strong relationships with its portfolio companies facilitate positive word-of-mouth recommendations to other companies seeking TCPs expertise. TCPs relationships often result in the ability to access investment opportunities earlier than many of its competitors and in some cases an exclusive basis.
The foundation of TCPs investment process is intensive investment research and analysis by its experienced staff of investment professionals. TCPs senior professionals have worked together for numerous years and we believe that they have a superior level of credit investing knowledge relative to other credit investors. TCP supplements its in-house knowledge with industry experts, including CEO/CFO-level executives, with direct management experience in the industries under consideration. TCP prefers these industry experts to consultants because of the practical business advice that comes from having managed businesses. TCP rigorously and comprehensively analyzes issuers of securities of interest. The process includes a quantitative and qualitative assessment of the issuers business, an evaluation of its management, an analysis of the business strategy and industry trends, and an in-depth examination of the companys capital structure, financial results and projections. TCPs due diligence process includes:
| an assessment of the outlook for the industry and general macroeconomic trends; |
| discussions with issuer management and other industry executives, including the assessment of management/board strengths and weaknesses; |
| an analysis of the fundamental asset values and the enterprise value of the issuer; |
| review of the issuers key assets, core competencies, competitive advantages, historical and projected financial statements, capitalization, financial flexibility, debt amortization requirements, and tax, environmental, legal and regulatory contingencies; |
| review of the issuers existing credit documents, including credit agreements, indentures, intercreditor agreements, and security agreements; and |
| review of documents governing the issuer, including charter, by-laws, and key contracts. |
As an early non-bank participant in the leveraged loan market, we believe that loan origination is a core competency of TCP. Supplementing industry deal teams experience and competency, TCP has seven professionals (including investment professionals) with legal experience, two of whom have a quarter-century each of relevant experience in secured credit. Deal teams work with TCPs in-house legal specialists and outside counsel to structure over-collateralized loans with what we believe to be strong creditor protections and contractual controls over borrower operations. In many cases, TCP works to obtain contractual governance
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rights and board seats to protect principal and maximize post-investment returns. Deals usually include upfront fees and/or equity participations through warrants or direct equity stakes.
A key element in maximizing investment returns in secondary purchases is buying and selling investments at the best available prices. TCP has a dedicated trading staff for both the highly specialized traded loan market and for high-yield bonds. Through its trading operations, TCP maintains its established relationships with a network of broker-dealers in the debt securities markets. These relationships provide TCP with access to the trading dynamics of existing or potential investments and assist it in effectively executing transactions. These relationships may also lead to the early identification of potential investment opportunities for the Company.
TCP actively monitors the financial performance of its portfolio companies and market developments. This constant monitoring permits TCP to update position risk assessments, seek to address potential problems early, refine exit plans, and make follow-on investment decisions quickly. We view active portfolio monitoring as a vital part of our investment process.
We consider board observation and information rights, regular dialogue with company management and sponsors, and detailed internally generated monitoring reports to be critical to our performance. We have developed a monitoring template that seeks to ensure compliance with these standards and that is used as a tool by the Investment Committee to assess investment performance relative to plan.
| Deal teams maintain contact with portfolio company management through regularly scheduled and ad hoc conference calls and onsite visits. |
| Deal teams review portfolio company progress relative to plan and pre-determined performance benchmarks. |
| Adverse or unexpected developments, as well as consequential routine updates, are reported to the Investment Committee and thoroughly discussed at regularly scheduled weekly meetings. If merited, the Investment Committee will hold ad hoc meetings as necessary to address urgent issues. |
| Deal teams, with Investment Committee approval, encourage portfolio company managers to catalyze events to monetize holdings for greater return, or where needed, corrective actions to address shortfalls to plan or benchmarks. |
| All existing portfolio holdings are formally reviewed in detail by the entire Investment Committee once per quarter at TCPs quarterly portfolio review. |
TCPs investment process is organized around the Investment Committee that provides for a centralized, repeatable decision process. The Investment Committee meets weekly and, with respect to each fund TCP advises, certain members of the Investment Committee are voting members. Upon completion of this offering, the Investment Committee will have six voting members: Todd R. Gerch, Mark K. Holdsworth, Michael E. Leitner, Howard M. Levkowitz, Michael E. Tennenbaum and Rajneesh Vig. Approval by a simple majority vote of the voting members of the Investment Committee for each respective fund is required for the purchase or sale of any investment, with certain de-minimis exceptions. No voting member has veto power. TCPs investment process is designed to maximize risk-adjusted returns and preserve downside protection.
Once we determine that a prospective portfolio company is suitable for a direct investment, we work with the management of that company and its other capital providers, including senior and junior lenders, and equity holders, to structure an investment. We negotiate among these parties to agree on how our investment is expected to be structured relative to the other capital in the portfolio companys capital structure.
We anticipate structuring our investments primarily as secured leveraged loans. Leveraged loans are generally senior debt instruments that rank ahead of subordinated debt of the portfolio company. Leveraged
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loans generally have the benefit of security interests on the assets of the portfolio company, which may rank ahead of, or be junior to, other security interests.
The Companys portfolio currently includes high-yield securities and the Company may invest in high-yield securities in the future. High-yield securities have historically experienced greater default rates than has been the case for investment grade securities and are generally rated below investment grade by one or more nationally recognized statistical rating organizations or will be unrated but of comparable credit quality to obligations rated below investment grade, and have greater credit and liquidity risk than more highly rated obligations. High-yield securities are generally unsecured and may be subordinate to other obligations of the obligor and are often issued in connection with leveraged acquisitions or recapitalizations in which the issuers incur a substantially higher amount of indebtedness than the level at which they had previously operated. The Companys portfolio also includes mezzanine investments which are generally unsecured and rated below investment grade. Mezzanine investments of the type in which the Company invests in are primarily privately negotiated subordinated debt securities often issued in connection with leveraged transactions, such as management buyouts, acquisitions, re-financings, recapitalizations and later stage growth capital financings, and are generally accompanied by related equity participation features such as options, warrants, preferred and common stock. In some cases, our debt investments may provide for a portion of the interest payable to be paid-in-kind interest. To the extent interest is paid-in-kind, it will be payable through the increase of the principal amount of the obligation by the amount of interest due on the then-outstanding aggregate principal amount of such obligation.
In some cases, we will also receive nominally priced warrants or options to buy a minority equity interest in the portfolio company in connection with a loan. As a result, if a portfolio company appreciates in value, we may achieve additional investment return from this equity interest. We may structure such warrants to include provisions protecting our rights as a minority-interest holder, as well as a put, or right to sell such securities back to the issuer, upon the occurrence of specified events. In many cases, we may also seek to obtain registration rights in connection with these equity interests, which may include demand and piggyback registration rights.
The Companys portfolio currently includes distressed debt investments and the Company is authorized to continue to invest in the securities and other obligations of distressed and bankrupt issuers, including debt obligations that are in covenant or payment default. As of March 31, 2011, approximately 3.3% of the Operating Companys total assets consisted of distressed investments, all of which consisted of investments in default. However, the Company does not anticipate distressed debt to be a significant part of its ongoing investment strategy. Such investments generally trade significantly below par and are considered speculative. The repayment of defaulted obligations is subject to significant uncertainties. Defaulted obligations might be repaid only after lengthy workout or bankruptcy proceedings, during which the issuer might not make any interest or other payments. Typically such workout or bankruptcy proceedings result in only partial recovery of cash payments or an exchange of the defaulted obligation for other debt or equity securities of the issuer or its affiliates, which may in turn be illiquid or speculative.
Opportunistic investments may include, but are not limited to, investments in debt securities of all kinds and at all levels of the capital structure and may include equity securities of public companies that are not thinly traded, emerging market debt, structured finance vehicles such as CLO funds and debt of middle-market companies located outside the United States. We do not intend such investments to be our primary focus as a BDC.
We intend to tailor the terms of each investment to the facts and circumstances of the transaction and the prospective portfolio company, negotiating a structure that protects our rights and manages our risk while creating incentives for the portfolio company to achieve its business plan and improve its operating results. We will seek to limit the downside potential of our investments by:
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| requiring a total return on our investments (including both interest and potential equity appreciation) that we believe will compensate us appropriately for credit risk; |
| negotiating covenants in connection with our investments that afford our portfolio companies as much flexibility in managing their businesses as possible, consistent with the preservation of our capital. Such restrictions may include affirmative and negative covenants, default penalties, lien protection, change of control provisions and board rights, including either observation or rights to a seat on the board of directors under some circumstances; and |
| selecting investments that we believe have a very low probability of loss. |
We expect to hold most of our investments to maturity or repayment, but we may sell some of our investments earlier if a liquidity event occurs, such as a sale, recapitalization or worsening of the credit quality of the portfolio company.
As a BDC, we will offer, and must provide upon request, managerial assistance to certain of our portfolio companies. This assistance could involve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. We may receive fees for these services and will reimburse the General Partner as our Administrator for its allocated costs in providing such assistance subject to review and approval by our board of directors. TCP will provide such managerial assistance on our behalf to portfolio companies that request this assistance.
Our primary competitors to provide financing to middle-market companies include public and private funds, commercial and investment banks, commercial finance companies and private equity and hedge funds. Many of our competitors are substantially larger and have considerably greater financial and marketing resources than we do. For example, some competitors may have access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC or to the distribution and other requirements we must satisfy to maintain our favorable RIC tax status.
We do not own any real estate or other physical properties materially important to our operation. Our headquarters are currently located at 2951 28th Street, Suite 1000, Santa Monica, CA 90405. TCP furnishes us office space and we reimburse it for such costs on an allocated basis.
We, the Operating Company, the General Partner and TCP are currently party to certain lawsuits in the normal course of business. Furthermore, third parties may try to seek to impose liability on us in connection with the activities of our portfolio companies. While the outcome of any such open legal proceedings cannot at this time be predicted with certainty, we do not expect these matters will have a material adverse impact on the financial condition or results of operations of the Holding Company, the Operating Company, the General Partner or TCP.
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The information contained in this section should be read in conjunction with the selected financial data and our financial statements and notes thereto appearing elsewhere in this prospectus.
We were organized as a Delaware limited liability company on July 17, 2006 and were initially funded on July 31, 2006. Our investment objective is to seek to achieve high total returns while minimizing losses. We seek to achieve our investment objective primarily through investments in debt securities of leveraged middle market companies.
Prior to the completion of our public offering, we will convert from a Delaware limited liability company to a Delaware corporation and make an election to be treated as a BDC under the 1940 Act. Upon conversion from a limited liability company to a corporation, owners of our common limited liability company interests will receive shares of our new common stock with an aggregate net asset value equal to the aggregate net asset value of limited liability company interests owned by the stockholder on the conversion date, less the costs of the Conversion and less the amount of any cash distributed for fractional common shares. Each of our outstanding limited liability company interests is expected to be converted into shares of common stock based upon a net asset value at , 2011 of $ , which would cause us to have a total of shares of common stock outstanding immediately after the Conversion without giving effect to any shares sold in our public offering. Our preferred limited liability company interests have been called for redemptions and will be redeemed prior to our conversion to a corporation. Preferred limited partnership interests in the Operating Company, which were issued to the lenders under the Leverage Program, are expected to remain outstanding.
We commenced operations on July 31, 2006, when Special Value Bond Fund II, LLC and Special Value Absolute Return Fund, LLC (the Predecessor Funds or SVBFII and SVAR, respectively) each contributed most of their assets to the Operating Company in exchange for 100% of the Operating Companys common limited partnership interests and general partnership interests in a non-taxable transaction; SVBFII and SVAR then exchanged their common equity in the Operating Company for 100% of our common equity, which they then distributed to their respective members who had chosen to participate in the transaction.
Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount of debt and equity capital available to middle-market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we make.
As a BDC, we will be required to invest at least 70% of our total assets in qualifying assets (with certain limited exceptions), which include investments in private or thinly traded public U.S. companies, cash, cash equivalents, U.S. Government securities and high-quality debt investments that mature in one year or less. We will also be permitted to make certain follow-on investments in companies that were eligible portfolio companies at the time of initial investment but that no longer meet the definition.
We generate revenues primarily in the form of interest on the debt we hold. We also generate revenue from dividends on our equity interests and capital gains on the sale of warrants and other debt or equity interests that we acquire. Our investments in fixed income instruments generally have an expected maturity of three to five years, although we have no lower or upper constraint on maturity. Interest on our debt investments is generally payable quarterly or semi-annually. Payments of principal of our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt investments and preferred stock investments may defer payments of cash interest or dividends or PIK. Any outstanding principal amount of our debt investments and any accrued but unpaid interest will generally become due at the maturity date. In addition, we may generate revenue in the form of prepayment fees, commitment, origination, structuring or due diligence fees, fees for providing significant managerial assistance and consulting fees.
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Our primary operating expenses include the payment of a base management fee and, depending on our operating results, incentive compensation, and, following our conversion to a BDC, expenses reimbursable under the management agreement, administration fees and the allocable portion of overhead under the administration agreement. The base management fee and incentive compensation remunerates the Advisor for work in identifying, evaluating, negotiating, closing and monitoring our investments. Following conversion to a BDC, our administration agreement with the Administrator will provide that the Administrator may be reimbursed for costs and expenses incurred by the Administrator for office space rental, office equipment and utilities allocable to us under the administration agreement, as well as any costs and expenses incurred by the Administrator or its affiliates relating to any non-investment advisory, administrative or operating services provided by the Administrator or its affiliates to us. We also bear all other costs and expenses of our operations and transactions (and the Holding Companys common stockholders indirectly bear all of the costs and expenses of the Holding Company and the Operating Company), which may include those relating to:
| our organization; |
| calculating our net asset value (including the cost and expenses of any independent valuation firms); |
| interest payable on debt, if any, incurred to finance our investments; |
| costs of future offerings of our common stock and other securities, if any; |
| the base management fee and any incentive compensation; |
| dividends and distributions on our preferred shares, if any, and common shares; |
| following conversion to a BDC, administration fees payable under the administration agreement; |
| fees payable to third parties relating to, or associated with, making investments; |
| transfer agent and custodial fees; |
| registration fees; |
| listing fees; |
| taxes; |
| director fees and expenses; |
| costs of preparing and filing reports or other documents with the SEC; |
| costs of any reports, proxy statements or other notices to our stockholders, including printing costs; |
| our fidelity bond; |
| directors and officers/errors and omissions liability insurance, and any other insurance premiums; |
| indemnification payments; |
| direct costs and expenses of administration, including audit and legal costs; and |
| all other expenses reasonably incurred by us and, after conversion to a BDC, the Administrator in connection with administering our business, such as the allocable portion of overhead under the administration agreement, including rent and other allocable portions of the cost of certain of our officers and their respective staffs. |
The investment management agreement provides that the base management fee will be calculated at an annual rate of 1.5% of our total assets (excluding cash and cash equivalents) payable quarterly in arrears. For purposes of calculating the base management fee, total assets is determined without deduction for any borrowings or other liabilities. For the first calendar quarter (or portion thereof) of our operations as a BDC, the base management fee will be calculated based on the initial value of our total assets (excluding cash and cash equivalents) as of a date as close as practicable to the Conversion. Beginning with our second calendar quarter of operations as a BDC, the base management fee will be calculated based on the value of our total
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assets (excluding cash and cash equivalents) at the end of the most recently completed calendar quarter. The base management fee for any partial quarter will be appropriately pro-rated.
Additionally, the investment management agreement and the Amended and Restated Limited Partnership Agreement provide that the Advisor or its affiliates may be entitled to incentive compensation under certain circumstances. No incentive compensation will be incurred prior to January 1, 2013. Beginning January 1, 2013, the incentive compensation will equal the sum of (1) 20% of all ordinary income since that date and (2) 20% of all net realized capital gains (net of any net unrealized capital depreciation) since that date, with each component being subject to a total return requirement of 8% of contributed common equity annually. The incentive compensation initially will be payable to the General Partner by the Operating Company pursuant to the Amended and Restated Limited Partnership Agreement. If the Operating Company is terminated or for any other reason incentive compensation is not paid by the Operating Company, it would be paid pursuant to the investment management agreement between us and the Advisor. The determination of incentive compensation is subject to limitations under the 1940 Act and the Advisers Act.
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. Management considers the following critical accounting policies important to understanding the financial statements. In addition to the discussion below, our critical accounting policies are further described in the notes to our financial statements.
We value our portfolio investments at fair value based upon the principles and methods of valuation set forth in policies adopted by our board of directors. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. Market participants are buyers and sellers in the principal (or most advantageous) market for the asset that (i) are independent of us, (ii) are knowledgeable, having a reasonable understanding about the asset based on all available information (including information that might be obtained through due diligence efforts that are usual and customary), (iii) are able to transact for the asset, and (iv) are willing to transact for the asset or liability (that is, they are motivated but not forced or otherwise compelled to do so).
Investments for which market quotations are readily available are valued at such market quotations unless the quotations are deemed not to represent fair value. We generally obtain market quotations from recognized exchanges, market quotation systems, independent pricing services or one or more broker-dealers or market makers. However, short term debt investments with remaining maturities within 60 days are generally valued at amortized cost, which approximates fair value. Debt and equity securities for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued at fair value as determined in good faith by our board of directors. Because we expect that there will not be a readily available market value for many of the investments in our portfolio, we expect to value many of our portfolio investments at fair value as determined in good faith by our board of directors using a consistently applied valuation process in accordance with a documented valuation policy that has been reviewed and approved by our board of directors. Due to the inherent uncertainty and subjectivity of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments and may differ materially from the values that we may ultimately realize. In addition, changes in the market environment and other events may have differing impacts on the market quotations used to value some of our investments than on the fair values of our investments for which market quotations are not readily available. Market quotations may be deemed not to represent fair value in certain circumstances where we believe that facts and circumstances applicable to an issuer, a seller or purchaser, or the market for a particular security cause current market quotations to not reflect the fair value of the security. Examples of these events could include cases where a security trades infrequently causing a quoted purchase or sale price
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to become stale, where there is a forced sale by a distressed seller, where market quotations vary substantially among market makers, or where there is a wide bid-ask spread or significant increase in the bid-ask spread.
The valuation process adopted by our board of directors with respect to investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value is as follows:
| The investment professionals of the Advisor provide recent portfolio company financial statements and other reporting materials to independent valuation firms engaged by our board of directors. |
| Such firms evaluate this information along with relevant observable market data to conduct independent appraisals each quarter, and their preliminary valuation conclusions are documented and discussed with senior management of the Advisor. |
| The board of directors discusses the valuations and determines the fair value of each investment in our portfolio in good faith based on the input of the Advisor, the respective independent valuation firms and the audit committee. |
However, smaller investments aggregating less than 5% of our total capitalization may be valued at fair value as determined in good faith by the board of directors based on valuations provided by the Advisor without the employment of an independent valuation firm.
Those investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in determining the fair value of our investments include, as relevant and among other factors: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio companys ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, merger and acquisition comparables, our principal market (as the reporting entity) and enterprise values.
When valuing all of our investments, we strive to maximize the use of observable inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances.
Our investments may be categorized based on the types of inputs used in their valuation. The level in the GAAP valuation hierarchy in which an investment falls is based on the lowest level input that is significant to the valuation of the investment in its entirety. Investments are classified by GAAP into the three broad levels as follows:
Level 1 Investments valued using unadjusted quoted prices in active markets for identical assets.
Level 2 Investments valued using other unadjusted observable market inputs, e.g. quoted prices in markets that are not active or quotes for comparable instruments.
Level 3 Investments that are valued using quotes and other observable market data to the extent available, but which also take into consideration one or more unobservable inputs that are significant to the valuation taken as a whole.
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As of March 31, 2011, 1.9% of our investments were categorized as Level 1, 39.3% were categorized as Level 2, 57.8% were Level 3 investments valued based on valuations by independent third party sources, and 1.0% were Level 3 investments valued based on valuations by the Advisor.
Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our financial statements express the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on the financial statements.
We record interest income, adjusted for amortization of premium and accretion of discount, and dividend income on an accrual basis to the extent that we expect to collect such amounts. For loans and securities with PIK income, which represents contractual interest or dividends accrued and added to the principal balance and generally due at maturity, we may not accrue PIK income if the portfolio company valuation indicates that the PIK income is not collectible. Origination, structuring, closing, commitment and other upfront fees and discounts and premiums on investments purchased are recognized when earned. Upon the prepayment of a loan or debt security, we record any prepayment fees as interest income.
We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized. Realized gains and losses are computed using the specific identification method. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.
March 31, 2011:
Investment portfolio: $427.3 million
Net assets: $265.7 million
Net indebtedness (borrowings less cash and cash equivalents): $25.0 million
Preferred Interests: $134 million
Net asset value per share: $634.30*
Pro forma net asset value per share: $ **
Portfolio Activity for the three months ended March 31, 2011:
Cost of investments purchased during period: $37.0 million
Sales, repayments and other exits during period: $60.4 million
Number of portfolio companies at end of period: 44
Operating Results for the three months ended March 31, 2011:
Net investment income before incentive compensation per share: $37.60*
Pro forma net investment income before incentive compensation per share: $ **
Net investment income per share: $37.60*
Pro forma net investment income per share: $ **
Common shareholder dividends declared per share: $17.90*
Pro forma common shareholder dividends declared per share: $ **
Net increase in net assets from operations per share: $21.61*
Pro forma net increase in net assets from operations per
share: $ **
Net investment income before incentive compensation: $15.8 million
Net investment income: $15.8 million
Net realized and unrealized gains: $(6.3) million
Net increase in net assets from operations: $9.1 million
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At December 31, 2010:
Investment portfolio: $453.0 million
Net assets: $264.2 million
Net indebtedness (borrowings less cash and cash equivalents): $42.3 million
Preferred Interests: $134 million
Net asset value per share: $630.59*
Pro forma net asset value per share: $ **
Portfolio Activity for the Year Ended December 31, 2010:
Cost of investments purchased during period: $262.8 million
Sales, repayments and other exits during period: $192.4 million
Number of portfolio companies at end of period: 44
Operating Results for the Year Ended December 31, 2010:
Net investment income before incentive compensation per share: $92.87*
Pro forma net investment income before incentive compensation per share: $ **
Net investment income per share: $92.87*
Pro forma net investment income per share: $ **
Common shareholder dividends declared per share: $89.99*
Pro forma common shareholder dividends declared per share: $ **
Net increase in net assets from operations per share: $164.71*
Pro forma net increase in net assets from operations per
share: $ **
Net investment income before incentive compensation: $38.9 million
Net investment income: $38.9 million
Net realized and unrealized gains: $31.6 million
Net increase in net assets from operations: $69.0 million
* | These per share calculations are based on the 418,955.777 shares outstanding prior to the Conversion, which were initially issued at $1,000 per share, and accordingly should not be considered a representation of our per share calculations following this offering. |
** | Pro forma for the Conversion and the issuance of shares of common stock in this offering. |
During the three months ended March 31, 2011, we invested approximately $37.0 million across one new and seven existing portfolio companies. Of these investments, 97% were senior secured debt comprised of senior loans ($21.4 million, or 58% of the total) and senior secured notes ($14.4 million, or 39%). The remaining $1.2 million (3% of the total) of new investments were in unsecured or subordinated debt securities. Additionally, we received approximately $60.4 million in proceeds from sales or repayments of investments during the three months ended March 31, 2011, comprised of $7.9 million from equity investments and $52.5 million from debt investments.
At March 31, 2011, our investment portfolio of $427.3 million (at fair value) consisted of 44 portfolio companies and was invested 37% in senior secured loans, 29% in senior secured notes, 8% in unsecured or subordinated debt, and 26% in equity investments. Our average portfolio company investment at amortized cost was approximately $10.9 million. Our largest portfolio company investment by value was approximately $45.5 million and our five largest portfolio company investments by value comprised approximately 32% of our portfolio at March 31, 2011.
The weighted average yield to maturity of the debt and income producing equity securities in our portfolio was 12.0% at March 31, 2011 and 12.9% at March 31, 2010. The weighted average yields to maturity on our senior secured debt and other debt investments were 11.6% and 15.7%, respectively, at March 31, 2011, versus 11.8% and 15.8% at March 31, 2010. Yields exclude common equity investments and preferred equity investments with no stated dividend rate.
At March 31, 2011, 48% of our debt investments bore interest based on floating rates, such as LIBOR, EURIBOR, the Federal Funds Rate or the Prime Rate, and 52% bore interest at fixed rates. The percentage of
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our floating rate debt investments that bore interest based on an interest rate floor was 32% at March 31, 2011. At March 31, 2010, 35% of our debt investments bore interest based on floating rates and 65% bore interest at fixed rates. The percentage of our floating rate debt investments that bore interest based on an interest rate floor was 18% at March 31, 2010.
During the year ended December 31, 2010, we invested approximately $262.8 million across 20 new and 14 existing portfolio companies. These investments consisted primarily of senior loans secured by first liens ($159.8 million, or 61% of the total) or second liens ($24.4 million, or 9%), senior secured notes ($60.7 million, or 23%), equity securities ($2.9 million, or 1%) and unsecured or subordinated debt securities ($15.0 million, or 6%). Additionally, we received proceeds from sales/repayments of investment principal of approximately $192.4 million during the year ended December 31, 2010.
At December 31, 2010, our investment portfolio of $453.0 million (at fair value) consisted of 44 portfolio companies and was invested 39% in senior secured loans, 8% in unsecured or subordinated debt, 25% in senior secured notes, and 28% in equity investments. Our average portfolio company investment at amortized cost was approximately $11.2 million. Our largest portfolio company investment by value was approximately $47.5 million and our five largest portfolio company investments by value comprised approximately 38% of our portfolio at December 31, 2010. At December 31, 2009, our investment portfolio of $343.1 million (at fair value) consisted of 40 portfolio companies and was invested 25% in senior secured loans, 14% in unsecured or subordinated debt, 19% in senior secured notes and 42% in equity investments. Our average portfolio company investment at amortized cost was approximately $9.8 million at December 31, 2009. Our largest portfolio company investment by value was approximately $51.1 million and our five largest portfolio company investments by value comprised approximately 46% of our portfolio at December 31, 2009.
The weighted average yield to maturity of the debt and income producing equity securities in our portfolio was 13.1% at December 31, 2010 and 12.5% at December 31, 2009. The weighted average yields to maturity on our senior secured debt and other debt investments were 11.9% and 22.1%, respectively, at December 31, 2010, versus 14.8% and 15.8% at December 31, 2009. Yields exclude common equity investments and preferred equity investments with no stated dividend rate.
At December 31, 2010, 36% of our debt investments bore interest based on floating rates, such as LIBOR, EURIBOR, the Federal Funds Rate or the Prime Rate, and 64% bore interest at fixed rates. The percentage of our floating rate debt investments that bore interest based on an interest rate floor was 36% at December 31, 2010. At December 31, 2009, 42% of our debt investments bore interest based on floating rates and 58% bore interest at fixed rates. The percentage of our floating rate debt investments that bore interest based on an interest rate floor was 25% at December 31, 2009.
Investment income totaled $18.0 million and $8.3 million, respectively, for the three months ended March 31, 2011 and 2010, of which $9.5 million and $4.1 million were attributable to interest and fees on senior secured debt, $1.2 million and $2.0 million to interest earned on other debt investments, $6.6 million and $1.8 million to dividends from equity securities and $0.7 million and $0.4 million to other income, respectively. The increased investment income in the three months ended March 31, 2011 compared to the three months ended March 31, 2010 primarily reflects a significant increase in senior secured debt held in the portfolio. The increased dividend income in the three months ended March 31, 2011 compared to the three months ended March 31, 2010 was due to a significant dividend received on one equity position. Total investments at fair value and their cost were $427.3 million and $473.7 million at March 31, 2011, compared to $392.1 million and $440.5 million at March 31, 2010. Three-month LIBOR averaged 0.308% during the three months ended March 31, 2011, compared to 0.257% during the three months ended March 31, 2010.
Net expenses for the three months ended March 31, 2011 and 2010 were $2.2 million and $2.3 million, respectively, which consisted of $1.7 million and $1.7 million in base management fees, $0.1 million and $0.1
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million in interest expense and fees related to the Revolving Facility, $0.1 million and $0.1 million in amortization of debt issuance costs, and $0.3 million and $0.4 million in other expenses, respectively. No incentive compensation was paid during the three months ended March 31, 2011 and 2010. Total expenses for each of these periods include an immaterial amount of expenses incurred by the Holding Company.
Net investment income was $15.8 million and $6.0 million respectively, for the three months ended March 31, 2011 and 2010. The increase in net investment income in the three months ended March 31, 2011 compared to the three months ended March 31, 2010 primarily reflects increased interest and dividend income.
Net realized gains for the three months ended March 31, 2011 and 2010 were $2.6 million and $3.6 million, respectively. For the three months ended March 31, 2011 and 2010, the change in net unrealized appreciation or depreciation was $(8.9) million and $2.6 million, respectively. The change in net unrealized appreciation or depreciation during the three months ended March 31, 2011 were due to markdowns on one debt and one equity position.
Dividends on the Preferred Interests for the three months ended March 31, 2011 and 2010 were $0.4 million and $0.4 million, respectively, as average LIBOR rates for the two periods were similar.
The net increase in net assets resulting from operations was $9.1 million and $11.8 million for the three months ended March 31, 2011 and 2010, respectively. The decreased amount in the three months ended March 31, 2011 compared to the three months ended March 31, 2010 primarily reflects a decrease in net unrealized appreciation or depreciation, which was partially offset by an increase in interest and dividend income.
Investment income totaled $47.8 million, $27.1 million and $37.2 million, respectively, for the years ended December 31, 2010, 2009 and 2008, of which $26.1 million, $19.0 million and $25.2 million were attributable to interest and fees on senior secured debt, $6.3 million, $7.7 million and $8.6 million to interest earned on other debt investments, $13.5 million, $0.0 million and $2.3 million to dividends from equity securities, $0.0 million, $0.0 million and $0.8 million to interest earned on short-term investments and cash equivalents, and $1.8 million, $0.4 million and $0.2 million to other income, respectively. The increase in investment income in 2010 compared to 2009 primarily reflects an increase in the size of our portfolio and a significant increase in dividends received on certain equity positions. The decrease in investment income in 2009 compared to 2008 primarily reflects a decrease in interest rates, which affected our floating rate debt, an increase in equity holdings relative to debt investments as a result of restructurings of portfolio companies and debt sales and a reduction in the size of the portfolio. Total investments at fair value and their cost were $453.0 million and $490.9 million at December 31, 2010, compared to $343.1 million and $393.7 million at December 31, 2009, and $348.5 million and $497.7 million at December 31, 2008, respectively. Three-month LIBOR averaged 0.34% during the year ended December 31, 2010, compared to 0.69% during the year ended December 31, 2009 and 2.93% during the year ended December 31, 2008.
Net expenses (including any taxes) for the years ended December 31, 2010, 2009 and 2008 were $8.9 million, $9.2 million and $14.7 million, respectively, which consisted of $6.8 million, $6.8 million and $8.3 million in base management fees, $0.5 million, $0.5 million and $4.9 million in interest expense and fees related to the Revolving Agreement, $0.5 million, $0.5 million and $0.4 million in professional fees, $0.4 million each year in amortization of debt issuance costs, $0.1 million each year in insurance expenses, $0.2 million each year in director fees and $0.4 million, $0.6 million and $0.4 million in other expenses,
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respectively. Base management fees decreased in 2009 compared to 2008 due to a commensurate reduction in our capital structure. Interest expense decreased in 2009 compared to 2008 due to lower interest rates and lower borrowings during the period. No incentive compensation was paid during the years ended December 31, 2010, 2009 or 2008. Total expenses for each of these years include an immaterial amount of expenses incurred by the Holding Company.
Net investment income was $38.9 million, $17.9 million and $22.5 million respectively, for the years ended December 31, 2010, 2009 and 2008. The increase in net investment income in 2010 compared to 2009 primarily reflects the increase in the size of our portfolio and the increased dividend income. The decrease in net investment income in 2009 compared to 2008 primarily reflects the decrease in interest rates and the decrease in debt holdings due to restructurings and sales, partially offset by the reduction in base management fees and interest expense.
Net realized gains (losses) for the years ended December 31, 2010, 2009 and 2008 were $18.7 million, $(62.6) million and $(22.8) million, respectively. For the years ended December 31, 2010, 2009 and 2008, the change in net unrealized appreciation or depreciation was $12.9 million, $98.8 million and $(186.5) million, respectively. Net realized and unrealized gains during 2010 and 2009 were primarily a result of reversals of prior years unrealized depreciation and improved capital market conditions. Net realized and unrealized losses during 2008 were primarily a result of unprecedented turmoil in the capital markets.
Dividends on the Preferred Interests for the years ended December 31, 2010, 2009 and 2008 were $1.5 million, $1.7 million and $5.2 million, respectively. The decrease in dividends was due to reductions in the average LIBOR rate.
The net increase (decrease) in net assets resulting from operations was $69.0 million, $52.3 million and $(188.8) million for the years ended December 31, 2010, 2009 and 2008, respectively. The increase in 2010 compared to 2009 primarily reflects an increase in interest income from new investments as well as dividends from certain equity positions, offset somewhat by a smaller positive change in net unrealized appreciation or depreciation. The increase in 2009 compared to 2008 primarily reflects the large positive change in net unrealized appreciation or depreciation.
Since our inception, our liquidity and capital resources have been generated primarily through our initial private placement of common shares, our Leverage Program, and cash flows from operations, including investments sales and repayments and income earned from investments and cash equivalents. The primary use of cash has been investments in portfolio companies, cash distributions to our stockholders, payments to service our Leverage Program and other general corporate purposes.
Net cash used in operating activities during the three months ended March 31, 2011 was $37.4 million. Our primary use of cash in operating activities during this period consisted of settlements of investment acquisitions (net of dispositions) of $25.4 million, partially offset by net investment income (net of non-cash income) of approximately $12.2 million.
We used $31.1 million for financing activities during the three months ended March 31, 2011, consisting primarily of $19.7 million of dividends on common interests, $0.4 million of dividends on the Preferred Interests, and $11.0 million of net repayments under our Revolving Facility.
At March 31, 2011, we had $14.0 million in cash and cash equivalents.
The Revolving Facility is secured by substantially all of the assets in our portfolio, including cash and cash equivalents. At March 31, 2011, we had $39.0 million drawn and outstanding under the Revolving Facility, with an additional $77.0 million available to us, subject to compliance with customary affirmative and
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negative covenants, including the maintenance of a minimum shareholders equity, the maintenance of ratios of not less than 300% of total assets (less total liabilities other than indebtedness) to total indebtedness and not less than 200% of total assets (less total liabilities other than indebtedness) to the sum of total preferred equity and indebtedness, and restrictions on certain payments and issuance of debt. Economic conditions, like those that began in 2007 and continued through 2010, may result in a decrease in the value of our investments, which would affect both the asset coverage ratios and the value of the collateral securing the Revolving Facility, and may therefore impact our ability to borrow under the Revolving Facility. See Risks Risks Related to our Business In addition to regulatory restrictions that restrict our ability to raise capital, the Leverage Program contains various covenants which, if not complied with, could accelerate repayment under the Revolving Facility or require redemption of the Preferred Interests, thereby materially and adversely affecting our liquidity, financial condition and results of operations. At March 31, 2011, we were in compliance with all financial and operational covenants required by the Revolving Facility.
Economic conditions, like those that began in 2007 and continued through 2010, while creating attractive opportunities for us, may decrease liquidity and raise the cost of capital generally, which could limit our ability to renew, extend or replace the Leverage Program on terms as favorable as are currently included therein. If we are unable to renew, extend or replace the Leverage Program upon its maturity, we expect to have sufficient funds to repay the outstanding balance in full from our net investment income and sales of, and repayments of principal from, our portfolio company investments, as well as from anticipated debt and equity capital raises, among other sources. Economic conditions, like those that began in 2007 and continued through 2010, may limit our ability to raise capital or the ability of the companies in which we invest to repay our loans or engage in a liquidity event, such as a sale, recapitalization or initial public offering. Risks Risks Related to our Business The Revolving Facility matures in July 2014 and the Preferred Interests will be subject to mandatory redemption in July 2016. Any inability to renew, extend or replace the Revolving Facility or replace the Preferred Interests could adversely impact our liquidity and ability to find new investments or maintain distributions to our stockholders.
Challenges in the market are intensified for us by certain regulatory limitations under the Code and the 1940 Act. To maintain our qualification as a RIC, we must satisfy, among other requirements, an annual distribution requirement to pay out at least 90% of our ordinary income and short-term capital gains to our stockholders. Because we are required to distribute our income in this manner, and because the illiquidity of many of our investments may make it difficult for us to finance new investments through the sale of current investments, our ability to make new investments is highly dependent upon external financing. While we anticipate being able to continue to satisfy all covenants and repay the outstanding balance under the Leverage Program when due, there can be no assurance that we will be able to do so, which could lead to an event of default. See Risks Risks related to our Business In addition to regulatory restrictions that restrict our ability to raise capital, the Leverage Program contains various covenants which, if not complied with, could accelerate repayment under the Revolving Facility or require redemption of the Preferred Interests, thereby materially and adversely affecting our liquidity, financial condition and results of operations.
Our Revolving Facility is a senior secured revolving credit facility with certain lenders pursuant to which amounts may be drawn up to $116 million. The Revolving Facility matures on July 31, 2014, and may be extended at our option for one 12-month period. At March 31, 2011, $39 million in advances were outstanding under the Revolving Facility, all of which were short-term draws of less than one year.
We have also entered into several contracts under which we have future commitments. Pursuant to an investment management agreement, the Advisor manages our day-to-day operations and provides investment advisory services to us. Following the conversion to a BDC, payments under the investment management agreement will be equal to a percentage of the value of our gross assets (excluding cash and cash equivalents) and an incentive compensation, plus reimbursement of certain expenses incurred by the Advisor. Under our administration agreement following conversion to a BDC, the Administrator will provide us with administrative services, facilities and personnel. Payments under the administration agreement will be equal to an allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations to us, and may include rent and our allocable portion of the cost of certain of our officers and their respective staffs. We will be responsible for reimbursing the Advisor for due diligence and negotiation
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expenses, fees and expenses of custodians, administrators, transfer and distribution agents, counsel and directors, insurance, filings and registrations, proxy expenses, expenses of communications to investors, compliance expenses, interest, taxes, portfolio transaction expenses, costs of responding to regulatory inquiries and reporting to regulatory authorities, costs and expenses of preparing and maintaining our books and records, indemnification, litigation and other extraordinary expenses and such other expenses as are approved by the directors as being reasonably related to the organization, offering, capitalization, operation or administration of the Funds and any portfolio investments, as applicable. The Advisor is not responsible for any of the foregoing expenses and such services are not investment advisory services under the 1940 Act. Either party may terminate each of the investment management agreement and administration agreement without penalty upon not less than 60 days written notice to the other.
Our quarterly dividends, if any, are determined under guidelines established by our board of directors. Dividends are declared considering our estimate of annual taxable income available for distribution to stockholders and the amount of taxable income carried over from the prior year for distribution in the current year. We cannot assure stockholders that they will receive any dividends or dividends at a particular level. Dividends declared by the Company since July 2006 (inception of operations) have been as follows:
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Dividend Amount Per Share Outstanding* |
Record Date | Pay Date | ||||||
$ 11.08 | 9/30/2006 | 11/1/2006 | ||||||
34.37 | 12/31/2006 | 1/26/2007 | ||||||
26.76 | 3/31/2007 | 4/2/2007 | ||||||
74.16 | 6/30/2007 | 7/2/2007 | ||||||
21.51 | 9/30/2007 | 10/9/2007 | ||||||
71.05** | 12/31/2007 | 12/28/2007 | ||||||
9.55 | 6/30/2008 | 7/9/2008 | ||||||
9.55 | 10/1/2008 | 10/8/2008 | ||||||
9.55 | 7/1/2009 | 7/8/2009 | ||||||
11.93 | 9/14/2009 | 10/1/2009 | ||||||
8.35 | 12/22/2009 | 1/5/2010 | ||||||
6.44 | 12/30/2009 | 1/29/2010 | ||||||
7.16 | 3/26/2010 | 4/15/2010 | ||||||
16.71 | 6/21/2010 | 7/1/2010 | ||||||
19.10 | 9/20/2010 | 10/4/2010 | ||||||
31.03 | 12/27/2010 | 1/6/2011 | ||||||
15.99 | 12/27/2010 | 1/31/2011 | ||||||
17.90 | 3/23/2011 | 4/7/2011 |
* | The dividend amounts per share outstanding are calculated based on the 418,955.777 shares outstanding prior to the Conversion, which were initially issued at $1,000 per share, and should not be considered a representation of our future dividends following this offering. |
** | $5.72 of the $71.05 per share distribution was a return of capital. |
Tax characteristics of all dividends are reported to stockholders on Form 1099-DIV or Form 1042-S after the end of the calendar year.
We have elected to be taxed as a RIC under Subchapter M of the Code. In order to maintain favorable RIC tax treatment, we must distribute annually to our stockholders at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, out of the assets legally available for distribution. In order to avoid certain excise taxes imposed on RICs, we must distribute during each calendar year an amount at least equal to the sum of:
| 98% of our ordinary income (not taking into account any capital gains or losses) for the calendar year; |
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| 98.2% of the amount by which our capital gains exceed our capital losses (adjusted for certain ordinary losses) for the one-year period generally ending on October 31 of the calendar year; and |
| certain undistributed amounts from previous years on which we paid no U.S. federal income tax. |
We may, at our discretion, carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. If we choose to do so, all other things being equal, this would increase expenses and reduce the amounts available to be distributed to our stockholders. We will accrue excise tax on estimated taxable income as required. In addition, although we currently intend to distribute realized net capital gains (i.e., net long-term capital gains in excess of short-term capital losses), if any, at least annually, out of the assets legally available for such distributions, we may in the future decide to retain such capital gains for investment.
Following our conversion to a BDC, we will maintain an opt out dividend reinvestment plan for our common stockholders. As a result, if we declare a dividend, stockholders cash dividends will be automatically reinvested in additional shares of our common stock, unless they specifically opt out of the dividend reinvestment plan so as to receive cash dividends.
We may not be able to achieve operating results that will allow us to make dividends and distributions at a specific level or to increase the amount of these dividends and distributions from time to time. Also, we may be limited in our ability to make dividends and distributions due to the asset coverage test applicable to us as a BDC under the 1940 Act and due to provisions in our existing and future credit facilities. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of favorable RIC tax treatment. In addition, in accordance with U.S. generally accepted accounting principles and tax regulations, we include in income certain amounts that we have not yet received in cash, such as PIK interest, which represents contractual interest added to the loan balance that becomes due at the end of the loan term, or the accrual of original issue or market discount. Since we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the requirement to distribute at least 90% of our investment company taxable income to obtain tax benefits as a RIC and may be subject to an excise tax.
In order to satisfy the annual distribution requirement applicable to RICs, we have the ability to declare a large portion of a dividend in shares of our common stock instead of in cash. As long as a portion of such dividend is paid in cash (which portion can be as low as 20% for our taxable years ending on or before December 31, 2011) and certain requirements are met, the entire distribution would be treated as a dividend for U.S. federal income tax purposes.
We are subject to financial market risks, including changes in interest rates. At March 31, 2011, 48% of our debt investments bore interest based on floating rates, such as LIBOR, EURIBOR, the Federal Funds Rate or the Prime Rate. The interest rates on such investments generally reset by reference to the current market index after one to six months. At March 31, 2011, the percentage of our floating rate debt investments that bore interest based on an interest rate floor was 32%. Floating rate investments subject to a floor generally reset by reference to the current market index after one to six months only if the index exceeds the floor.
Generally, higher yielding assets such as those in our investment portfolio do not necessarily follow a linear interest rate relationship and are less sensitive in price to interest rate changes than many other debt investments. However, to illustrate the potential impact of changes in interest rates, we have performed the following analysis based on our March 31, 2011 balance sheet and assuming no changes in our investment structure. Net asset value is analyzed using the assumptions that interest rates, as defined by the LIBOR and U.S. Treasury yield curves, increase or decrease and that the yield curves of the rate shocks would be parallel to each other. Under this analysis, an instantaneous 100 basis point increase in LIBOR and U.S. Treasury yields could cause a decline of approximately $6.5 million, in the value of our net assets at March 31, 2011 and a corresponding hypothetical 100 basis point decrease in LIBOR and U.S. Treasury yields would cause an increase of approximately $4.6 million, in the value of our net assets on that date.
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We have entered into a number of business relationships with affiliated or related parties, including the following:
| Each of the Holding Company and the Operating Company have entered into an investment management agreement with the Advisor. |
| Following conversion to a BDC, the Administrator will provide us with administrative services necessary to conduct our day-to-day operations. For providing these services, facilities and personnel, the Administrator may be reimbursed by us for expenses incurred by the Administrator in performing its obligations under the administration agreement, including our allocable portion of the cost of certain of our officers and the Administrators administrative staff and providing, at our request and on our behalf, significant managerial assistance to our portfolio companies to which we are required to provide such assistance. |
| We have entered into a royalty-free license agreement with TCP, pursuant to which TCP has agreed to grant us a non-exclusive, royalty-free license to use the name TCP. |
| Pursuant to its limited partnership agreement, the general partner of the Operating Company is SVOF/MM, LLC. SVOF/MM, LLC is an affiliate of the Advisor and the general partners or managing member of certain other funds managed by the Advisor. |
The Advisor and its affiliates, employees and associates currently do and in the future may manage other funds and accounts. The Advisor and its affiliates may determine that an investment is appropriate for us and for one or more of those other funds or accounts. Accordingly, conflicts may arise regarding the allocation of investments or opportunities among us and those accounts. In general, the Advisor will allocate investment opportunities pro rata among us and the other funds and accounts (assuming the investment satisfies the objectives of each) based on the amount of committed capital each then has available. The allocation of certain investment opportunities in private placements is subject to independent director approval pursuant to the terms of the co-investment exemptive order applicable to us and described above. In certain cases, investment opportunities may be made other than on a pro rata basis. For example, we may desire to retain an asset at the same time that one or more other funds or accounts desire to sell it or we may not have additional capital to invest at a time the other funds or accounts do. See Risks Risks related to our business If TCP is unable to manage our investments effectively, we may be unable to achieve our investment objective. In addition, TCP may face conflicts in allocating investment opportunities between us and certain other entities that could impact our investment returns and Risks Risks related to our operations as a BDC While our ability to enter into transactions with our affiliates will be restricted under the 1940 Act, we have received an exemptive order from the SEC permitting certain affiliated investments subject to certain conditions. As a result, we may face conflict of interests and investments made pursuant to the exemptive order conditions could in certain circumstances affect adversely the price paid or received by us or the availability or size of the position purchased or sold by us.
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The following is a listing of each portfolio company investment, together referred to as our investment portfolio, at March 31, 2011. Percentages shown for class of securities held by us represent percentage of the class owned and do not necessarily represent voting ownership or economic ownership. Percentages shown for equity securities other than warrants or options represent the actual percentage of the class of security held before dilution. Percentages shown for warrants and options held represent the percentage of class of security we may own on a fully diluted basis assuming we exercise our warrants or options.
On March 31, 2011, our board of directors valued our investment portfolio at fair value as determined in good faith using a consistently applied valuation process in accordance with a documented valuation policy that has been reviewed and approved by our board of directors. For more information relating to our investments, see our schedules of investments included in our financial statements appearing elsewhere in this prospectus.
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Investment | Company Address | Principal Amount |
Fair Value |
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Debt Investments |
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Bank Debt(1) |
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Business Support Services |
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STG-Fairway Acquisitions, Inc., Senior Secured 1st Lien Term Loan, 13.5%, due 12/30/15 | 100 Carillon Parkway, St. Petersburg, FL 33716 |
$ | 24,504,817 | $ | 24,994,914 | |||||||
Commercial and Industrial Machinery and Equipment Rental and Leasing |
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AerCap Holdings N.V., Secured 1st Lien Term Loan, 10.25%, due 12/3/15 (Netherlands) | AerCap House, Stationsplein 965, 1117 CE Schiphol, The Netherlands |
$ | 10,411,593 | 10,411,593 | ||||||||
Communications Equipment Manufacturing |
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Mitel Networks Corporation, 1st Lien Term Loan, LIBOR + 3.25%, due 8/10/14 | 350 Legget Drive, Kanata, Ontario, Canada K2K 2W7 |
$ | 12,955,329 | 12,437,116 | ||||||||
Computer and Peripheral Equipment Manufacturing |
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Targus Group, 1st Lien Term Loan, LIBOR + 5.75% Cash + 2% PIK, due 11/22/12 | 1211 North Miller Street, Anaheim, CA 92806 |
$ | 1,991,091 | 1,991,091 | ||||||||
Electric Power Generation, Transmission and Distribution |
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La Paloma Generating Company, Residual Bank Debt(3) |
Park 80 West, 250 Pehle Avenue, Suite 105, Saddle Brook, NJ 07663 |
$ | 23,218,322 | 63,163 | ||||||||
Texas Competitive Electric Holdings Company, LLC, B3 Term Loan, LIBOR + 3.5%, due 10/10/14 | 1601 Bryan Street, Dallas, TX 75201 |
$ | 7,548,030 | 6,360,785 | ||||||||
Texas Competitive Electric Holdings Company, LLC, Delayed Draw Term Loan, LIBOR + 3.5%, due 10/10/14 | 1601 Bryan Street, Dallas, TX 75201 |
$ | 6,818,772 | 5,709,017 | ||||||||
Total Electric Power Generation, Transmission and Distribution | 12,132,965 | |||||||||||
Machine Shops; Turned Product; and Screw, Nut, and Bolt Manufacturing |
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Precision Partners Holdings, 1st Lien Delayed Draw Term Loan, LIBOR + 6.5%, due 10/2/13 |
90 Matawan Road, Suite 203, Matawan, NJ 07747 |
$ | 263,277 | 235,633 |
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Investment | Company Address | Principal Amount |
Fair Value |
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Precision Partners Holdings, 1st Lien Term Loan, LIBOR + 6.5%, due 10/2/13 | 90 Matawan Road, Suite 203, Matawan, NJ 07747 |
$ | 3,704,904 | $ | 3,315,889 | |||||||
Total Machine Shops; Turned Product; and Screw, Nut, and Bolt Manufacturing | 3,551,522 | |||||||||||
Offices of Real Estate Agents and Brokers |
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Realogy Corporation, 2nd Lien Term Loan A, 13.5%, due 10/15/17 |
One Campus Drive, Parsippany, NJ 07054 |
$ | 5,325,301 | 5,801,916 | ||||||||
Other Financial Investment Activities |
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American Capital, Ltd., Senior Secured 1st Lien Term Loan, LIBOR + 5.5%, due 12/31/13 | 2 Bethesda Metro Center, Bethesda, MD 20814 |
$ | 2,982,555 | 2,996,537 | ||||||||
Marsico Capital Management, Senior Secured 1st Lien Term Loan, LIBOR + 5%, due 12/14/14 |
1200 17th Street, #1600, Denver, CO 80202 |
$ | 16,893,722 | 13,747,266 | ||||||||
Total Other Financial Investment Activities | 16,743,803 | |||||||||||
Other General Merchandise Stores |
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Conn Appliances, Inc., Term Loan, LIBOR + 11.5%, due 11/30/14 | 3295 College St., Beaumont, TX 77701 |
$ | 11,340,270 | 11,340,270 | ||||||||
Radio and Television Broadcasting |
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Encompass Digital Media, Inc., 1st Lien Term Loan, LIBOR + 6%, due 2/28/16 | 3030 Andrita Street, Los Angeles, CA 90065 |
$ | 2,734,375 | 2,816,406 | ||||||||
Encompass Digital Media, Inc., 2nd Lien Term Loan, 16.5%, due 8/28/16 | 3030 Andrita Street, Los Angeles, CA 90065 |
$ | 15,001,338 | 15,601,391 | ||||||||
Total Radio and Television Broadcasting | 18,417,797 | |||||||||||
Software Publishers |
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EAM Software Finance Pty, Ltd., Senior Secured 1st Lien Tranche A Term Loan, BBSY + 2.25% Cash + 1.5% PIK, due 5/10/13 (Australia)(4) |
193 Turbot Street, Brisbane, Queensland 4000, Australia |
AUD 3,062,730 | 3,067,007 | |||||||||
EAM Software Finance Pty, Ltd., Senior Secured 1st Lien Tranche B Term Loan, BBSY + 2.25% Cash + 1.5% PIK, due 11/10/13 (Australia)(4) |
193 Turbot Street, Brisbane, Queensland 4000, Australia |
AUD 4,985,422 | 4,938,315 | |||||||||
Total Software Publishers | 8,005,322 | |||||||||||
Sporting Goods, Hobby, Book, and Music Stores |