|
TICC CAPITAL CORP. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that
involve substantial risks and uncertainties. These forward-looking statements
are not historical facts, but rather are based on current expectations,
estimates and projections about TICC, our current and prospective portfolio
investments, our industry, our beliefs, and our assumptions. Words such as
"anticipates," "expects," "intends," "plans," "will," "may," "continue,"
"believes," "seeks," "estimates," "would," "could," "should," "targets,"
"projects," and variations of these words and similar expressions are intended
to identify forward-looking statements. The forward-looking statements contained
in this Quarterly Report on Form 10-Q involve risks and uncertainties, including
statements as to:
• our future operating results;
• our business prospects and the prospects of our portfolio companies; • the impact of investments that we expect to make;
• our contractual arrangements and relationships with third parties;
• the dependence of our future success on the general economy and its impact on
the industries in which we invest;
• the ability of our portfolio companies to achieve their objectives;
• our expected financings and investments;
• the adequacy of our cash resources and working capital; and
• the timing of cash flows, if any, from the operations of our portfolio
companies.
These statements are not guarantees of future performance and are subject to
risks, uncertainties, and other factors, some of which are beyond our control
and difficult to predict and could cause actual results to differ materially
from those expressed or forecasted in the forward-looking statements, including
without limitation:
• an economic downturn could impair our portfolio companies' ability to continue
to operate, which could lead to the loss of some or all of our investments in
such portfolio companies;
• a contraction of available credit and/or an inability to access the equity
markets could impair our lending and investment activities;
• interest rate volatility could adversely affect our results, particularly if we
elect to use leverage as part of our investment strategy;
• currency fluctuations could adversely affect the results of our investments in
foreign companies, particularly to the extent that we receive payments
denominated in foreign currency rather than U.S. dollars; and
• the risks, uncertainties and other factors we identify in "Risk Factors" and
elsewhere in this Quarterly Report on Form 10-Q and in our filings with the
SEC.
Although we believe that the assumptions on which these forward-looking
statements are based are reasonable, any of those assumptions could prove to be
inaccurate, and as a result, the forward-looking statements based on those
assumptions also could be inaccurate. Important assumptions include our ability
to originate new loans and investments, certain margins and levels of
profitability and the availability of additional capital. In light of these and
other uncertainties, the inclusion of a projection or forward-looking statement
in this Quarterly Report on Form 10-Q should not be regarded as a representation
by us that our plans and objectives will be achieved. These risks and
uncertainties include those described or identified in "Risk Factors" and
elsewhere in this Quarterly Report on Form 10-Q. You should not place undue
reliance on these forward-looking statements, which apply only as of the date of
this Quarterly Report on Form 10-Q.
Except where the context requires otherwise, the terms "TICC," "Company," "we,"
"us" and "our" refer to TICC Capital Corp. together with its subsidiaries, TICC
Capital Corp. 2011-1 Holdings LLC ("Holdings") TICC CLO LLC ("2011
Securitization Issuer" or "TICC CLO") and TICC CLO 2012-1 LLC ("2012
Securitization Issuer" or "TICC CLO 2012-1"); "TICC Management" refers to TICC
Management, LLC; and "BDC Partners" refers to BDC Partners, LLC.
The following analysis of our financial condition and results of operations
should be read in conjunction with our financial statements and the related
notes thereto contained elsewhere in this Quarterly Report on Form 10-Q.
32
OVERVIEW
Our investment objective is to maximize our portfolio's total return. Our
primary focus is to seek current income by investing in corporate debt
securities. We have also invested and may continue to invest in structured
finance investments, including CLO vehicles, which own debt securities. We may
also invest in publicly traded debt and/or equity securities. We operate as a
closed-end, non-diversified management investment company and have elected to be
treated as a business development company under the Investment Company Act of
1940, as amended (the "1940 Act"). We have elected to be treated for tax
purposes as a regulated investment company ("RIC"), under the Internal Revenue
Code of 1986, as amended (the "Code"), beginning with our 2003 taxable year.
Our investment activities are managed by TICC Management, a registered
investment adviser under the Investment Advisers Act of 1940, as amended. TICC
Management is owned by BDC Partners, its managing member, and Charles M. Royce,
our non-executive Chairman, who holds a minority, non-controlling interest in
TICC Management. Jonathan H. Cohen, our Chief Executive Officer, and Saul B.
Rosenthal, our President and Chief Operating Officer, are the members of BDC
Partners. Under an investment advisory agreement (the "Investment Advisory
Agreement"), we have agreed to pay TICC Management an annual base fee calculated
on gross assets, and an incentive fee based upon our performance. Under an
amended and restated administration agreement (the "Administration Agreement"),
we have agreed to pay or reimburse BDC Partners, as administrator, for certain
expenses incurred in operating TICC. Our executive officers and directors, and
the executive officers of TICC Management and BDC Partners, serve or may serve
as officers and directors of entities that operate in a line of business similar
to our own. Accordingly, they may have obligations to investors in those
entities, the fulfillment of which might not be in the best interests of us or
our stockholders. For more information, see "Risk Factors-Risks Relating to our
Business and Structure-There are significant potential conflicts of interest,
which could impact our investment returns."
On August 10, 2011, the Company completed a $225.0 million debt securitization
financing transaction. The Class A Notes offered in the debt securitization were
issued by TICC CLO, a subsidiary of Holdings, a direct subsidiary of TICC, and
the notes are secured by the assets held by the 2011 Securitization Issuer. The
securitization was executed through a private placement of $101.25 million of
Aaa/AAA Class A Notes of the 2011 Securitization Issuer. Holdings retained all
of the subordinated notes, which totaled $123.75 million (the "2011 Subordinated
Notes"), and retained all the membership interests in the 2011 Securitization
Issuer.
On August 23, 2012, the Company completed a $160 million debt securitization
financing transaction. The secured and subordinated notes offered in the debt
securitization were issued by TICC CLO 2012-1 LLC ("2012 Securitization Issuer"
or "TICC CLO 2012-1"), a newly formed special purpose vehicle that is a
wholly-owned subsidiary of the Company. The secured notes of the 2012
Securitization Issuer have an aggregate face amount of $120 million and were
issued in four classes. The class A-1 notes have an initial face amount of $88
million, are rated AAA(sf)/Aaa(sf) by Standard & Poor's Ratings Services (S&P)
and Moody's Investors Service, Inc. (Moody's), respectively, and bear interest
at three-month LIBOR plus 1.75%. The class B-1 notes have an initial face amount
of $10 million, are rated AA(sf)/Aa2(sf) by S&P and Moody's, respectively, and
bear interest at three-month LIBOR plus 3.50%. The class C-1 notes have an
initial face amount of $11.5 million, are rated A(sf)/A2(sf) by S&P and Moody's,
respectively, and bear interest at three-month LIBOR plus 4.75%. The class D-1
notes have an initial face amount of $10.5 million, are rated BBB(sf)/Baa2(sf)
by S&P and Moody's, respectively, and bear interest at three-month LIBOR plus
5.75%. TICC presently owns all of the subordinated notes, which totaled $40
million, and $3 million of the class D-1 notes issued in this CLO transaction.
For further information on this securitization, see Note 4.
On September 26, 2012, we completed a private placement of 5-year unsecured
7.50% Senior Convertible Notes Due 2017 (the "Convertible Notes"). A total of
$105.0 million aggregate principal amount of the Convertible Notes were issued
at the closing. An additional $10.0 million aggregate principal amount of the
Convertible Notes were issued on October 22, 2012 pursuant to the exercise of
the initial purchasers' option to purchase additional Convertible Notes. The
Convertible Notes are convertible into shares of our common stock based on an
initial conversion rate of 87.2448 shares of our common stock per $1,000
principal amount of Convertible Notes, which is equivalent to an initial
conversion price of approximately $11.46 per share of common stock. The
conversion price for the Convertible Notes will be reduced for quarterly cash
dividends paid to common shares to the extent that the quarterly dividend
exceeds $0.29 cents per share, subject to adjustment. The Convertible Notes bear
interest at an annual rate of 7.50%, payable semiannually in arrears on May 1
and November 1 of each year, beginning May 1, 2013. The Convertible Notes mature
on November 1, 2017, unless previously converted in accordance with their terms.
The Convertible Notes are our general unsecured obligations, rank equally in
right of payment with our future senior unsecured debt, and rank senior in right
of payment to any potential subordinated debt, should any be issued in the
future.
While the structure of our investments will vary, and while we invest across a
wide range of different industries, we have historically overweighted our
investments in the debt of technology-related companies. We seek to invest in
entities that, as a general matter, have been operating for at least one year
prior to the date of our investment and that will, at the time of our
investment, have employees and revenues, and are cash flow positive. Many of
these companies will have financial backing provided by private equity or
venture capital funds or other financial or strategic sponsors at the time we
make an investment. The types of portfolio companies in which we invest,
however, will generally be considered below investment grade.
We generally expect to invest between $5 million and $25 million in each of our
portfolio companies, although this investment size may vary proportionately as
the size of our capital base changes and market conditions warrant, and accrue
interest at fixed or variable rates. We expect that our investment portfolio
will be diversified among a large number of investments with few investments, if
any, exceeding 5% of the total portfolio. As of September 30, 2012, our debt
investments had stated interest rates of between 3.81% and 16.00% (excluding our
investment in GenuTec Business Solutions, Inc. which carries a zero interest
rate through October 30, 2014) and maturity dates of between 5 and 144 months.
In addition, our total portfolio had a weighted average yield on debt
investments of approximately 10.3% including GenuTec Business Solutions, Inc.
33
Our loans may carry a provision for deferral of some or all of the interest
payments and amendment fees, which will be added to the principal amount of the
loan. This form of deferred income is referred to as "payment-in-kind," or
"PIK," interest or other income and, when earned, is recorded as interest or
other income and an increase in the principal amount of the loan. For the
quarter ended September 30, 2012, we recognized approximately $201,000 from PIK
interest and dividend income associated with our investments in Pegasus
Solutions, Inc., Merrill Communications, LLC., and Shearers Food, Inc., compared
to PIK interest of approximately $147,000 for the quarter ended September 30,
2011. In the event we recognize deferred loan interest income in excess of our
available capital as a result of our receipt of PIK income, we may be required
to liquidate assets in order to pay a portion of the incentive fee due to TICC
Management.
We have historically and may continue to borrow funds to make investments. As a
result, we are exposed to the risks of leverage, which may be considered a
speculative investment technique. Borrowings, also known as leverage, magnify
the potential for gain and loss on amounts invested and therefore increase the
risks associated with investing in our securities. In addition, the costs
associated with our borrowings, including any increase in the management fee
payable to TICC Management, will be borne by our common stockholders.
In addition, as a BDC under the 1940 Act, we are required to make available
significant managerial assistance, for which we may receive fees, to our
portfolio companies. These fees would be generally non-recurring, however in
some instances they may have a recurring component. We have received no fee
income for managerial assistance to date.
Prior to making an investment, we may enter into a non-binding term sheet with
the potential portfolio company. These term sheets are generally subject to a
number of conditions, including but not limited to the satisfactory completion
of our due diligence investigations of the company's business and legal
documentation for the loan.
To the extent possible, our loans will be collateralized by a security interest
in the borrower's assets or guaranteed by a principal to the transaction.
Interest payments, if not deferred, are normally payable quarterly with most
debt investments having scheduled principal payments on a monthly or quarterly
basis. When we receive a warrant to purchase stock in a portfolio company, the
warrant will typically have a nominal strike price, and will entitle us to
purchase a modest percentage of the borrower's stock.
During the quarter ended September 30, 2012, we closed approximately $128.0
million in portfolio investments, including additional investments of
approximately $44.2 million in existing portfolio companies and approximately
$83.8 million in new portfolio companies. During the quarter ended September 30,
2012, we recognized a total of $45.3 million from principal repayments on debt
investments, and we recognized approximately $9.0 million from the sale of
portfolio investments. We realized net gains on investments during the quarter
ended September 30, 2012 in the amount of approximately $1.8 million. For the
quarter ended September 30, 2012, we had net unrealized appreciation of
approximately $21.5 million.
Based upon the fair value determinations made in good faith by the Board of
Directors, during the quarter ended September 30, 2012, we had net unrealized
appreciation of approximately $21.5 million, comprised of $25.4 million in gross
unrealized appreciation, $2.4 million in gross unrealized depreciation and
approximately $1.5 million relating to the reversal of prior period net
unrealized appreciation as an investment was realized. The most significant
changes in net unrealized appreciation and depreciation during the quarter ended
September 30, 2012 were as follows (in millions):
34
Unrealized
appreciation
Portfolio Company (depreciation)
Jersey Street 2006-1A CLO LTD. $ 1.5
Canaras CLO Equity - 2007-1A, 1X 1.4
Emporia CLO 2007 3A E 1.2
Stone Tower CLO LTD 2007 7X 1.1
ACA CLO 2007-1a sub 1.1
Muir Grove CLO LTD 2007 1X E 1.0
GSC Partners 2007-8X Sub CDO 0.9
Rampart 2007-1A CLO Equity 0.7
OCT11 2007-1A CLO 0.7
ACA CLO 2006-2, Limited 0.7
Merrill Communications, LLC 0.6
Fusionstorm, Inc. 2 0.6
Prospero CLO II BV 0.6
Band Digital Inc. (0.7 )
American Integration Technologies, LLC (1.4 )
Net all other 11.5
Total $ 21.5
For the quarter ended September 30, 2011, we recorded net realized gains on
investments of approximately $0.1 million, which represents the gain realized on
the repayment of our investment in Flexera Software.
Based upon the fair value determinations made in good faith by the Board of
Directors, during the quarter ended September 30, 2011, we had net unrealized
depreciation of approximately $20.1 million, comprised of $0.3million in gross
unrealized appreciation, $20.3 million in gross unrealized depreciation and
approximately $0.1 million relating to the reversal of prior period net
unrealized appreciation as an investment was realized. The most significant
changes in net unrealized appreciation and depreciation during the quarter ended
September 30, 2011 were as follows (in millions):
Unrealized
appreciation
Portfolio Company (depreciation)
Vision Solutions, Inc. $ (0.4 )
CIFC CLO - 2006-1A B2L (0.4 )
Ocean Trails CLO II 2007-2a-d (0.4 )
Hewetts Island CDO 2007 - 1RA E (0.4 )
Nextag, Inc. (0.4 )
Primus 2007 2X Class E CLO (0.4 )
GXS Worldwide Inc. (0.4 )
Canaras CLO Equity - 2007-1A, 1X (0.4 )
Latitude II CLO 2006 2A D (0.4 )
RBS Holding Company (0.4 )
Loomis Sayles CLO 2006-1AE (0.5 )
Pegasus Solutions, Inc. (0.5 )
Hewetts Island CDO III 2005-1A D (0.5 )
Jersey Straits 2006-1A CLO LTD (0.5 )
Avenue CLO V LTD 2007-5A D1 (0.5 )
SourceHov, LLC (0.6 )
Lightpoint CLO 2007-8a (0.6 )
ACA CLO 2006-2, Limited (0.6 )
Latitude III CLO 2007-3A (0.6 )
Landmark V CDO LTD (0.6 )
Emporia CLO 2007 3A E (0.7 )
Harch 2005-2A BB CLO (0.7 )
Integra Telecomm, Inc. (0.9 )
Hewetts Island CDO IV 2006-4 (1.0 )
Prospero CLO II BV (2.0 )
Net all other (5.3 )
Total $ (20.1 )
35
Current Market and Economic Conditions
Current market conditions appear generally stable. During 2011 and through the
quarter ended September 30, 2012, we saw much less severe price volatility for
corporate loans (compared with the prior three year period), consistent with
many other parts of the debt and equity markets. During 2012, the market for new
investments has become more competitive and yields have generally decreased. We
expect the market for new investments to remain competitive through the
remainder of 2012. In view of the above circumstances, we continue to invest in
syndicated and larger middle-market loans, and, opportunistically, in certain
structured finance investments, including collateralized loan obligation
investment vehicles, and continue to be active in those markets.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity
with generally accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and revenues and expenses during the periods
reported. Actual results could materially differ from those estimates. We have
identified our investment valuation policy as a critical accounting policy.
Investment Valuation
The most significant estimates made in the preparation of our consolidated
financial statements are the valuation of investments and the related amounts of
unrealized appreciation and depreciation of investments recorded. We believe
that there is no single definitive method for determining fair value in good
faith. As a result, determining fair value requires that judgment be applied to
the specific facts and circumstances of each portfolio investment while
employing a consistently applied valuation process for the types of investments
we make. We are required to specifically fair value each individual investment
on a quarterly basis.
In May 2011, the FASB issued ASU 2011-04, " Fair Value Measurement which
represents amendments to achieve common fair value measurement and disclosure
requirements in US GAAP and IFRS ." The amendments are of two types: (i) those
that clarify the FASB's intent about the application of existing fair value
measurement and disclosure requirements and (ii) those that change a particular
principle or requirement for measuring fair value or for disclosing information
about fair value measurements. The amendments that change a particular principle
or requirement for measuring fair value or disclosing information about fair
value measurements relate to (i) measuring the fair value of the financial
instruments that are managed within a portfolio; (ii) application of premium and
discount in a fair value measurement; and (iii) additional disclosures about
fair value measurements. The update is effective for annual periods beginning
after December 15, 2011 and as such we have adopted this ASU beginning with the
quarter ended March 31, 2012. We have increased our disclosures related to Level
3 fair value measurement, in addition to other required disclosures. There were
no related impacts on our financial position or results of operations.
We adopted ASC 820-10, Fair Value Measurements and Disclosure, which establishes
a three-level valuation hierarchy for disclosure of fair value measurements, on
January 1, 2008. ASC 820-10 clarified the definition of fair value and requires
companies to expand their disclosure about the use of fair value to measure
assets and liabilities in interim and annual periods subsequent to initial
recognition. ASC 820-10 defines fair value as the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. ASC 820-10 also establishes
a three-tier fair value hierarchy, which prioritizes the inputs used in
measuring fair value. These tiers include: Level 1, defined as observable inputs
such as quoted prices in active markets; Level 2, which includes inputs such as
quoted prices for similar securities in active markets and quoted prices for
identical securities in markets that are not active; and Level 3, defined as
unobservable inputs for which little or no market data exists, therefore
requiring an entity to develop its own assumptions. We have determined that due
to the general illiquidity of the market for our investment portfolio, whereby
little or no market data exists, almost all of our investments are based upon
"Level 3" inputs.
36
Our Board of Directors determines the value of our investment portfolio each
quarter. In connection with that determination, members of TICC Management's
portfolio management team prepare portfolio company valuations using the most
recent portfolio company financial statements and forecasts. Since March 2004,
we have engaged third-party valuation firms to provide assistance in valuing our
bilateral investments and, more recently, for certain of our syndicated loans,
although our Board of Directors ultimately determines the appropriate valuation
of each such investment.
Our process for determining the fair value of a bilateral investment begins with
determining the enterprise value of the portfolio company. Enterprise value
means the entire value of the company to a potential buyer, including the sum of
the values of debt and equity securities used to capitalize the enterprise at a
point in time. The fair value of our investment is based, in part, on the
enterprise value at which the portfolio company could be sold in an orderly
disposition over a reasonable period of time between willing parties other than
in a forced or liquidation sale. The liquidity event whereby we exit a private
investment is generally the sale, the recapitalization or, in some cases, the
initial public offering of the portfolio company.
There is no one methodology to determine enterprise value and, in fact, for any
one portfolio company, enterprise value is best expressed as a range of fair
values, from which we derive a single estimate of enterprise value. To determine
the enterprise value of a portfolio company, we analyze the historical and
projected financial results, as well as the nature and value of any collateral.
We also use industry valuation benchmarks and public market comparables. We also
consider other events, including private mergers and acquisitions, a purchase
transaction, public offering or subsequent debt or equity sale or restructuring,
and include these events in the enterprise valuation process. We generally
require portfolio companies to provide annual audited and quarterly unaudited
financial statements, as well as annual projections for the upcoming fiscal
year.
Typically, our bilateral debt investments are valued on the basis of a fair
value determination arrived at through an analysis of the borrower's financial
and operating condition or other factors, as well as consideration of the
entity's enterprise value. The types of factors that we may take into account in
valuing our investments include: market trading and transaction comparables,
applicable market yields and multiples, security covenants, call protection
provisions, the nature and realizable value of any collateral, the portfolio
company's ability to make payments and its earnings and discounted cash flows,
among other factors. The fair value of equity interests in portfolio companies
is determined based on various factors, including the enterprise value remaining
for equity holders after the repayment of the portfolio company's debt and other
preference capital, and other pertinent factors such as recent offers to
purchase a portfolio company, recent transactions involving the purchase or sale
of the portfolio company's equity securities, or other liquidity events. The
determined equity values are generally discounted when we have a minority
position, restrictions on resale, specific concerns about the receptivity of the
capital markets to a specific company at a certain time, or other factors.
We will record unrealized depreciation on bilateral investments when we believe
that an investment has become impaired, including where collection of a loan or
realization of an equity security is doubtful. To the extent that we believe
that it has become probable that a loan is not collectible or probable that an
equity investment is not realizable, we will classify that amount as a realized
loss. We will record unrealized appreciation if we believe that the underlying
portfolio company has appreciated in value and our equity security has also
appreciated in value. Changes in fair value, other than such changes that are
considered probable of non-collection or non-realization, as described above,
are recorded in the statement of operations as net change in unrealized
appreciation or depreciation.
37
Under the valuation procedures approved by our Board of Directors, upon the
recommendation of the Valuation Committee, a third-party valuation firm will
prepare valuations for each of our bilateral investments for which market
quotations are not readily available that, when combined with all other
investments in the same portfolio company, (i) have a value as of the previous
quarter of greater than or equal to 2.5% of our total assets as of the previous
quarter, and (ii) have a value as of the current quarter of greater than or
equal to 2.5% of our total assets as of the previous quarter, after taking into
account any repayment of principal during the current quarter. In addition, the
frequency of those third-party valuations of our portfolio securities is based
upon the grade assigned to each such security under our credit grading system as
follows: Grade 1, at least annually; Grade 2, at least semi-annually; Grades 3,
4, and 5, at least quarterly. TICC Management also retains the authority to
seek, on our behalf, additional third party valuations with respect to both our
bilateral portfolio securities and our syndicated loan investments. Our Board of
Directors retains ultimate authority as to the third-party review cycle as well
as the appropriate valuation of each investment.
On April 9, 2009, the FASB issued additional guidelines under ASC 820-10-35, "
Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly ," which provides guidance on factors that should be considered in
determining when a previously active market becomes inactive and whether a
transaction is orderly. In accordance with ASC 820-10-35, our valuation
procedures specifically provide for the review of indicative quotes supplied by
the large agent banks that make a market for each security. However, the
marketplace for which we obtain indicative bid quotes for purposes of
determining the fair value of our syndicated loan investments have shown these
attributes of illiquidity as described by ASC-820-10-35. Due to limited market
liquidity in the syndicated loan market, TICC believes that the non-binding
indicative bids received from agent banks for certain syndicated investments
that we own may not be determinative of their fair value and therefore
alternative valuation procedures may need to be undertaken. As a result, TICC
may engage third-party valuation firms to provide assistance in valuing certain
syndicated investments that we own. In addition, TICC Management prepares an
analysis of each syndicated loan, including a financial summary, covenant
compliance review, recent trading activity in the security, if known, and other
business developments related to the portfolio company. All available
information, including non-binding indicative bids which may not be
determinative of fair value, is presented to the Valuation Committee to consider
in its determination of fair value. In some instances, there may be limited
trading activity in a security even though the market for the security is
considered not active. In such cases the Valuation Committee will consider the
number of trades, the size and timing of each trade, and other circumstances
around such trades, to the extent such information is available, in its
determination of fair value. The Valuation Committee will evaluate the impact of
such additional information, and factor it into its consideration of the fair
value that is indicated by the analysis provided by third-party valuation firms.
We have considered the factors described in ASC 820-10 and have determined that
we are properly valuing the securities in our portfolio.
We have also acquired a number of debt and equity positions in CLO investment
vehicles. These investments are special purpose financing vehicles. In valuing
such investments, we consider the operating metrics of the specific investment
vehicle, including compliance with collateralization tests, defaulted and
restructured securities, and payment defaults, if any. In addition, we consider
the indicative prices provided by the broker who arranges transactions in such
investment vehicles, as well as any available information on other relevant
transactions in the market. TICC Management or the Valuation Committee may
request an additional analysis by a third-party firm to assist in the valuation
process of CLO investment vehicles. All information is presented to our Board of
Directors for its determination of fair value of these investments.
The Company's assets measured at fair value on a recurring basis subject to the
disclosure requirements of ASC 820-10-35 at September 30, 2012, were as follows:
($ in millions) Fair Value Measurements at Reporting Date Using
Significant
Quoted Prices in Other Significant
Active Markets for Observable Unobservable
Identical Assets Inputs Inputs
Assets (Level 1) (Level 2) (Level 3) Total
Cash equivalents $ 0.0 $ 0.0 $ 0.0 $ 0.0
Senior Secured Notes 0.0 12.7 342.6 355.3
CLO Debt 0.0 0.0 87.7 87.7
CLO Equity 0.0 0.0 82.8 82.8
Subordinated Notes 0.0 0.0 4.9 4.9
Common Stock 0.0 0.0 4.6 4.6
Preferred Shares 0.0 0.0 1.4 1.4
Warrants to purchase equity 0.0 0.0 1.0 1.0
Total $ 0.0 $ 12.7 $ 525.0 $ 537.7
38
A reconciliation of the fair value of investments for three months ended
September 30, 2012, utilizing significant unobservable inputs, is as follows:
Collateralized Collateralized
Loan Loan Warrants to
Senior Obligation Obligation Subordinated Common Preferred Purchase
Secured Note Debt Equity Note Stock Share Equity Equity
($ in millions) Investments Investments Investments Investments Investments Investments Investments TotalBalance at June 30, 2012 $ 292.1 $ 68.8 $ 58.9 $ 4.4 $ 4.2 $ 1.8 $ 0.3 $ 430.5
Realized Gains included in earnings 1.6 0.0 0.0 0.0 0.0 0.0 0.0 1.6
Unrealized (depreciation)
appreciation included in earnings 1.2 10.4 8.9 0.6 0.4 (0.5 ) 0.7 21.7
Accretion of discount 0.5 0.8 0.0 0.0 0.0 0.0 0.0 1.3
Purchases 95.3 7.7 15.0 0.0 0.0 0.0 0.0 118.0
Repayments and Sales (48.2 ) 0.0 0.0 (0.1 ) 0.0 0.0 0.0 (48.3 )
Payment in Kind income 0.1 0.0 0.0 0.0 0.0 0.1 0.0 0.2
Transfers in and/or out of level 3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Balance at September 30, 2012 $ 342.6 $ 87.7 $ 82.8 $ 4.9 $ 4.6 $ 1.4 $ 1.0 $ 525.0
The amount of total gains or losses
for the period included in earnings
attributable to the change in
unrealized gains or losses relating
to our Level 3 assets still held at
the reporting date and reported
within the net change in unrealized
gains or losses on investments in
our Statement of Operations(1) $ 2.8 $ 10.4 $ 8.9 $ 0.6 $ 0.3 $ (0.4 ) $ 0.6 $ 23.2
(1) Includes rounding adjustments to reconcile period balances.
A reconciliation of the fair value of investments for nine months ending
September 30, 2012, utilizing significant unobservable inputs, is as follows:
Collateralized Collateralized
Senior Loan Loan Warrants to
Secured Obligation Obligation Subordinated Common Preferred Purchase
Note Debt Equity Note Stock Share Equity Equity
($ in millions) Investments Investments Investments Investments Investments Investments Investments TotalBalance at December 31, 2011 $ 279.2 $ 51.0 $ 39.3 $ 4.9 $ 3.1 $ 2.5 $ 0.8 $ 380.8
Realized Gains included in earnings 3.0 0.2 0.0 0.0 0.0 0.0 0.1 3.3
Unrealized (depreciation)
appreciation included in earnings (3.4 ) 13.6 11.7 0.5 1.5 (1.4 ) 0.6 23.1
Accretion of discount 2.1 2.1 0.0 0.0 0.0 0.0 0.0 4.2
Purchases 183.5 22.3 31.8 0.0 0.0 0.0 0.0 237.6
Repayments and Sales (125.9 ) (1.5 ) 0.0 (0.5 ) 0.0 0.0 (0.5 ) (128.4 )
Payment in Kind income 4.1 0.0 0.0 0.0 0.0 0.3 0.0 4.4
Transfers in and/or out of level 3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Balance at September 30, 2012 $ 342.6 $ 87.7 $ 82.8 $ 4.9 $ 4.6 $ 1.4 $ 1.0 $ 525.0
The amount of total gains or losses
for the period included in earnings
attributable to the change in
unrealized gains or losses relating
to our Level 3 assets still held at
the reporting date and reported
within the net change in unrealized
gains or losses on investments in
our Statement of Operations(1) $ (2.4 ) $ 13.8 $ 11.7 $ 0.4 $ 1.4 $ (1.3 ) $ 0.4 $ 24.0
(1) Includes rounding adjustments to reconcile period balances.
39
Our assets measured at fair value on a recurring basis subject to the disclosure
requirements of ASC 820-10-35 at December 31, 2011, were as follows:
($ in millions) Fair Value Measurements at Reporting Date Using
Significant
Quoted Prices in Other Significant
Active Markets for Observable Unobservable
Identical Assets Inputs Inputs
Assets (Level 1) (Level 2) (Level 3) Total
Cash equivalents $ 0.0 $ 0.0 $ 0.0 $ 0.0
Senior Secured Notes 0.0 10.7 279.2 289.9
CLO Debt 0.0 0.0 51.0 51.0
CLO Equity 0.0 0.0 39.3 39.3
Subordinated Notes 0.0 0.0 4.9 4.9
Common Stock 0.0 0.0 3.1 3.1
Preferred Shares 0.0 0.0 2.5 2.5Warrants to purchase equity 0.0 0.0 0.8 0.8
Total $ 0.0 $ 10.7 $ 380.8 $ 391.5
A reconciliation of the fair value of investments for the year ended December
31, 2011, utilizing significant unobservable inputs, is as follows:
Collateralized Collateralized
Senior Loan Loan Preferred Warrants
Secured Obligation Obligation Subordinated Common Share to Purchase
Note Debt Equity Note Stock Equity Equity
($ in millions) Investments Investments Investments Investments Investments Investments Investments Total
Balance at December 31,
2010 $ 173.9 $ 50.4 $ 8.9 $ 6.0 $ 5.8 $ 2.0 $ 0.5 $ 247.5
Realized Losses included in
earnings 2.7 0.9 0.0 0.0 0.0 0.0 0.0 3.6
Unrealized (depreciation)
appreciation included in earnings (5.7 ) (9.5 ) (1.5 ) (0.4 ) (2.7 ) 0.1 0.3 (19.4 )
Accretion of discount 2.8 2.2 0.0 0.0 0.0 0.0 0.0 5.0
Purchases 230.0 10.6 31.9 0.0 0.0 0.0 0.0 272.5Repayments and Sales (1) (113.8 ) (3.6 ) 0.0 (0.7 ) 0.0 0.4 0.0 (117.7 )
Transfers in and/or out of level 3 (10.7 ) 0.0 0.0 0.0 0.0 0.0 0.0 (10.7 )
Balance at December 31, 2011 $ 279.2 $ 51.0 $ 39.3 $ 4.9 $ 3.1 $ 2.5 $ 0.8 $ 380.8
The amount of total gains or losses
for the period included in earnings
attributable to the change in
unrealized gains or losses relating
to our Level 3 assets still held at
the reporting date and reported
within the net change in unrealized
gains or losses on investments in
our Statement of Operations $ (4.1 ) $ (8.8 ) $ (1.3 ) $ (0.3 ) $ (2.7 ) $ 0.1 $ 0.3 $ (16.8 )
(1) Includes PIK income of approximately $1.5 million and rounding adjustments
to reconcile period balances.
PORTFOLIO COMPOSITION AND INVESTMENT ACTIVITY
The total fair value of our investment portfolio was approximately $537.7
million and $391.5 million as of September 30, 2012 and December 31, 2011,
respectively. The increase in investments during the nine month period was due
primarily to new investments of approximately $247.6 million and net unrealized
appreciation of approximately $22.8 million. Funding for these new investments
was provided by equity and debt capital raises. These increases were partially
offset by debt repayments and sales of securities totaling approximately $136.4
million.
40
In certain instances, we receive payments based on scheduled amortization of the
outstanding balances and sales of portfolio investments. In addition, we receive
repayments of some of our debt investments prior to their scheduled maturity
date. The frequency or volume of these repayments may fluctuate significantly
from period to period. For the quarter ended September 30, 2012, we recognized
approximately $9.0 million largely from the sales of our debt investment in CHS
Community Health Systems, Inc. ($3.9 million), Airvana Network Solutions, Inc.
($2.7 million) and our partial sale of our investment in Goodman Global, Inc.
($2.0 million), whereas for the year ended December 31, 2011, we recognized
proceeds of approximately $11.3 million from the sales of securities. Also,
during the quarter ended September 30, 2012, we had repayments and amortization
payments of approximately $45.3 million, whereas, for the year ended December
31, 2011, we had repayments and amortization payments of approximately $107.9
million.
As of September 30, 2012, we had investments in debt securities of, or loans to,
78 portfolio companies, with a fair value of approximately $447.9 million, and
equity investments in 24 portfolio companies, with a fair value of approximately
$89.8 million. As of December 31, 2011, we had investments in debt securities
of, or loans to, 69 portfolio companies, with a fair value of approximately
$345.8 million, and equity investments in 21 portfolio companies, with a fair
value of approximately $45.7 million.
A reconciliation of the investment portfolio for the nine months ended September
30, 2012 and the year ended December 31, 2011 follows:
September 30, 2012 December 31, 2011
(dollars in millions) (dollars in millions)
Beginning Investment Portfolio $ 391.5 $ 247.5
Portfolio Investments Acquired 247.6 272.5
Debt repayments (115.9 ) (107.9 )
Sales of securities (20.5 ) (11.3 )
Payment in Kind 4.4 1.5
Original Issue Discount 4.3 5.0Net Unrealized Appreciation (Depreciation) 22.8 (19.4 )
Net Realized Gains 3.5 3.6
$ 537.7 $ 391.5
The following table indicates the quarterly portfolio investment activity for
the past seven quarters:
New Investments Debt Repayments Sales of Securities
Quarter ended (dollars in millions) (dollars in millions) (dollars in millions)
September 30, 2012 $ 128.0 $ 45.3 $ 9.0
June 30, 2012 62.1 66.2 2.5
March 31, 2012 57.5 4.4 9.0
Total $ 247.6 $ 115.9 $ 20.5
December 31, 2011 $ 60.3 $ 28.5 $ 2.9
September 30, 2011 81.0 9.0 -
June 30, 2011 30.6 12.6 -
March 31, 2011 100.6 57.8 8.4
Total $ 272.5 $ 107.9 $ 11.3
41
The following table shows the fair value of our portfolio of investments by
asset class as of September 30, 2012 and December 31, 2011:
September 30, 2012 December 31, 2011
Investments at Percentage of Investments at Percentage of
Fair Value Total Portfolio Fair Value Total Portfolio
(dollars in millions) (dollars in millions)
Senior Secured Notes $ 355.3 66.1 % $ 289.9 74.1 %
CLO Debt 87.7 16.3 % 51.0 13.0 %
CLO Equity 82.8 15.4 % 39.3 10.0 %
Subordinated Notes 4.9 0.9 % 4.9 1.3 %
Common Stock 4.6 0.8 % 3.1 0.8 %
Preferred Shares 1.4 0.3 % 2.5 0.6 %
Warrants 1.0 0.2 % 0.8 0.2 %
Total $ 537.7 100.0 % $ 391.5 100.0 %
The following table shows our portfolio of investments by industry at fair
value, as of September 30, 2012 and December 31, 2011:
September 30, 2012 December 31, 2011
Investments Percentage Investments at Percentage
at Fair Value of Fair Value Fair Value of Fair Value
Structured finance $ 170.5 31.7 % $ 90.3 23.0 %
Software 37.7 7.0 % 42.5 10.9 %
Enterprise software 37.3 6.9 % 18.9 4.8 %
Telecommunication services 34.8 6.5 % 32.6 8.3 %
Healthcare 32.1 6.0 % 28.1 7.2 %
Retail 31.8 5.9 % 18.8 4.8 %
Financial intermediaries 30.4 5.7 % 11.6 3.0 %
Business services 27.9 5.2 % 29.4 7.5 %
Web hosting 24.7 4.6 % 14.5 3.7 %
IT consulting 20.9 3.9 % 9.6 2.5 %
Education 13.6 2.5 % 8.7 2.2 %
Printing and publishing 12.1 2.3 % 14.7 3.8 %
Auto parts manufacturer 11.8 2.2 % 9.4 2.4 %
Cable/satellite television 10.7 2.0 % 4.9 1.2 %
Computer hardware 9.0 1.7 % 10.1 2.6 %
Logistics 7.9 1.5 % 0.0 0.0 %
Food products manufacturer 4.5 0.8 % 4.0 1.0 %
Gorcery 3.9 0.7 % 0.0 0.0 %
Shipping and transportation 3.5 0.6 % 0.0 0.0 %
Digital media 2.9 0.5 % 0.0 0.0 %
Advertising 2.9 0.5 % 7.6 1.9 %
Building and development 2.9 0.5 % 4.8 1.2 %
Utlities 2.5 0.5 % 0.0 0.0 %
IT value-added reseller 1.4 0.3 % 1.5 0.4 %Semiconductor capital equipment 0.0 0.0 % 22.6 5.8 %
Packaging and glass 0.0 0.0 % 4.9 1.3 %
Interactive voice messaging services 0.0 0.0% 2.0 0.5 %
Total $ 537.7 100.0 % $ 391.5 100.0 %
42
PORTFOLIO GRADING
We have adopted a credit grading system to monitor the quality of our debt
investment portfolio. As of September 30, 2012 and December 31, 2011, our
portfolio had a weighted average grade of 2.2 and 2.2, respectively, based upon
the fair value of the debt investments in the portfolio. Equity securitiesare
not graded.
At September 30, 2012, and December 31, 2011, our debt investment portfolio was
graded as follows:
43
September 30, 2012
Percentage of Portfolio at Percentage of
Grade Summary Description Principal Value Total Portfolio Fair Value Total Portfolio
(dollars in millions) (dollars in millions)
1 Company is ahead of expectations and/or outperforming
financial covenant requirements and such trend is expected
to continue $ - 0.0 % $ - 0.0 %
2 Full repayment of principal and interest is expected 397.0 82.7 % 374.4 83.6 %
3 Closer monitoring is required. Full repayment of principal
and interest is expected 73.0 15.2 % 69.4 15.5 %
4 A reduction of interest income has occurred or is expected
to occur. No loss of principal is expected - 0.0 % - 0.0 %
5 A loss of some portion of principal is expected 10.2 2.1 % 4.1 0.9 %
$ 480.2 100.0 % $ 447.9 100.0 %
December 31, 2011
Percentage of Portfolio at Percentage of
Grade Summary Description Principal Value Total Portfolio Fair Value Total Portfolio
(dollars in millions) (dollars in millions)
1 Company is ahead of expectations and/or outperforming
financial covenant requirements and such trend is expected
to continue $ 13.2 3.4 % $ 13.1 3.8 %
2 Full repayment of principal and interest is expected 301.9 78.3 % 267.1 77.2 %
3 Closer monitoring is required. Full repayment of principal
and interest is expected 67.2 17.4 % 63.6 18.4 %
4 A reduction of interest income has occurred or is expected
to occur. No loss of principal is expected - 0.0 % - 0.0 %
5 A loss of some portion of principal is expected 3.5 0.9 % 2.0 0.6 %
$ 385.8 100.0 % $ 345.8 100.0 %
We expect that a portion of our investments will be in the grades 3, 4 or 5
categories from time to time, and, as such, we will be required to work with
troubled portfolio companies to improve their business and protect our
investment. The number and amount of investments included in grades 3, 4 or 5
may fluctuate from period to period.
Further discussion regarding the other investments which experienced significant
unrealized depreciation is presented in "Results of Operations."
44
RESULTS OF OPERATIONS
Set forth below is a comparison of our results of operations for the three
months ended September 30, 2012 to the three months ended September 30, 2011.
Investment Income
As of September 30, 2012, our debt investments had stated interest rates of
between 3.81% and 16.00% (excluding our investment in GenuTec Business
Solutions, Inc. which carries a zero interest rate through October 30, 2014) and
maturity dates of between 5 and 144 months. In addition, our total portfolio had
a weighted average yield on debt investments of approximately 10.3% including
GenuTec Business Solutions, Inc., compared with 11.4% as of September 30, 2011.
Investment income for the three months ended September 30, 2012 was
approximately $15.6 million compared to approximately $11.1 million for the
three months ended September 30, 2011. This increase was due in part to an
increase in the amount of distributions from the equity interests in our CLO
vehicle investments and the amount of performing assets in the portfolio. The
total principal value of income producing debt investments as of September 30,
2012 and September 30, 2011 was approximately $474.9 million and $356.0 million,
respectively. For the quarter ended September 30, 2012, investment income
consisted of approximately $7.7 million in cash interest from portfolio
investments, approximately $1.4 million in amortization of original issue and
market discount, approximately $31,000 of discount income derived from
unscheduled principal cash remittances at par on discounted debt securities,
approximately $6.0 million in distributions from the equity interest in
securitized vehicle investments and an equity investment, as well as
approximately $0.2 million in PIK interest income.
For the quarter ended September 30, 2012, fee income of approximately $279,000
was recorded, compared to fee income of approximately $61,000 for the quarter
ended September 30, 2011. Fee income consists of non-recurring fees in
connection with our investments in portfolio companies, including commitment
fees, origination fees and amendment fees.
Operating Expenses
Total expenses for the quarter ended September 30, 2012 were $11.0 million,
which includes the increase of the accrued capital gains incentive fee of
approximately $4.6 million.
Expenses before incentive fees, for the quarter ended September 30, 2012, were
approximately $5.3 million. This amount consisted of investment advisory fees,
interest expense and other debt financing expenses, professional fees,
compensation expense, and general and administrative expenses. Expenses before
incentive fees increased approximately $2.1 million from the quarter ended
September 30, 2011, attributable primarily to higher investment advisory fees
(consisting of the base management fee), interest expense associated with the
senior notes issued under our debt securitization transactions and convertible
notes issued in September 2012, as well as increased professional fees
associated with our audit and legal expenses. Expenses before incentive fees for
the quarter ended September 30, 2011 were approximately $3.2 million.
The investment advisory fee for the third quarter of 2012 was approximately $2.8
million, representing the base fee as provided for in the Investment Advisory
Agreement. The investment advisory fee in the comparable period in 2011 was
approximately $1.9 million. The increase of approximately $854,000 is due to an
increase in average gross assets. At each of September 30, 2012 and December 31,
2011, respectively, approximately $2.8 million and $1.9 million of investment
advisory fees remained payable to TICC Management, including the net investment
income incentive fee discussed below.
Interest expense and other debt financing expenses for the third quarter of 2012
was approximately $1.4 million, which was directly related to our debt
securitization financing transactions as well as our convertible note
transaction. Interest expense for the third quarter of 2011 was approximately
$434,000.
TICC CLO LLC
In August 2011, senior notes in the amount of $101,250,000 were issued by a
newly formed special purpose vehicle in which a wholly-owned subsidiary of TICC
owns all of the equity. Under this structure, the notes bear interest, after the
effective date, at three-month London Inter Bank Offered Rate ("LIBOR") plus
2.25% (prior to the effective date, the Class A Notes bear interest at
five-month LIBOR plus 2.25%). The accrued interest payable on these notes during
the third quarter of 2012 was approximately $517,000. Additionally, for the
quarter ended September 30, 2012, the amortization of discount on the issued
notes was approximately $40,000 and the amortization of deferred debt issuance
costs was approximately $76,000. At December 31, 2011, interest expense of
approximately $1.1 million remained payable.
45
TICC CLO 2012-1 LLC
On August 23, 2012, the Company completed a $160 million debt securitization
financing transaction. The secured and subordinated notes offered in the debt
securitization were issued by TICC CLO 2012-1 LLC ("2012 Securitization Issuer"
or "TICC CLO 2012-1"), a newly formed special purpose vehicle that is a
wholly-owned subsidiary of the Company. The secured notes of the 2012
Securitization Issuer have an aggregate face amount of $120 million and were
issued in four classes. The class A-1 notes have an initial face amount of $88
million, are rated AAA(sf)/Aaa(sf) by Standard & Poor's Ratings Services (S&P)
and Moody's Investors Service, Inc. (Moody's), respectively, and bear interest
at three-month LIBOR plus 1.75%. The class B-1 notes have an initial face amount
of $10 million, are rated AA(sf)/Aa2(sf) by S&P and Moody's, respectively, and
bear interest at three-month LIBOR plus 3.50%. The class C-1 notes have an
initial face amount of $11.5 million, are rated A(sf)/A2(sf) by S&P and Moody's,
respectively, and bear interest at three-month LIBOR plus 4.75%. The class D-1
notes have an initial face amount of $10.5 million, are rated BBB(sf)/Baa2(sf)
by S&P and Moody's, respectively, and bear interest at three-month LIBOR plus
5.75%. TICC presently owns all of the subordinated notes, which totaled $40
million, and $3 million of the class D-1 notes issued in this CLO transaction.
For further information on this securitization, see Note 4.
The aggregate accrued interest payable on the notes of the 2012 Securitization
Issuer during the third quarter of 2012 was approximately $402,000.
Additionally, for the quarter ended September 30, 2012, the aggregate
amortization of discount on the issued notes of the 2012 Securitization Issuer
was approximately $41,000 and the amortization of deferred debt issuance costs
was approximately $25,000.
2017 Convertible Notes
On September 26, 2012, we issued $105,000,000 aggregate principal amount of the
Convertible Notes. The Convertible Notes mature on November 1, 2017. The
Convertible Notes bear interest at a rate of 7.50% per year, payable
semi-annually in arrears on May 1 and November 1 of each year, commencing on May
1, 2013. The accrued interest payable on the Convertible Notes during the third
quarter of 2012 was approximately $109,000. Additionally, for the quarter ended
September 30, 2012, the amortization of deferred issuance costs was
approximately $6,000.
The table below summarizes the components of interest expense for the three
months ended September 30, 2012 and 2011:
Three Months Ended September 30, 2012 Three Months Ended September 30, 2011
Stated Note Amortization of Stated Note Amortization of
Interest Discount Deferred Debt Interest Discount Deferred Debt
(dollars in thousands) Expense Expense Issuance Costs Total Expense Expense Issuance Costs Total
TICC CLO LLC Class A Notes $ 699.9 $ 39.9 $ 76.3 $ 816.1 $ 383.3 $ 8.7 $ 42.3 $ 434.3
TICC CLO 2012-1 LLC Class A-1 Notes 235.3 17.9 - 253.2 - - - -
TICC CLO 2012-1 LLC Class B-1 Notes 45.7 5.1 - 50.8 - - - -
TICC CLO 2012-1 LLC Class C-1 Notes 68.1 9.3 - 77.4 - - - -
TICC CLO 2012-1 LLC Class D-1 Notes 52.6 8.3 - 60.9 - - - -
TICC CLO 2012-1 amortization of deferred debt - - 25.1 25.1 - - - -
2017 Convertible Notes 109.4 - 6.1 115.5 - - - -
Total $ 1,211.0 $ 80.5 $ 107.5 $ 1,399.0 $ 383.3 $ 8.7 $ 42.3 $ 434.3
Professional fees, consisting of legal, valuation, audit and tax fees, were
approximately $421,000 for the quarter ended September 30, 2012, compared to
approximately $386,000 for the quarter ended September 30, 2011. This was the
result of an increase in audit fees which was partially offset by lower legal
and valuation costs.
Compensation expenses were approximately $289,000 for the quarter ended
September 30, 2012, compared to approximately $218,000 for the quarter ended
September 30, 2011, reflecting the allocation of compensation expenses for the
services of our chief financial officer, chief compliance officer, controller
and senior accountants, and other administrative support personnel. At September
30, 2012 and December 31, 2011, respectively, approximately $450,000 and
$605,000 of compensation expenses remained payable.
General and administrative expenses, consisting primarily of directors' fees,
insurance, listing fees, transfer agent and custodian fees, office supplies,
facilities costs and other expenses, were approximately $424,000 for the three
months ended September 30, 2012 compared to approximately $186,000 for the same
period in 2011. The increase was due largely to charges for excise tax and costs
incurred directly by TICC CLO. Office supplies, facilities costs and other
expenses are allocated to us under the terms of the Administration Agreement.
Incentive Fees
The net investment income incentive fee for the third quarter of 2012 was
approximately $1.0 million compared to $456,000 in the third quarter of 2011.
The net investment income incentive fee is calculated and payable quarterly in
arrears based on our "Pre-Incentive Fee Net Investment Income" for the
immediately preceding calendar quarter subject to a hurdle rate which is
determined as of December 31 of the preceding year. For this purpose,
"Pre-Incentive Fee Net Investment Income" means interest income, dividend income
and any other income accrued during the calendar quarter minus our operating
expenses for the quarter (including the base fee, expenses payable under the
Administration Agreement with BDC Partners, and any interest expense and
dividends paid on any issued and outstanding preferred stock, but excluding the
incentive fee). For the quarter ended September 30, 2012, the investment adviser
permanently waived $5,000 of the net investment income incentive fee.
46
The capital gains incentive fee expense for the third quarter ended September
30, 2012 was approximately $4.6 million. The capital gains incentive fee
expense, as reported under generally accepted accounting principles, is
calculated on the basis of net realized and unrealized gains and losses at the
end of each period. The expense related to the hypothetical liquidation of the
portfolio (and assuming no other changes in realized or unrealized gains and
losses) would only become payable to our investment adviser in the event of a
complete liquidation of our portfolio as of period end and the termination of
the Investment Advisory Agreement on such date. The $4.6 million capital gains
incentive fee accrual as of September 30, 2012 relates entirely to this
hypothetical liquidation calculation. For the quarter ended September 30, 2011,
a reversal of approximately $4.2 million was recorded.
The amount of the capital gains incentive fee which will actually be payable is
determined in accordance with the terms of the Investment Advisory Agreement and
is calculated as of the end of each calendar year (or, upon termination of the
Investment Advisory Agreement, as of the termination date). The terms of the
Investment Advisory Agreement state that the capital gains incentive fee
calculation is based on net realized gains, if any, offset by gross unrealized
depreciation for the calendar year. No effect is given to gross unrealized
appreciation in this calculation. For the year ended December 31, 2011, such an
accrual was not required under the terms of the Investment Advisory Agreement.
Realized and Unrealized Gains/Losses on Investments
For the quarter ended September 30, 2012, we recorded net realized gains on
investments of approximately $1.8 million, which primarily represents the gain
on the repayments of several of our investment including American Integration
Technologies, LLC ($1.4 million.)
Based upon the fair value determinations made in good faith by the Board of
Directors, during the quarter ended September 30, 2012, we had net unrealized
appreciation of approximately $21.5 million, comprised of $25.4 million in gross
unrealized appreciation, $2.4 million in gross unrealized depreciation and
approximately $1.5 million relating to the reversal of prior period net
unrealized appreciation as an investment was realized. The most significant
changes in net unrealized appreciation and depreciation during the quarter ended
September 30, 2012 were as follows (in millions):
Unrealized
appreciation
Portfolio Company (depreciation)
Jersey Street 2006-1A CLO LTD. $ 1.5
Canaras CLO Equity - 2007-1A, 1X 1.4
Emporia CLO 2007 3A E 1.2
Stone Tower CLO LTD 2007 7X 1.1
ACA CLO 2007-1a sub 1.1
Muir Grove CLO LTD 2007 1X E 1.0
GSC Partners 2007-8X Sub CDO 0.9
Rampart 2007-1A CLO Equity 0.7
OCT11 2007-1A CLO 0.7
ACA CLO 2006-2, Limited 0.7
Merrill Communications, LLC 0.6
Fusionstorm, Inc. 2 0.6
Prospero CLO II BV 0.6
Band Digital Inc. (0.7 )
American Integration Technologies, LLC (1.4 )
Net all other 11.5
Total $ 21.5
47
For the quarter ended September 30, 2011, we recorded net realized gains on
investments of approximately $83,000.
Based upon the fair value determinations made in good faith by the Board of
Directors, during the quarter ended September 30, 2011, we had net unrealized
depreciation of approximately $20.1 million, comprised of $284,000 in gross
unrealized appreciation, $20.3 million in gross unrealized depreciation and
approximately $0.1 million relating to the reversal of prior period net
unrealized appreciation as an investment was realized. The most significant
changes in net unrealized appreciation and depreciation during the quarter ended
September 30, 2011 were as follows (in millions):
Unrealized
appreciation
Portfolio Company (depreciation)
Vision Solutions, Inc. $ (0.4 )
CIFC CLO - 2006-1A B2L (0.4 )
Ocean Trails CLO II 2007-2a-d (0.4 )
Hewetts Island CDO 2007 - 1RA E (0.4 )
Nextag, Inc. (0.4 )
Primus 2007 2X Class E CLO (0.4 )
GXS Worldwide Inc. (0.4 )
Canaras CLO Equity - 2007-1A, 1X (0.4 )
Latitude II CLO 2006 2A D (0.4 )
RBS Holding Company (0.4 )
Loomis Sayles CLO 2006-1AE (0.5 )
Pegasus Solutions, Inc. (0.5 )
Hewetts Island CDO III 2005-1A D (0.5 )
Jersey Straits 2006-1A CLO LTD (0.5 )
Avenue CLO V LTD 2007-5A D1 (0.5 )
SourceHov, LLC (0.6 )
Lightpoint CLO 2007-8a (0.6 )
ACA CLO 2006-2, Limited (0.6 )
Latitude III CLO 2007-3A (0.6 )
Landmark V CDO LTD (0.6 )
Emporia CLO 2007 3A E (0.7 )
Harch 2005-2A BB CLO (0.7 )
Integra Telecomm, Inc. (0.9 )
Hewetts Island CDO IV 2006-4 (1.0 )
Prospero CLO II BV (2.0 )
Net all other (5.3 )
Total $ (20.1 )
Please see "-Portfolio Grading" for more information.
Net Increase in Net Assets Resulting from Net Investment Income
Net investment income for the quarter ended September 30, 2012 and 2011 was $4.6
million and $11.6 million, respectively. This decrease was due to a greater
hypothetical capital gains incentive fee, increased management fees (which is
comprised of the base management fee and the net investment income incentive
fee) as well as increased interest expense. These were partially offset by an
increase in the amount of performing assets in the portfolio and distributions
from the CLO equity investments in our portfolio.
Excluding the impact of the capital gains incentive fee of approximately $4.6
million, net investment income for the quarter ended September 30, 2012 was
approximately $9.3 million compared to approximately $7.5 million for the same
period in 2011.
Based on weighted-average shares outstanding of 39,383,076 (basic) and
39,880,940 (diluted), the net increase in net assets resulting from net
investment income per common share for the quarter ended September 30, 2012 was
approximately $0.12 (basic and diluted), compared to approximately $0.36 per
share (basic and diluted) for the same period in 2011.
48
Excluding the impact of the accrued capital gains incentive fee, the net
increase in net assets resulting from core net investment income per common
share would have been $0.24, (basic) and $0.23 (diluted), compared to $0.23 per
share (basic and diluted), for the same period in 2011.
Please see "-Supplemental Information Regarding Core Net Investment Income and
Core Net Increase in Net Assets Resulting from Operations" below for more
information.
Net Increase in Net Assets Resulting from Operations
We had a net increase in net assets resulting from operations of approximately
$27.9 million for the quarter ended September 30, 2012, compared to a net
decrease of approximately $8.4 million for the comparable period in 2011. This
increase was attributable to greater unrealized appreciation and realized gains
as well as an increase in the amount of performing assets in the portfolio and
distributions from the CLO equity investments in our portfolio. This increase
was partially offset by greater hypothetical capital gains incentive fee,
increased management fees as well as higher interest expense.
Based on weighted-average shares outstanding of 39,383,076 (basic) and
39,880,940 (diluted), the net increase in net assets resulting from operations
per common share for the quarter ended September 30, 2012 was approximately
$0.71 (basic) and approximately $0.70 (diluted), compared to a net increase in
net assets resulting from operations of approximately $0.36 per share (basic and
diluted) for the same period in 2011.
Excluding the impact of the accrued capital gains incentive fee, the core net
increase in net assets resulting from operations per common share would have
been approximately $0.83 for basic and $0.82 for diluted, compared to a decrease
of $0.39 per share for the same period in 2011.
Set forth below is a comparison of our results of operations for the nine months
ended September 30, 2012 to the nine months ended September 30, 2011.
Investment Income
As of September 30, 2012, our debt investments had stated interest rates of
between 3.81% and 16.00% (excluding our investment in GenuTec Business
Solutions, Inc. which carries a zero interest rate through October 30, 2014) and
maturity dates of between 5 and 144 months. In addition, our total portfolio had
a weighted average yield on debt investments of approximately 10.3% including
GenuTec Business Solutions, Inc., compared with 11.4% as of September 30, 2011.
Investment income for the nine months ended September 30, 2012 was approximately
$50.8 million compared to approximately $32.0 million for the nine months ended
September 30, 2011. This increase was due in part to an increase in the
distributions from the equity interests in our CLO vehicle investments and the
amount of performing assets in the portfolio as well as a one-time fee of
approximately $3.4 million associated with our investment in American
Integration Technologies, LLC. The total principal value of income producing
debt investments as of September 30, 2012 and September 30, 2011 was
approximately $474.9 million and $356.0 million, respectively. For the nine
months ended September 30, 2012, investment income consisted of approximately
$22.5 million in cash interest from portfolio investments, approximately $4.3
million in amortization of original issue and market discount, approximately
$0.5 million of discount income derived from unscheduled principal cash
remittances at par on discounted debt securities, approximately $18.0 million in
distributions from the equity interest in securitized vehicle investments and an
equity investment, as well as approximately $1.0 million in PIK interest income.
For the nine months ended September 30, 2012, fee income of approximately $4.5
million was recorded, compared to fee income of approximately $507,000 for the
nine months ended September 30, 2011. Fee income consists of non-recurring fees
in connection with our investments in portfolio companies, including commitment
fees, origination fees and amendment fees. During the nine months ended
September 30, 2012, we recorded approximately $3.4 million of PIK fee income in
association with our investment in AIT.
Operating Expenses
Total expenses for the nine months ended September 30, 2012 were $23.0 million,
which includes the accrued capital gains incentive fee of approximately $4.6
million.
Expenses before incentive fees, for the nine months ended September 30, 2012,
were approximately $14.1 million. This amount consisted of investment advisory
fees, interest expense and other debt financing expenses, professional fees,
compensation expense, and general and administrative expenses. Expenses before
incentive fees increased approximately $6.1 million from the nine months ended
September 30, 2011, attributable primarily to higher interest expense associated
with the senior notes issued under our collateralized loan obligation
transaction, higher investment advisory fees (consisting of the base management
fee) as well as increased professional fees associated with our legal and audit
expenses. Expenses before incentive fees for the nine months ended September 30,
2011 were approximately $8.0 million.
49
The investment advisory fee for the nine months of 2012 was approximately $7.4
million, representing the base fee as provided for in the Investment Advisory
Agreement. The investment advisory fee in the comparable period in 2011 was
approximately $5.2 million. The increase of approximately $2.2 million is due to
an increase in average gross assets. At each of September 30, 2012 and December
31, 2011, respectively, approximately $2.8 million and $1.9 million of
investment advisory fees remained payable to TICC Management, including the net
investment income incentive fee discussed below.
Interest expense and other debt financing expenses for the nine months ended of
2012 was approximately $3.1 million, which was directly related to our debt
securitization financing transaction compared with interest expense of
approximately $434,000 for the nine months ending September 30, 2011.
TICC CLO LLC
In August 2011, senior notes in the amount of $101,250,000 were issued by a
newly formed special purpose vehicle in which a whole-owned subsidiary of TICC
owns all of the equity. Under this structure, the notes bear interest, after the
effective date, at three-month London Inter Bank Offered Rate ("LIBOR") plus
2.25% (prior to the effective date, the Class A Notes bear interest at
five-month LIBOR plus 2.25%). The accrued interest payable on these notes during
the third quarter of 2012 was approximately $517,000. Additionally, for the nine
months ended September 30, 2012, the amortization of discount on the issued
notes was approximately $132,000 and the amortization of deferred debt issuance
costs was approximately $227,000. At December 31, 2011, interest expense of
approximately $1.1 million remained payable.
TICC CLO 2012-1 LLC
On August 23, 2012, the Company completed a $160 million debt securitization
financing transaction. The secured and subordinated notes offered in the debt
securitization were issued by TICC CLO 2012-1 LLC ("2012 Securitization Issuer"
or "TICC CLO 2012-1"), a newly formed special purpose vehicle that is a
wholly-owned subsidiary of the Company. The secured notes of the 2012
Securitization Issuer have an aggregate face amount of $120 million and were
issued in four classes. The class A-1 notes have an initial face amount of $88
million, are rated AAA(sf)/Aaa(sf) by Standard & Poor's Ratings Services (S&P)
and Moody's Investors Service, Inc. (Moody's), respectively, and bear interest
at three-month LIBOR plus 1.75%. The class B-1 notes have an initial face amount
of $10 million, are rated AA(sf)/Aa2(sf) by S&P and Moody's, respectively, and
bear interest at three-month LIBOR plus 3.50%. The class C-1 notes have an
initial face amount of $11.5 million, are rated A(sf)/A2(sf) by S&P and Moody's,
respectively, and bear interest at three-month LIBOR plus 4.75%. The class D-1
notes have an initial face amount of $10.5 million, are rated BBB(sf)/Baa2(sf)
by S&P and Moody's, respectively, and bear interest at three-month LIBOR plus
5.75%. TICC presently owns all of the subordinated notes, which totaled $40
million, and $3 million of the class D-1 notes issued in this CLO transaction.
For further information on this securitization, see Note 4.
The aggregate accrued interest payable on the notes of the 2012 Securitization
Issuer during the third quarter of 2012 was approximately $402,000.
Additionally, for the nine months ended September 30, 2012, the aggregate
amortization of discount on the issued notes of the 2012 Securitization Issuer
was approximately $41,000 and the amortization of deferred debt issuance costs
was approximately $25,000.
2017 Convertible Notes
On September 26, 2012, we issued $105.0 million aggregate principal amount of
the Convertible Notes. The Convertible Notes mature on November 1, 2017. The
Convertible Notes bear interest at a rate of 7.50% per year, payable
semi-annually in arrears on May 1 and November 1 of each year, commencing on May
1, 2013. The accrued interest payable on the Convertible Notes during the third
quarter of 2012 was approximately $109,000. Additionally, for the nine months
ended September 30, 2012, the amortization of deferred issuance costs was
approximately $6,000.
The table below summarizes the components of interest expense for the nine
months ended September 30, 2012 and 2011:
Nine Months Ended September 30, 2012 Nine Months Ended September 30, 2011
Amortization of Amortization
Stated Note Deferred Debt Stated of Deferred
Interest Discount Issuance Interest Note Debt Issuance
(dollars in thousands) Expense Expense Costs Total Expense Discount Expense Costs Total
TICC CLO LLC Class A Notes $ 2,110.2 $ 131.9 $ 227.1 $ 2,469.2 $ 383.3 $ 8.7 $ 42.3 $ 434.3
TICC CLO 2012-1 LLC Class A-1
Notes 235.3 17.9 - 253.2 - - - -
TICC CLO 2012-1 LLC Class B-1
Notes 45.7 5.1 - 50.8 - - - -
TICC CLO 2012-1 LLC Class C-1
Notes 68.1 9.3 - 77.4 - - - -
TICC CLO 2012-1 LLC Class D-1
Notes 52.6 8.3 - 60.9 - - - -
TICC CLO 2012-1 amortization of
deferred debt - - 25.1 25.1 - - - -
2017 Convertible Notes 109.4 - 6.1 115.5 - - - -
Total $ 2,621.3 $ 172.5 $ 258.3 $ 3,052.1 $ 383.3 $ 8.7 $ 42.3 $ 434.3
50
Professional fees, consisting of legal, valuation, audit and tax fees, were
approximately $1.6 million for the nine months ended September 30, 2012,
compared to approximately $847,000 for the nine months ended September 30, 2011.
This was the result of an increase in audit fees and legal services which were
approximately $977,000 and $545,000, respectively.
Compensation expenses were approximately $839,000 for the nine months ended
September 30, 2012, compared to approximately $713,000 for the nine months ended
September 30, 2011, reflecting the allocation of compensation expenses for the
services of our chief financial officer, chief compliance officer, controller
and senior accountants, and other administrative support personnel. At September
30, 2012 and December 31, 2011, respectively, approximately $450,000 and
$605,000 of compensation expenses remained payable.
General and administrative expenses, consisting primarily of directors' fees,
insurance, listing fees, transfer agent and custodian fees, office supplies,
facilities costs and other expenses, were approximately $1.2 million for the
nine months ended September 30, 2012 compared to approximately $761,000 for the
same period in 2011. Office supplies, facilities costs and other expenses are
allocated to us under the terms of the Administration Agreement.
Incentive Fees
The net investment income incentive fee for the nine months of 2012 was
approximately $4.4 million compared to $1.4 million for the nine months ended
September 30, 2011. The net investment income incentive fee is calculated and
payable quarterly in arrears based on our "Pre-Incentive Fee Net Investment
Income" for the immediately preceding calendar quarter subject to a hurdle rate
which is determined as of December 31 of the preceding year. For this purpose,
"Pre-Incentive Fee Net Investment Income" means interest income, dividend income
and any other income accrued during the calendar quarter minus our operating
expenses for the quarter (including the base fee, expenses payable under the
Administration Agreement with BDC Partners, and any interest expense and
dividends paid on any issued and outstanding preferred stock, but excluding the
incentive fee). For the nine months ending September 30, 2012, the investment
adviser permanently waived $5,000 of this incentive fee.
The capital gains incentive fee expense for the nine months ended September 30,
2012 was approximately $4.6 million. The capital gains incentive fee expense, as
reported under generally accepted accounting principles, is calculated on the
basis of net realized and unrealized gains and losses at the end of each period.
The expense related to the hypothetical liquidation of the portfolio (and
assuming no other changes in realized or unrealized gains and losses) would only
become payable to our investment adviser in the event of a complete liquidation
of our portfolio as of period end and the termination of the Investment Advisory
Agreement on such date. The $4.6 million capital gains incentive fee accrual as
of September 30, 2012 relates entirely to this hypothetical liquidation
calculation. For the nine months ended September 30, 2011, an expense of
approximately $873,000 was recorded.
The amount of the capital gains incentive fee which will actually be payable is
determined in accordance with the terms of the Investment Advisory Agreement and
is calculated as of the end of each calendar year (or upon termination of the
Investment Advisory Agreement). The terms of the Investment Advisory Agreement
state that the capital gains incentive fee calculation is based on net realized
gains, if any, offset by gross unrealized depreciation for the calendar year. No
effect is given to gross unrealized appreciation in this calculation. For the
year ended December 31, 2011, such an accrual was not required under the terms
of the Investment Advisory Agreement.
Realized and Unrealized Gains/Losses on Investments
For the nine months ended September 30, 2012, we recorded net realized gains on
investments of approximately $3.6 million, which represents the gains on the
sale and repayments of several of our investments, principally in American
Integration Technologies, LLC ($1.4 million), GRD Holding III ($370,000),
Liberty CDO LTD 2005-1AC ($216,000), Power Tools, Inc. ($204,000), Attachmate
Corporation ($135,000), Syniverse Holdings, Inc. ($137,000), Sonic Wall, Inc.
($140,000) and Shield Finance Co. ($115,000).
Based upon the fair value determinations made in good faith by the Board of
Directors, during the nine months ended September 30, 2012, we had net
unrealized appreciation of approximately $22.8 million, comprised of $44.1
million in gross unrealized appreciation, $19.2 million in gross unrealized
depreciation and approximately $2.1 million relating to the reversal of prior
period net unrealized appreciation as an investment was realized. The most
significant changes in net unrealized appreciation and depreciation during the
nine months ended September 30, 2012 were as follows (in millions):
51
Unrealized
appreciation
Portfolio Company (depreciation)
Jersey Street 2006-1A CLO LTD. $ 1.7
Canaras CLO Equity - 2007-1A, 1X 1.6
Harbourview - 2006A CLO Equity 1.5
GSC Partners 2007-8X Sub CDO 1.4
Emporia CLO 2007 3A E 1.4
Prospero CLO II BV 1.3
Integra Telecom Holdings, Inc. 1.2
Hewetts Island CDO IV 2006-4 E 1.2
Muir Grove CLO LTD 2007 1X E 1.0
Algorithmic Implementations, Inc. 1.0
SourceHOV, LLC 1.0
Power Tools, Inc. 0.9
GALE 2007-4A CLO 0.8
Stone Tower CLO LTD 2007 7X 0.8
Rampart 2007-1A CLO Equity 0.8
Lightpoint CLO 2007-8A 0.8
ACA CLO 2007-1a sub 0.8
Harch 2005-2A BB CLO 0.8
ACA CLO 2006-2, Limited 0.8
RBS Holding Company (0.9 )
Stratus Technologies, Inc. (1.0 )
American Integration Technologies, LLC (1.5 )
Merrill Communications, LLC (1.5 )
GenuTec Business Solutions, Inc. (2.0 )
Pegasus Solutions, Inc. (2.5 )
Net all other 11.4
Total $ 22.8
For the nine months ended September 30, 2011, we recorded net realized gains on
investments of approximately $2.7 million, which largely represents relatively
small gains on several different investments including the realized gains on the
repayment of our investment in Prodigy Health Group ($0.7 million) and the sale
of our investment in Del Mar CLO I Ltd. 2006-1 ($0.4 million).
Based upon the fair value determinations made in good faith by the Board of
Directors, during the nine months ended September 30, 2011, we had net
unrealized losses of approximately $17.1 million, comprised of $18.2 million in
gross unrealized appreciation, $32.9 million in gross unrealized depreciation
and approximately $2.4 million relating to the reversal of prior period net
unrealized appreciation as certain investments were realized. The most
significant changes in net unrealized appreciation and depreciation during the
nine months ended September 30, 2011 were as follows (in millions):
YTD Unrealized
appreciation
Portfolio Company (depreciation)
American Integration Technologies, LLC 1.7
ACA CLO 2006-2, Limited 1.1
Pegasus Solutions, Inc. common stock 1.0
Fusionstorm, Inc. 0.5
Sargas CLO 2006 -1A 0.5
Pegasus Solutions, Inc. preferred equity 0.4
Vision Solutions, Inc. (0.4 )
CIFC CLO - 2006-1A B2L (0.4 )
Hewetts Island CDO 2007 - 1RA E (0.4 )
Nextag, Inc. (0.4 )
52
YTD Unrealized
appreciation
Portfolio Company (depreciation)
Harbourview - 2006A CLO Equity (0.4 )
Primus 2007 2X Class E CLO (0.4 )
GXS Worldwide Inc. (0.4 )
Canaras CLO Equity - 2007-1A, 1X (0.4 )
Del Mar CLO I Ltd. 2006-1 (0.4 )
RBS Holding Company (0.4 )
Loomis Sayles CLO 2006-1AE (0.5 )
Pegasus Solutions, Inc. (0.5 )
Jersey Straits 2006-1A CLO LTD (0.5 )
SourceHov, LLC (0.6 )
Emporia CLO 2007 3A E (0.7 )
Ocean Trails CLO II 2007-2a-d (0.7 )
Prodigy Health Group (0.8 )
Lightpoint CLO 2007-8a (0.9 )
Hewetts Island CDO III 2005-1A D (1.0 )
Prospero CLO II BV (1.3 )
Hewetts Island CDO IV 2006-4 (1.6 )
Integra Telecomm, Inc. (1.9 )
Net all other (7.3 )
Total $ (17.1 )
Please see "-Portfolio Grading" for more information.
Net Increase in Net Assets Resulting from Net Investment Income
Net investment income for the nine months ended September 30, 2012 and 2011 was
approximately $27.8 million and $21.7 million, respectively. This increase was
due in part to an increase in the amount of performing assets in the portfolio
and distributions from the CLO equity investments in our portfolio, as well as
the non-recurrence of a one-time fee of approximately $3.4 million associated
with our investment in American Integration Technologies, LLC.
Excluding the impact of the capital gains incentive fee of approximately $4.6
million, net investment income for the nine months ended September 30, 2012 was
approximately $32.4 million compared to approximately $22.6 million for thesame
period in 2011.
Based on weighted-average shares outstanding of 36,859,005 (basic) and
37,026,172 (diluted), the net increase in net assets resulting from net
investment income per common share for the nine months ended September 30, 2012
was approximately $0.75 (basic and diluted), compared to approximately $0.67 per
share (basic and diluted) for the same period in 2011. Excluding the impact of
the accrued capital gains incentive fee, the net increase in net assets
resulting from core net investment income per common share would have been
approximately $0.88 (basic) and approximately $0.87 (diluted), compared to $0.70
per share (basic and diluted) for the same period in 2011.
Please see "-Supplemental Information Regarding Core Net Investment Income and
Core Net Increase in Net Assets Resulting from Operations" below for more
information.
Net Increase in Net Assets Resulting from Operations
We had a net increase in net assets resulting from operations of approximately
$54.2 million for the nine months ended September 30, 2012, compared to a net
increase of approximately $7.3 million for the comparable period in 2011. This
increase was attributable to greater net investment income and was partially
offset set by the expense accrual for the capital gains incentive fee of
approximately $4.6 million as of September 30, 2012.
Based on weighted-average shares outstanding of 36,859,005 (basic) and
37,026,172 (diluted), the net increase in net assets resulting from operations
per common share for the nine months ended September 30, 2012 was approximately
$1.47 (basic) and approximately $1.47 (diluted), compared to a net increase in
net assets resulting from operations of approximately $0.23 per share (basic and
diluted) for the same period in 2011.
Excluding the impact of the accrued capital gains incentive fee, the core net
increase in net assets resulting from operations per common share would have
been approximately $1.59 (basic) and approximately $1.59 (diluted), compared to
an increase of $0.25 per share (basic and diluted) for the same period in 2011.
53
Please see "-Portfolio Grading" above for more information.
Please see "-Supplemental Information Regarding Core Net Investment Income and
Core Net Increase in Net Assets Resulting from Operations" below for more
information.
On a supplemental basis, we provide information relating to core net investment
income, its ratio to net assets, and core net increase in net assets resulting
from operations, which are non-GAAP measures. These measures are provided in
addition to, but not as a substitute for, net investment income and net increase
in net assets resulting from operations. The Company's non-GAAP measures may
differ from similar measures by other companies, even if similar terms are used
to identify such measures. Core net investment income represents net investment
income excluding our capital gains incentive fee. Core net increase in net
assets resulting from operations represents net increase in net assets resulting
from operations excluding the capital gains incentive fee. As the capital gains
incentive fee is based on a hypothetical event that did not occur, we believe
that core net investment income and core net increase in net assets resulting
from operations are useful indicators of performance during this period.
Further, as the capital gains incentive fee is not a currently tax deductible
expense and as the RIC requirements are to distribute taxable earnings, the core
net investment income provides an indication of taxable income for the yearto
date.
The following tables provide a reconciliation of net investment income to core
net investment income (for the three and nine months ended September 30, 2012
and 2011, respectively):
Three Months Ended Nine Months Ended
September 30, 2012 September 30, 2012
Per Share Per Share
Amount Amounts Amount Amounts
Net investment income $ 4,607,574 $ 0.117 $ 27,799,570 $ 0.754Capital gains incentive fee 4,649,814 0.118 4,559,957 0.124
Core net investment income $ 9,257,388 $ 0.235 $ 32,359,527
$ 0.878
Three Months Ended Nine Months Ended
September 30, 2011 September 30, 2011
Per Share Per Share
Amount Amounts Amount Amounts Net investment income $ 11,615,785 $ 0.36 $ 21,687,245 $ 0.67
Capital gains incentive fee (4,153,198 ) (0.13 ) 873,288
0.03
Core net investment income $ 7,462,587 $ 0.23 $ 22,560,533 $ 0.70
The following tables provide a reconciliation of net increase in net assets
resulting from operations to core net increase in net assets resulting from
operations (for the three and nine months ended September 30, 2012 and 2011,
respectively):
Three Months Ended Nine Months Ended
September 30, 2012 September 30, 2012
Per Share Per Share
Amount Amounts Amount Amounts
Net increase in net assets resulting
from operations $ 27,856,644 $ 0.707 $ 54,199,886 $ 1.470
Capital gains incentive fee 4,649,814 $ 0.118 4,559,957 0.124
Core net increase in net assets
resulting from operations $ 32,506,458 $ 0.825 $ 58,759,843 $ 1.594
Three Months Ended Nine Months Ended
September 30, 2011 September 30, 2011
Per Share Per Share
Amount Amounts Amount Amounts
Net (decrease) increase in net assets
resulting from operations $ (8,415,279 ) $ (0.26 ) $ 7,349,009 $ 0.22
Capital gains incentive fee (4,153,198 ) (0.13 ) 873,288 0.03
Core net (decrease) increase in net
assets resulting from operations $ (12,568,477 ) $ (0.39 ) $ 8,222,297 $ 0.25
54
In addition, the following ratio is presented to supplement the financial
highlights included in Note 10 to the financial statements:
2012 2011
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
September 30, 2012 September 30, 2012 September 30, 2011 September 30, 2011
Ratio of core net investment income to average net
assets, for the three and nine month periods ended
September 30, 2012 and 2011, respectively
9.88 % 12.35 % 9.13 % 9.36 %
The following table provides a reconciliation of the ratio of net investment
income to average net assets to the ratio of core net investment income to
average net assets, for the three and nine month periods ended September 30,
2012 and 2011, respectively.
2012 2011
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
September 30, 2012 September 30, 2012 September 30, 2011 September 30, 2011
Ratio of net investment income to average
net assets
4.92 % 10.61 % 14.21 % 9.00 %
Ratio of capital gain incentive fee to
average net assets 4.96 % 1.74 % (5.08 )% 0.36 %
Ratio of core net investment income to
average net assets 9.88 % 12.35 % 9.13 % 9.36 %
55
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2012, we issued approximately 8.3
million shares in two equity offerings, raising approximately $78.4 millionin
net proceeds.
During the nine months ended September 30, 2012, cash and cash equivalents
increased from approximately $4.5 million at the beginning of the period to
approximately $122.9 million at the end of the period. Net cash used by
operating activities for the period, consisting primarily of the items described
in "-Results of Operations," was approximately $67.7 million, largely reflecting
purchases of new investments of approximately $226.4 million partially offset by
proceeds from principal repayments and sales of investments of approximately
$135.9 million. Net cash used by investing activities reflects the change in
restricted cash in the debt securitization entity. During the period, net cash
provided by financing activities was approximately $259.6 million reflecting
primarily the net proceeds of approximately $109.9 million borrowed under our
debt securitization financing transaction completed in August 2012, $102.1
million borrowed under our issuance of the Convertible Notes and $78.4 million
resulting from two equity offerings, partially offset by the distribution of
dividends.
Contractual Obligations
We have certain obligations with respect to the investment advisory and
administration services we receive. See "-Overview". We incurred approximately
$7.4 million for investment advisory services, excluding pre-incentive net
investment income incentive fees and approximately $1.2 million for
administrative services for the nine months ended September 30, 2012.
TICC CLO is obligated to repay the notes issued in connection with the debt
securitization financing that we completed in August 2011. The notes of the 2011
Securitization Issuer mature in 2021, in the total amount of $101,250,000. There
are no amortization payments due on the notes of the 2011 Securitization Issuer
prior to maturity. See "Borrowings" below.
TICC CLO 2012-1 is obligated to repay the notes issued in connection with the
debt securitization financing that we completed in August 2012. The notes of the
2012 Securitization Issuer mature in 2023, in the total amount of $120,000,000.
There are no amortization payments due on the notes of the 2012 Securitization
Issuer prior to maturity. See "Borrowings" below.
TICC is obligated to repay the Convertible Notes, which mature in 2017, in the
total amount of $105,000,000, unless previously converted in accordance with
their terms.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements, including any risk
management of commodity pricing or other hedging practices.
Borrowings
On August 10, 2011, the Company completed a $225.0 million debt securitization
financing transaction. The Class A Notes offered in the securitization were
issued by TICC CLO, and are secured by the assets held by the trustee on behalf
of the 2011 Securitization Issuer. The notes are an obligation of TICC CLO. The
securitization was executed through a private placement of $101.25 million of
Aaa/AAA Class A Notes which bear interest, after the effective date, at
three-month LIBOR plus 2.25% (prior to the effective date, the Class A Notes
bear interest at five-month LIBOR plus 2.25%). The notes were sold at a discount
to par, and the amount of the discount is being amortized over the term of the
notes. The Class A Notes are included in the September 30, 2012 consolidated
statements of assets and liabilities. For the nine months period ended September
30, 2012, the Class A note holders were paid interest on the Class A notes of
approximately $2.7 million. Holdings retained all of the 2011 Subordinated Notes
totaling $123.75 million and all of the membership interests in the 2011
Securitization Issuer. The 2011 Subordinated Notes do not bear interest, but are
entitled to the residual economic interest in the 2011 Securitization Issuer.
On August 23, 2012, the Company completed a $160 million debt securitization
financing transaction. The secured and subordinated notes offered in the debt
securitization were issued by TICC CLO 2012-1 LLC ("2012 Securitization Issuer"
or "TICC CLO 2012-1"), a newly formed special purpose vehicle that is a
wholly-owned subsidiary of the Company. The secured notes of the 2012
Securitization Issuer have an aggregate face amount of $120 million and were
issued in four classes. The class A-1 notes have an initial face amount of $88
million, are rated AAA(sf)/Aaa(sf) by Standard & Poor's Ratings Services (S&P)
and Moody's Investors Service, Inc. (Moody's), respectively, and bear interest
at three-month LIBOR plus 1.75%. The class B-1 notes have an initial face amount
of $10 million, are rated AA(sf)/Aa2(sf) by S&P and Moody's, respectively, and
bear interest at three-month LIBOR plus 3.50%. The class C-1 notes have an
initial face amount of $11.5 million, are rated A(sf)/A2(sf) by S&P and Moody's,
respectively, and bear interest at three-month LIBOR plus 4.75%. The class D-1
notes have an initial face amount of $10.5 million, are rated BBB(sf)/Baa2(sf)
by S&P and Moody's, respectively, and bear interest at three-month LIBOR plus
5.75%. TICC presently owns all of the subordinated notes, which totaled $40
million, and $3 million of the class D-1 notes issued in this CLO transaction.
The TICC CLO 2012-1 debt securitization financing transaction has an "accordion"
feature which allows, under certain circumstances and subject to the
satisfaction of certain conditions, for an increase in the amount of secured and
subordinated notes issued by the special purpose vehicle. If the same classes of
secured notes are to be issued, the increase must be pro rata to the existing
secured and subordinated notes, and is limited to a total increase of $160
million in total size. Alternatively, the special purpose vehicle may issue a
class of secured notes that is pari passu to the class D-1 notes or junior to
all secured classes, without a cap on the amount of the notes. It is not
necessary that the Company own all or any of the notes permitted by this
feature, which may affect the accounting treatment of the debt securitization
financing transaction.
56
On September 26, 2012, the Company issued $105,000,000 aggregate principal
amount of the Convertible Notes. The Convertible Notes are convertible into
shares of our common stock based on an initial conversion rate of 87.2448 shares
of our common stock per $1,000 principal amount of Convertible Notes, which is
equivalent to an initial conversion price of approximately $11.46 per share of
common stock. The conversion price for the Convertible Notes will be reduced for
quarterly cash dividends paid to common shares to the extent that the quarterly
dividend exceeds $0.29 cents per share, subject to adjustment. The Convertible
Notes mature on November 1, 2017, unless previously converted in accordance with
their terms. The Convertible Notes are our general unsecured obligations, rank
equally in right of payment with our future senior unsecured debt, and rank
senior in right of payment to any potential subordinated debt, should any be
issued in the future.
Distributions
In order to qualify as a regulated investment company and to avoid corporate
level tax on the income we distribute to our stockholders, we are required,
under Subchapter M of the Code, to distribute at least 90% of our ordinary
income and short-term capital gains to our stockholders on an annual basis.
57
The following table reflects the cash distributions, including dividends and
returns of capital, if any, per share that we have declared on our common stock
to date:
Date Declared Record Date Payment Date Amount
Fiscal 2012
November 1 , 2012 December 17, 2012 December 31, 2012 $ 0.29
July 26, 2012 September 14, 2012 September 28, 2012 0.29
May 2, 2012 June 15, 2012 June 29, 2012 0.27
March 1, 2012 March 21, 2012 March 30, 2012 0.27
Total (2012) 1.12
Fiscal 2011
November 3, 2011 December 16, 2011 December 30, 2011 0.25
July 28, 2011 September 16, 2011 September 30, 2011 0.25
May 3, 2011 June 16, 2011 June 30, 2011 0.25
March 3, 2011 March 21, 2011 March 31, 2011 0.24
Total (2011) 0.99 (1)
Fiscal 2010
November 2, 2010 December 10, 2010 December 31, 2010 0.24
July 29, 2010 September 10, 2010 September 30, 2010 0.22
April 29, 2010 June 10, 2001 June 30, 2010 0.20
March 4, 2010 March 24, 2010 March 31, 2010 0.15
Total (2010) 0.81 (1)
Fiscal 2009
October 29, 2009 December 10, 2009 December 31, 2009 0.15
July 30, 2009 September 10, 2009 September 30, 2009 0.15
May 5, 2009 June 10, 2009 June 30, 2009 0.15
March 5, 2009 March 17, 2009 March 31, 2009 0.15
Total (2009) 0.60 (1)
58
Date Declared Record Date Payment Date Amount
Fiscal 2008
October 30, 2008 December 10, 2008 December 31, 2008 0.20
July 31, 2008 September 10, 2008 September 30, 2008 0.20
May 1, 2008 June 16, 2008 June 30, 2008 0.30
March 11, 2008 March 21, 2008 March 31, 2008 0.36
Total (2008) 1.06 (2)
Fiscal 2007
October 25, 2007 December 10, 2007 December 31, 2007 0.36
July 26, 2007 September 7, 2007 September 28, 2007 0.36
April 30, 2007 June 8, 2007 June 29, 2007 0.36
February 27, 2007 March 9, 2007 March 30, 2007 0.36
Total (2007) 1.44 (3)
Fiscal 2006
December 20, 2006 December 29, 2006 January 17, 2007 0.12
October 26, 2006 December 8, 2006 December 29, 2006 0.34
July 26, 2006 September 8, 2006 September 29, 2006 0.32
April 26, 2006 June 9, 2006 June 30, 2006 0.30
February 9, 2006 March 10, 2006 March 31, 2006 0.30
Total (2006) 1.38
Fiscal 2005
December 7, 2005 December 30, 2005 January 18, 2006 0.12
October 27, 2005 December 9, 2005 December 30, 2005 0.30
July 27, 2005 September 10, 2005 September 30, 2005 0.25
April 27, 2005 June 10, 2005 June 30, 2005 0.20
February 9, 2005 March 10, 2005 March 31, 2005 0.14
Total (2005) 1.01
Fiscal 2004
October 27, 2004 December 10, 2004 December 31, 2004 0.11
July 28, 2004 September 10, 2004 September 30, 2004 0.11
May 5, 2004 June 10, 2004 June 30, 2004 0.11
February 2, 2004 March 15, 2004 April 5, 2004 0.10
Total (2004) 0.43 (4)
Total Distributions: $ 8.84 (5)
(1) Distributions for the fiscal years ended December 31, 2011, 2010 and 2009
were funded from undistributed net investment income.
(2) Includes a return of capital of approximately $0.08 per share for tax
purposes.
(3) Includes a return of capital of approximately $0.02 per share for tax
purposes.
(4) Includes a return of capital of approximately $0.10 per share for tax
purposes.
(5) We did not declare a dividend for the period ended December 31, 2003.
59
Related Parties
We have a number of business relationships with affiliated or related parties,
including the following:
• We have entered into the Investment Advisory Agreement with TICC Management.
TICC Management is controlled by BDC Partners, its managing member. Charles M.
Royce, as the non-managing member, holds a minority, non-controlling interest
in TICC Management. BDC Partners, as the managing member of TICC Management,
manages the business and internal affairs of TICC Management. In addition, BDC
Partners provides us with office facilities and administrative services
pursuant to the Administration Agreement.
• Messrs. Cohen and Rosenthal currently serve as Chief Executive Officer and
President, respectively, for T2 Advisers, LLC, the investment adviser to
Greenwich Loan Income Fund Limited (f/k/a T2 Income Fund Limited) ("GLIF"), a
Guernsey fund established and operated for the purpose of investing in
bilateral transactions and syndicated loans across a variety of industries
globally. BDC Partners is the managing member of T2 Advisers, LLC. In addition,
Mr. Conroy serves as the Chief Financial Officer of GLIF and the Chief
Financial Officer, Chief Compliance Officer and Treasurer of T2 Advisers, LLC.
• Messrs. Cohen and Rosenthal currently serve as Chief Executive Officer and
President, respectively, of Oxford Lane Capital Corp., a non-diversified
closed-end management investment company that invests primarily in leveraged
corporate loans, and its investment adviser, Oxford Lane Management, LLC
("Oxford Lane Management"). BDC Partners provides Oxford Lane Capital Corp.
with office facilities and administrative services pursuant to an
administration agreement and also serves as the managing member of Oxford Lane
Management. In addition, Patrick F. Conroy serves as the Chief Financial
Officer, Chief Compliance Officer and Corporate Secretary of Oxford Lane
Capital Corp. and Chief Financial Officer, Chief Compliance Officer and
Treasurer of Oxford Lane Management.
• BDC Partners is the managing member of Oxford Gate Capital, LLC, a private fund
in which Messrs. Cohen, Rosenthal and Conroy, along with certain investment and
administrative personnel of TICC Management, are invested.
BDC Partners has adopted a written policy with respect to the allocation of
investment opportunities among TICC, Oxford Lane Capital Corp., GLIF and Oxford
Gate Capital, LLC in view of the potential conflicts of interest raised by the
relationships described above.
In the ordinary course of business, we may enter into transactions with
portfolio companies that may be considered related party transactions. In order
to ensure that we do not engage in any prohibited transactions with any persons
affiliated with us, we have implemented certain policies and procedures whereby
our executive officers screen each of our transactions for any possible
affiliations between the proposed portfolio investment, us, companies controlled
by us and our employees and directors. We will not enter into any agreements
unless and until we are satisfied that doing so will not raise concerns under
the 1940 Act or, if such concerns exist, we have taken appropriate actions to
seek board review and approval or exemptive relief for such transaction. Our
Board of Directors reviews these procedures on an annual basis.
We have also adopted a Code of Ethics which applies to, among others, our senior
officers, including our Chief Executive Officer and Chief Financial Officer, as
well as all of our officers, directors and employees. Our Code of Ethics
requires that all employees and directors avoid any conflict, or the appearance
of a conflict, between an individual's personal interests and our interests.
Pursuant to our Code of Ethics, each employee and director must disclose any
conflicts of interest, or actions or relationships that might give rise to a
conflict, to our Chief Compliance Officer. Our Audit Committee is charged with
approving any waivers under our Code of Ethics. As required by the NASDAQ Global
Select Market corporate governance listing standards, the Audit Committee of our
Board of Directors is also required to review and approve any transactions with
related parties (as such term is defined in Item 404 of Regulation S-K).
RECENT DEVELOPMENTS
On November 1, 2012, the Board of Directors declared a distribution of $0.29 per
share for the fourth quarter, payable on December 31, 2012 to shareholders of
record as of December 17, 2012.
60
[ Back To LatinAmerica.tmcnet.com's Homepage 's Homepage ]
|
Internet Telephony Magazine
Click here to read latest issue
CUSTOMER 
Cloud Computing Magazine
Click here to read latest issue
M2M Evolution Magazine
Call Center/CRM
Info Tech 
IP Communications 
Mobile 
Green 
Satellite 
Robotics 
