OAKTREE SPECIALTY LENDING CORPORATION The following discussion should be read in connection with our Consolidated Financial Statements and the notes thereto included elsewhere in this annual report on Form 10-K. Some of the statements in this annual report on Form 10-K constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this annual report on Form 10-K may include statements as to: •our future operating results and distribution projections; •the ability of Oaktree to reposition our portfolio and to implement Oaktree's future plans with respect to our business; •the ability of Oaktree and its affiliates to attract and retain highly talented professionals; •our business prospects and the prospects of our portfolio companies; •the impact of the investments that we expect to make; •the ability of our portfolio companies to achieve their objectives; •our expected financings and investments and additional leverage we may seek to incur in the future; •the adequacy of our cash resources and working capital; •the timing of cash flows, if any, from the operations of our portfolio companies; and •the cost or potential outcome of any litigation to which we may be a party. In addition, words such as "anticipate," "believe," "expect," "seek," "plan," "should," "estimate," "project" and "intend" indicate forward-looking statements, although not all forward-looking statements include these words. The forward-looking statements contained in this annual report on Form 10-K involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in "Item 1A. Risk Factors" in this annual report on Form 10-K. Other factors that could cause actual results to differ materially include: •changes or potential disruptions in our operations, the economy, financial markets or political environment; •risks associated with possible disruptions in our operations or the economy generally due to terrorism, natural disasters or the COVID-19 pandemic; •future changes in laws or regulations (including the interpretation of these laws and regulations by regulatory authorities) and conditions in our operating areas, particularly with respect to Business Development Companies or RICs; •general considerations associated with the COVID-19 pandemic; •the ability of the parties to consummate the Mergers on the expected timeline, or at all; •the ability of the parties to consummate the Mergers on the expected timeline, or at all; •the effects of disruption on our business from the proposed Mergers; •the combined company's plans, expectations, objectives and intentions, as a result of the Mergers; •any potential termination of the Merger Agreement; •the actions of our stockholders or the stockholders of OCSL with respect to the proposals submitted for their approval in connection with the Mergers; and •other considerations that may be disclosed from time to time in our publicly disseminated documents and filings. We have based the forward-looking statements included in this annual report on Form 10-K on information available to us on the date of this annual report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with theSEC , including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Business Overview We are a specialty finance company that looks to provide customized capital solutions for middle-market companies in both the syndicated and private placement markets. We are a closed-end, externally managed, non-diversified management investment company that has elected to be regulated as a Business Development Company under the Investment Company Act of 1940, as amended, or the Investment Company Act. In addition, we have qualified and elected to be treated as a RIC under the Code for tax purposes. We are externally managed by Oaktree pursuant to the Investment Advisory Agreement. Oaktree Administrator, an affiliate of Oaktree, provides certain administrative and other services necessary for us to operate pursuant to the Administration Agreement. 52 -------------------------------------------------------------------------------- Our investment objective is to generate a stable source of current income while minimizing the risk of principal loss and, to a lesser extent, capital appreciation by providing innovative first-lien financing solutions to companies across a wide variety of industries. We invest in companies across a variety of industries that typically possess resilient business models with strong underlying fundamentals. We intend to deploy capital across credit and economic cycles with a focus on long-term results, which we believe will enable us to build lasting partnerships with financial sponsors and management teams. We invest in unsecured loans, including subordinated loans and bonds, issued by private middle-market companies and, to a lesser extent, senior and subordinated loans and bonds issued by public companies and equity investments. Oaktree intends to (1) rotate out of a small number of investments where the underlying business fundamentals may expose us to significant risk of loss of principal, (2) focus on increasing the size of private first lien investments originated on Oaktree's platform (which we call "core investments") and (3) supplement the portfolio with broadly syndicated and select privately placed loans. Oaktree is generally focused on middle-market companies, which we define as companies with enterprise values of between$100 million and$750 million . We generally invest in securities that are rated below investment grade by rating agencies or that would be rated below investment grade if they were rated. Below investment grade securities, which are often referred to as "high yield" and "junk," have predominantly speculative characteristics with respect to the issuer's capacity to pay interest and repay principal. Oaktree has performed a comprehensive review of our portfolio and categorized our portfolio into core investments, non-core performing investments and non-accrual investments. Certain additional information on such categorization and our portfolio composition is included in investor presentations that we file with theSEC . Since an Oaktree affiliate became our investment adviser inOctober 2017 , Oaktree and its affiliates have reduced the investments identified as non-core by over$250 million , at fair value. Over time, Oaktree intends to rotate us out of the remaining non-core investments, which were approximately$37 million at fair value as ofSeptember 30, 2020 . Business Environment and Developments We believe that the COVID-19 pandemic may have lasting effects on theU.S. and global financial markets and may cause further economic uncertainties or deterioration in the performance of the middle market inthe United States and worldwide. While the initial market disruptions have somewhat eased, the global economy continues to experience economic uncertainty. This uncertainty can impact the overall supply and demand of the market through changing spreads, deal terms and structures, and equity purchase price multiples. Despite this economic uncertainty, we believe attractive risk-adjusted returns can be achieved by making loans to companies in the middle market. Given the breadth of the investment platform of Oaktree and its affiliates, we believe that we have the resources and experience to source, diligence and structure investments in these companies and are well placed to generate attractive returns for investors. We have proactively taken a number of actions to evaluate and support our portfolio companies in light of the COVID-19 pandemic, including outreach to a variety of management teams and sponsors. We have been in close contact with many of our portfolio companies to understand their liquidity and solvency positions. We believe that these efforts to closely monitor and identify vulnerable investments will allow us to address potential problems early and provide constructive solutions to our portfolio companies. As ofSeptember 30, 2020 , 98.1% of our debt investment portfolio (at fair value) and 98.3% of our debt portfolio (at cost) bore interest at floating rates indexed to LIBOR and/or an alternate base rate (e.g., prime rate), which typically resets semi-annually, quarterly or monthly at the borrower's option. As a result of the COVID-19 pandemic and the related decision of theU.S. Federal Reserve to reduce certain interest rates, LIBOR decreased beginning inMarch 2020 . A prolonged reduction in interest rates will result in a decreases in our total investment income and could result in a decrease in our net investment income to the extent the decreases are not offset by an increase in the spread on our floating rate investments, a decrease in our interest expense or a reduction or waiver of our incentive fee on income. InJuly 2017 , the head of theUnited Kingdom Financial Conduct Authority announced the desire to phase out the use of LIBOR by the end of 2021. In anticipation of the cessation of LIBOR, we may need to renegotiate any credit agreements extending beyond 2021 with our prospective portfolio companies that utilize LIBOR as a factor in determining the interest rate. The reinvestment period of each of our borrowing facilities in place as ofSeptember 30, 2020 ends prior to the end of 2021 (and therefore prior to any phase out of LIBOR); however, we expect that any refinancings or future borrowing facilities that bear interest at floating rates indexed to LIBOR (or certain amendments to current borrowing facilities) would include procedures for the selection of a replacement reference rate following any phase out of LIBOR. Certain of the loan agreements with our portfolio companies have included fallback language in the event that LIBOR becomes unavailable. This language generally provides that the administrative agent may identify a replacement reference rate, typically with the consent of (or prior consultation with) the borrower. In certain cases, the administrative agent will be required to obtain the consent of either a majority of the lenders under the facility, or the consent of each lender, prior to identifying a replacement reference rate. Alternatively, certain of the loan agreements with our portfolio companies do not include any fallback language providing a mechanism for the parties to negotiate a new reference interest rate and will instead revert to the base rate in the event LIBOR ceases to exist. It remains unclear whether the cessation of LIBOR will be delayed due to COVID-19 or what form any delay may take, and there are no assurances that there will be a delay. It is also unclear what the duration and severity of COVID-19 will be, and whether this will impact 53 -------------------------------------------------------------------------------- LIBOR transition planning. COVID-19 may also slow regulators' and others' efforts to develop and implement alternative reference rates, which could make LIBOR transition planning more difficult, particularly if the cessation of LIBOR is not delayed but an alternative reference rate does not emerge as industry standard. Critical Accounting Policies Basis of Presentation Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted inthe United States of America , or GAAP, and pursuant to the requirements for reporting on Form 10-K and Regulation S-X. All intercompany balances and transactions have been eliminated. We are an investment company following the accounting and reporting guidance inFinancial Accounting Standards Board , or FASB, Accounting Standards Codification, or ASC, Topic 946, Financial Services-Investment Companies, or ASC 946. Investment Valuation We value our investments in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures, or ASC 820, which defines fair value as the amount 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. A liability's fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. ASC 820 prioritizes the use of observable market prices over entity-specific inputs. Where observable prices or inputs are not available or reliable, valuation techniques are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the investments or market and the investments' complexity. Hierarchical levels, defined by ASC 820 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
•Level 1 - Unadjusted, quoted prices in active markets for identical assets or liabilities as of the measurement date.
•Level 2 - Observable inputs other than Level 1 prices, such as quoted prices
for similar assets or liabilities; quoted prices in markets that are not active;
or other inputs that are observable or can be corroborated by observable market
data at the measurement date for substantially the full term of the assets or
liabilities.
•Level 3 - Unobservable inputs that reflect management's best estimate of what
market participants would use in pricing the asset or liability at the
measurement date. Consideration is given to the risk inherent in the valuation
technique and the risk inherent in the inputs to the model.
If inputs used to measure fair value fall into different levels of the fair
value hierarchy, an investment's level is based on the lowest level of input
that is significant to the fair value measurement. Our assessment of the
significance of a particular input to the fair value measurement in its entirety
requires judgment and considers factors specific to the investment. This
includes investment securities that are valued using "bid" and "ask" prices
obtained from independent third party pricing services or directly from brokers.
These investments may be classified as Level 3 because the quoted prices may be
indicative in nature for securities that are in an inactive market, may be for
similar securities or may require adjustments for investment-specific factors or
restrictions.
Financial instruments with readily available quoted prices generally will have a
higher degree of market price observability and a lesser degree of judgment
inherent in measuring fair value. As such, Oaktree obtains and analyzes readily
available market quotations provided by pricing vendors and brokers for all of
our investments for which quotations are available. In determining the fair
value of a particular investment, pricing vendors and brokers use observable
market information, including both binding and non-binding indicative
quotations.
We seek to obtain at least two quotations for the subject or similar securities,
typically from pricing vendors. If we are unable to obtain two quotes from
pricing vendors, or if the prices obtained from pricing vendors are not within
our set threshold, we seek to obtain a quote directly from a broker making a
market for the asset. Oaktree evaluates the quotations provided by pricing
vendors and brokers based on available market information, including trading
activity of the subject or similar securities, or by performing a comparable
security analysis to ensure that fair values are reasonably estimated. Oaktree
also performs back-testing of valuation information obtained from pricing
vendors and brokers against actual prices received in transactions. In addition
to ongoing monitoring and back-testing, Oaktree performs due diligence
procedures over pricing vendors to understand their methodology and controls to
support their use in the valuation process. Generally, we do not adjust any of
the prices received from these sources.
If the quotations obtained from pricing vendors or brokers are determined to not
be reliable or are not readily available, we value such investments using any of
three different valuation techniques. The first valuation technique is the
transaction precedent technique, which utilizes recent or expected future
transactions of the investment to determine fair value, to the extent
applicable. The second
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valuation technique is an analysis of the enterprise value, or EV, of the
portfolio company. EV means the entire value of the portfolio company to a
market participant, including the sum of the values of debt and equity
securities used to capitalize the enterprise at a point in time. The EV analysis
is typically performed to determine (i) the value of equity investments, (ii)
whether there is credit impairment for debt investments and (iii) the value for
debt investments that we are deemed to control under the Investment Company Act.
To estimate the EV of a portfolio company, Oaktree analyzes various factors,
including the portfolio company's historical and projected financial results,
macroeconomic impacts on the company, and competitive dynamics in the company's
industry. Oaktree also utilizes some or all of the following information based
on the individual circumstances of the portfolio company: (i) valuations of
comparable public companies, (ii) recent sales of private and public comparable
companies in similar industries or having similar business or earnings
characteristics, (iii) purchase prices as a multiple of their earnings or cash
flow, (iv) the portfolio company's ability to meet its forecasts and its
business prospects, (v) a discounted cash flow analysis, (vi) estimated
liquidation or collateral value of the portfolio company's assets and (vii)
offers from third parties to buy the portfolio company. We may probability
weight potential sale outcomes with respect to a portfolio company when
uncertainty exists as of the valuation date. The third valuation technique is a
market yield technique, which is typically performed for non-credit impaired
debt investments. In the market yield technique, a current price is imputed for
the investment based upon an assessment of the expected market yield for a
similarly structured investment with a similar level of risk, and we consider
the current contractual interest rate, the capital structure and other terms of
the investment relative to risk of the company and the specific investment. A
key determinant of risk, among other things, is the leverage through the
investment relative to the EV of the portfolio company. As debt investments held
by us are substantially illiquid with no active transaction market, we depend on
primary market data, including newly funded transactions and industry specific
market movements, as well as secondary market data with respect to high yield
debt instruments and syndicated loans, as inputs in determining the appropriate
market yield, as applicable.
In accordance with ASC 820-10, certain investments that qualify as investment
companies in accordance with ASC 946 may be valued using net asset value as a
practical expedient for fair value. Consistent with FASB guidance under ASC 820,
these investments are excluded from the hierarchical levels. These investments
are generally not redeemable.
We estimate the fair value of privately held warrants using a Black Scholes
pricing model, which includes an analysis of various factors and subjective
assumptions, including the current stock price (by using an EV analysis as
described above), the expected period until exercise, expected volatility of the
underlying stock price, expected dividends and the risk-free rate. Changes in
the subjective input assumptions can materially affect the fair value estimates.
Our Board of Directors undertakes a multi-step valuation process each quarter in
connection with determining the fair value of our investments:
•The quarterly valuation process begins with each portfolio company or
investment being initially valued by Oaktree's valuation team in conjunction
with Oaktree's portfolio management team and investment professionals
responsible for each portfolio investment;
•Preliminary valuations are then reviewed and discussed with management of
Oaktree;
•Separately, independent valuation firms engaged by our Board of Directors
prepare valuations of our investments, on a selected basis, for which market
quotations are not readily available or are readily available but deemed not
reflective of the fair value of the investment, and submit the reports to us and
provide such reports to Oaktree and the Audit Committee of our Board of
Directors;
•Oaktree compares and contrasts its preliminary valuations to the valuations of
the independent valuation firms and prepares a valuation report for the Audit
Committee;
•The Audit Committee reviews the preliminary valuations with Oaktree, and
Oaktree responds and supplements the preliminary valuations to reflect any
discussions between Oaktree and the Audit Committee;
•The Audit Committee makes a recommendation to our full Board of Directors
regarding the fair value of the investments in our portfolio; and
•Our Board of Directors discusses valuations and determines the fair value of
each investment in our portfolio.
The fair value of our investments as of September 30, 2020 and September 30,
2019 was determined in good faith by our Board of Directors. Our Board of
Directors has and will continue to engage independent valuation firms to provide
assistance regarding the determination of the fair value of a portion of our
portfolio securities for which market quotations are not readily available or
are readily available but deemed not reflective of the fair value of the
investment each quarter, and the Board of Directors may reasonably rely on that
assistance. As of September 30, 2020 , 94.9% of our portfolio at fair value was
valued either based on market quotations, the transactions precedent approach or
corroborated by independent valuation firms. However, our Board of Directors is
responsible for the ultimate valuation of the portfolio investments at fair
value as determined in good faith pursuant to our valuation policy and a
consistently applied valuation process.
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Due to the inherent uncertainty of determining the fair value of investments
that do not have a readily available market value, the fair value of our
investments may fluctuate from period to period. Because of the inherent
uncertainty of valuation, these estimated values may differ significantly from
the values that would have been reported had a ready market for the investments
existed, and it is reasonably possible that the difference could be material.
As of September 30, 2020 and September 30, 2019 , approximately 92.3% and 95.8%,
respectively, of our total assets represented investments at fair value.
Revenue Recognition
Interest Income
Interest income, adjusted for accretion of OID is recorded on an accrual basis
to the extent that such amounts are expected to be collected. We stop accruing
interest on investments when it is determined that interest is no longer
collectible. Investments that are expected to pay regularly scheduled interest
in cash are generally placed on non-accrual status when there is reasonable
doubt that principal or interest cash payments will be collected. Cash interest
payments received on investments may be recognized as income or a return of
capital depending upon management's judgment. A non-accrual investment is
restored to accrual status if past due principal and interest are paid in cash,
and the portfolio company, in management's judgment, is likely to continue
timely payment of its remaining obligations.
As of September 30, 2020 , there was one investment on which we had stopped
accruing cash and/or PIK interest or OID income. During the year ended
September 30, 2020 , we restructured our investment in the Subordinated Notes to
provide, among other things, that the Subordinated Notes will not pay interest
beginning on the April 15, 2020 scheduled coupon date through the January 15,
2021 scheduled coupon date. Given that the Subordinated Notes will not pay
interest for four consecutive quarters, our investment in the Subordinated Notes
was on cash non-accrual status and we did not recognize any interest income from
the OCSI Glick JV during the nine months ended September 30, 2020 .
In connection with our investment in a portfolio company, we sometimes receive
nominal cost equity that is valued as part of the negotiation process with the
portfolio company. When we receive nominal cost equity, we allocate our cost
basis in the investment between debt securities and the nominal cost equity at
the time of origination. Any resulting discount from recording the loan, or
otherwise purchasing a security at a discount, is accreted into interest income
over the life of the loan.
PIK Interest Income
Our investments in debt securities may contain PIK interest provisions. PIK
interest, which typically represents contractually deferred interest added to
the loan balance that is generally due at the end of the loan term, is generally
recorded on the accrual basis to the extent such amounts are expected to be
collected. We generally cease accruing PIK interest if there is insufficient
value to support the accrual or if we do not expect the portfolio company to be
able to pay all principal and interest due. Our decision to cease accruing PIK
interest on a loan or debt security involves subjective judgments and
determinations based on available information about a particular portfolio
company, including whether the portfolio company is current with respect to its
payment of principal and interest on its loans and debt securities; financial
statements and financial projections for the portfolio company; our assessment
of the portfolio company's business development success; information obtained by
us in connection with periodic formal update interviews with the portfolio
company's management and, if appropriate, the private equity sponsor; and
information about the general economic and market conditions in which the
portfolio company operates. Our determination to cease accruing PIK interest is
generally made well before our full write-down of a loan or debt security. In
addition, if it is subsequently determined that we will not be able to collect
any previously accrued PIK interest, the fair value of the loans or debt
securities would be reduced by the amount of such previously accrued, but
uncollectible, PIK interest. The accrual of PIK interest on our debt investments
increases the recorded cost bases of these investments in our Consolidated
Financial Statements including for purposes of computing the capital gains
incentive fee payable by us to Oaktree. To maintain our status as a RIC, certain
income from PIK interest may be required to be distributed to our stockholders,
even though we have not yet collected the cash and may never do so.
Fee Income
Oaktree or its affiliates may provide financial advisory services to portfolio
companies and, in return, we may receive fees for capital structuring services.
These fees are generally nonrecurring and are recognized by us upon the
investment closing date. We may also receive additional fees in the ordinary
course of business, including servicing, amendment and prepayment fees, which
are classified as fee income and recognized as they are earned or the services
are rendered.
We have also structured exit fees across certain of our portfolio investments to
be received upon the future exit of those investments. These fees are typically
paid to us upon the earliest to occur of (i) a sale of the borrower or
substantially all of the assets of the borrower, (ii) the maturity date of the
loan or (iii) the date when full prepayment of the loan occurs. The receipt of
such fees is contingent upon the
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occurrence of one of the events listed above for each of the investments. These
fees are included in net investment income over the life of the loan.
Dividend Income
We generally recognize dividend income on the ex-dividend date for public
securities and the record date for private equity investments. Distributions
received from private equity investments are evaluated to determine if the
distribution should be recorded as dividend income or a return of capital.
Generally, we will not record distributions from private equity investments as
dividend income unless there are sufficient earnings at the portfolio company
prior to the distribution. Distributions that are classified as a return of
capital are recorded as a reduction in the cost basis of the investment.
Portfolio Composition
Our investments principally consist of senior loans in private middle-market
companies and investments in OCSI Glick JV. As of September 30, 2020 , our senior
loans were typically secured by a first or second lien on the assets of the
portfolio company and generally had terms of up to ten years (but an expected
average life of between three and four years).
During the year ended September 30, 2020 , we originated $224.5 million of
investment commitments in 43 new and 16 existing portfolio companies and funded
$226.0 million of investments.
During the year ended September 30, 2020 , we received $292.1 million of proceeds
from prepayments, exits, other paydowns and sales and exited 48 portfolio
companies.
A summary of the composition of our investment portfolio at cost and fair value
as a percentage of total investments is shown in the following tables:
September 30, 2020 September 30, 2019 Cost:
Senior secured loans 86.16 % 88.33 %
OCSI Glick JV subordinated notes 12.07 10.54
OCSI Glick JV equity interests 1.32 1.13
Equity securities, excluding the OCSI Glick JV 0.45 -
Total 100.00 % 100.00 %
September 30, 2020 September 30, 2019
Fair value:
Senior secured loans 89.69 % 90.85 %
OCSI Glick JV subordinated notes 9.84 9.10
Equity securities, excluding the OCSI Glick JV 0.47 0.05
OCSI Glick JV equity interests - -
Total 100.00 % 100.00 %
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The industry composition of our portfolio at cost and fair value as a percentage of total investments was as follows:
September 30, 2020 September 30, 2019
Cost:
Multi-Sector Holdings (1) 13.36 % 11.68 %
Application Software 10.43 12.98
Aerospace & Defense 5.68 5.24
Diversified Support Services 4.89 4.38
Advertising 4.48 3.84
Movies & Entertainment 3.09 1.54
Integrated Telecommunication Services 2.87 2.78
Commercial Printing 2.84 2.47
Data Processing & Outsourced Services 2.61 2.66
Industrial Machinery 2.55 1.49
Health Care Supplies 2.50 -
Personal Products 2.49 0.48
Pharmaceuticals 2.47 2.01
Health Care Services 2.43 2.74
Biotechnology 2.28 1.27
Health Care Technology 2.18 1.74
Oil & Gas Storage & Transportation 2.04 0.09
Specialty Chemicals 1.86 0.75
Systems Software 1.84 2.48
Real Estate Services 1.81 1.57
Publishing 1.79 1.64
Leisure Facilities 1.74 1.43
Internet Services & Infrastructure 1.66 4.54
Trading Companies & Distributors 1.64 1.43
Distributors 1.63 -
Specialized Finance 1.55 2.43
Alternative Carriers 1.55 2.70
Fertilizers & Agricultural Chemicals 1.51 -
Research & Consulting Services 1.38 1.58
Electrical Components & Equipment 1.17 1.02
Auto Parts & Equipment 1.06 0.92
Internet & Direct Marketing Retail 1.00 -
Oil & Gas Refining & Marketing 0.99 1.89
Metal & Glass Containers 0.98 1.41
Insurance Brokers 0.95 -
Hotels, Resorts & Cruise Lines 0.86 -
Environmental & Facilities Services 0.72 0.67
Restaurants 0.63 -
Household Products 0.62 0.80
Independent Power Producers & Energy Traders 0.61 -
Managed Health Care 0.55 -
Electric Utilities 0.36 -
General Merchandise Stores 0.30 0.25
Specialized REITs 0.05 1.38
Oil & Gas Exploration & Production - 2.34
Interactive Media & Services - 1.89
Computer & Electronics Retail - 1.72
Communications Equipment - 1.55
IT Consulting & Other Services - 1.54
Health Care Equipment - 1.42
Human Resource & Employment Services - 1.29
Household Appliances - 1.09
Commodity Chemicals - 0.78
Oil & Gas Equipment & Services - 0.10
100.00 % 100.00 %
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September 30, 2020 September 30, 2019
Fair value:
Application Software 11.13 % 13.52 %
Multi-Sector Holdings (1) 9.84 9.10
Aerospace & Defense 5.67 5.44
Diversified Support Services 4.96 4.57
Advertising 4.44 3.51
Movies & Entertainment 3.26 1.61
Commercial Printing 2.94 2.58
Integrated Telecommunication Services 2.91 2.87
Personal Products 2.72 0.51
Data Processing & Outsourced Services 2.70 2.81
Health Care Supplies 2.68 -
Pharmaceuticals 2.67 2.02
Health Care Services 2.54 2.88
Biotechnology 2.48 1.35
Industrial Machinery 2.37 1.54
Health Care Technology 2.34 1.85
Oil & Gas Storage & Transportation 2.11 0.09
Systems Software 1.95 2.59
Specialty Chemicals 1.94 0.62
Publishing 1.93 1.75
Real Estate Services 1.88 1.65
Distributors 1.73 -
Trading Companies & Distributors 1.73 1.50
Internet Services & Infrastructure 1.65 4.77
Specialized Finance 1.64 2.42
Fertilizers & Agricultural Chemicals 1.62 -
Alternative Carriers 1.62 2.84
Research & Consulting Services 1.45 1.72
Leisure Facilities 1.45 1.50
Electrical Components & Equipment 1.22 1.01
Internet & Direct Marketing Retail 1.10 -
Auto Parts & Equipment 1.10 0.90
Insurance Brokers 1.05 -
Metal & Glass Containers 1.03 1.40
Hotels, Resorts & Cruise Lines 1.03 -
Oil & Gas Refining & Marketing 1.02 2.00
Environmental & Facilities Services 0.75 0.67
Restaurants 0.71 -
Household Products 0.66 0.80
Independent Power Producers & Energy Traders 0.63 -
Managed Health Care 0.58 -
Electric Utilities 0.39 -
General Merchandise Stores 0.30 0.24
Specialized REITs 0.08 1.45
Oil & Gas Exploration & Production - 2.34
Interactive Media & Services - 1.99
Computer & Electronics Retail - 1.81
Communications Equipment - 1.57
Health Care Equipment - 1.51
Human Resource & Employment Services - 1.34
IT Consulting & Other Services - 1.34
Household Appliances - 1.12
Commodity Chemicals - 0.83
Oil & Gas Equipment & Services - 0.07
100.00 % 100.00 %
___________________(1)This industry includes our investment in the OCSI Glick JV.
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OCSI Glick JV
In October 2014 , we entered into an LLC agreement with GF Equity Funding to form
the OCSI Glick JV. On April 21, 2015 , the OCSI Glick JV began investing in
senior secured loans of middle-market companies. We co-invest in these
securities with GF Equity Funding through the OCSI Glick JV. The OCSI Glick JV
is managed by a four person Board of Directors, two of whom are selected by us
and two of whom are selected by GF Equity Funding. The OCSI Glick JV is
capitalized as transactions are completed, and portfolio decisions and
investment decisions in respect of the OCSI Glick JV must be approved by the
OCSI Glick JV investment committee, consisting of one representative selected by
us and one representative selected by GF Equity Funding (with approval from a
representative of each required). The members provide capital to the OCSI Glick
JV in exchange for LLC equity interests, and we and GF Debt Funding, an entity
advised by affiliates of GF Equity Funding, provide capital to the OCSI Glick JV
in exchange for the Subordinated Notes. As of September 30, 2020 and September
30, 2019 , we and GF Equity Funding owned 87.5% and 12.5%, respectively, of the
outstanding LLC equity interests, and we and GF Debt Funding owned 87.5% and
12.5%, respectively, of the Subordinated Notes. The OCSI Glick JV is not an
"eligible portfolio company" as defined in section 2(a)(46) of the Investment
Company Act.
The OCSI Glick JV's portfolio consisted of middle-market and other corporate
debt securities of 40 and 39 portfolio companies as of September 30, 2020 and
September 30, 2019 , respectively. The portfolio companies in the OCSI Glick JV
are in industries similar to those in which we may invest directly.
The JV Deutsche Bank Facility, which, as of September 30, 2020 , had a
reinvestment period end date and maturity date of September 30, 2021 and March
31, 2025 , respectively, and permitted borrowings of up to $90.0 million (subject
to borrowing base and other limitations). Borrowings under the JV Deutsche Bank
Facility are secured by all of the assets of the OCSI Glick JV and all of the
equity interests in the OCSI Glick JV and bore interest at a rate equal to the
3-month LIBOR plus 2.65% per annum with a 0.25% LIBOR floor as of September 30,
2020 . Under the JV Deutsche Bank Facility, $80.7 million and $91.9 million of
borrowings were outstanding as of September 30, 2020 and September 30, 2019 ,
respectively.
As of September 30, 2020 , the JV Deutsche Bank Facility includes a waiver period
(which extends through January 3, 2021 ) during which the facility agent is
restricted from revaluing certain collateral obligations where the change in
valuation is caused by or results from a business disruption due primarily to
the COVID-19 pandemic (subject to OCSI Glick JV's ability to earlier terminate
such period in certain circumstances).
As of September 30, 2020 and September 30, 2019 , the OCSI Glick JV had total
assets of $137.9 million and $179.7 million , respectively. Our investment in the
OCSI Glick JV consisted of LLC equity interests and Subordinated Notes of $49.4
million and $54.3 million in the aggregate at fair value as of September 30,
2020 and September 30, 2019 , respectively. The Subordinated Notes are junior in
right of payment to the repayment of temporary contributions made by us to fund
investments of the OCSI Glick JV that are repaid when GF Equity Funding and GF
Debt Funding make their capital contributions and fund their Subordinated Notes,
respectively.
As of September 30, 2020 and September 30, 2019 , the OCSI Glick JV had total
capital commitments of $100.0 million , $87.5 million of which was from us and
the remaining $12.5 million from GF Equity Funding and GF Debt Funding.
Approximately $84.0 million in aggregate commitments was funded as of each of
September 30, 2020 and September 30, 2019 , of which $73.5 million was from us.
As of each of September 30, 2020 and September 30, 2019 , we had commitments to
fund Subordinated Notes to the OCSI Glick JV of $78.8 million , of which $12.4
million was unfunded. As of each of September 30, 2020 and September 30, 2019 ,
we had commitments to fund LLC equity interests in the OCSI Glick JV of $8.7
million , of which $1.6 million was unfunded as of each such date.
Below is a summary of the OCSI Glick JV's portfolio, followed by a listing of
the individual loans in the OCSI Glick JV's portfolio as of September 30, 2020
and September 30, 2019 :
September 30, 2020 September 30, 2019
Senior secured loans (1) $143,138,964 $177,911,560
Weighted average current interest rate on senior 5.56% 6.92%
secured loans (2)
Number of borrowers in the OCSI Glick JV 40 39
Largest loan exposure to a single borrower (1) $6,994,829 $7,425,000
Total of five largest loan exposures to borrowers $31,371,046 $34,662,500
(1)
__________
(1) At principal amount.
(2) Computed using the weighted average annual interest rate on accruing senior
secured loans at fair value.
60
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OCSI Glick JV Portfolio as of September 30, 2020
Cash Interest
Portfolio Company Investment Type Rate (1)(2) Industry Principal Cost Fair Value (3) Notes
AI Ladder (Luxembourg) First Lien Term Loan, LIBOR+4.50% Electrical Components &
Subco S.a.r.l. cash due 7/9/2025 4.65%
Equipment
2,558,168 (4)
First Lien Term Loan, LIBOR+5.25%
Alvogen Pharma US, Inc. cash due 12/31/2023 6.25% Pharmaceuticals 6,994,829 6,808,979 6,773,337
First Lien Term Loan, LIBOR+4.00%
Amplify Finco Pty Ltd. cash due 11/26/2026 4.75% Movies & Entertainment 2,985,000 2,955,150 2,567,100 (4)
First Lien Term Loan, LIBOR+3.75%
Anastasia Parent, LLC cash due 8/11/2025 Personal Products 1,684,513 1,352,429 743,814 (6)
First Lien Term Loan, LIBOR+7.00%
Ancile Solutions, Inc. cash due 6/30/2021 8.00% Application Software 3,201,353 3,194,577
3,178,943 (4)
cash due 12/24/2026 7.00% Airport Services 3,731,250 3,648,256 3,470,063
First Lien Term Loan, LIBOR+4.00% Oil & Gas Equipment &
Brazos Delaware II, LLC cash due 5/21/2025 4.16% Services 4,887,066 4,870,862 3,733,376
California Pizza First Lien Term Loan, LIBOR+8.00%
Kitchen, Inc. cash due 8/23/2022 Restaurants 5,004,489 4,813,378 1,526,369 (6)
Carrols Restaurant First Lien Term Loan, LIBOR+6.25%
Group, Inc. cash due 4/30/2026 7.25% Restaurants 1,118,198 1,062,723 1,109,811 (4)
First Lien Term Loan, LIBOR+5.00% Oil & Gas Refining &
CITGO Petroleum Corp. cash due 3/28/2024 6.00% Marketing 3,591,768 3,555,850 3,421,159 (4)
First Lien Term Loan, LIBOR+4.50%
Connect U.S. Finco LLC cash due 12/11/2026 5.50% Alternative Carriers 4,582,107 4,482,733
4,453,258 (4)
First Lien Term Loan, LIBOR+3.75%
Curium Bidco S.à.r.l. cash due 7/9/2026 3.97% Biotechnology 4,950,000 4,912,875 4,912,875 (4)
eResearch Technology, First Lien Term Loan, LIBOR+4.50%
Inc. cash due 2/4/2027 5.50%
Application Software 2,493,750 2,468,813
2,486,992 (4)
First Lien Term Loan, LIBOR+4.25%
Gigamon, Inc. cash due 12/27/2024 5.25% Systems Software 5,835,900 5,800,375 5,762,951
Second Lien Term Loan, Research & Consulting
Guidehouse LLP LIBOR+8.00% cash due 5/1/2026 8.15% Services 5,000,000 4,982,443 4,825,000 (4)
Helios Software First Lien Term Loan, LIBOR+4.25%
Holdings, Inc. cash due 10/24/2025 4.52% Systems Software 992,422 982,498
980,642 (4)
7.25% Education Services 2,887,500 2,790,416 2,699,813
First Lien Term Loan, LIBOR+5.75%
Integro Parent, Inc. cash due 10/31/2022 6.75% Insurance Brokers 3,277,221 3,249,274 3,011,753
First Lien Delayed Draw Term
7/13/2022 6.50% Alternative Carriers 398,251 328,422 414,511 (5)
First Lien Term Loan, LIBOR+3.50%
LTI Holdings, Inc. cash due 9/6/2025 3.65% Electronic Components 1,386,341 1,100,748 1,294,496
MHE Intermediate First Lien Term Loan, LIBOR+5.00% Diversified Support
Holdings, LLC cash due 3/8/2024 6.00% Services 4,101,250 4,058,056 3,991,747 (4)
First Lien Delayed Draw Term
MHE Intermediate Loan, LIBOR+5.00% cash due Diversified Support
Holdings, LLC 3/8/2024 6.00% Services 828,579 818,379 806,456 (4)
Total MHE Intermediate
Holdings, LLC 4,929,829 4,876,435 4,798,203
First Lien Term Loan, LIBOR+5.50%
MRI Software LLC cash due 2/10/2026 6.50%
Application Software 1,614,980 1,601,301 1,575,954 (4)
First Lien Revolver, LIBOR+5.50%
MRI Software LLC cash due 2/10/2026 Application Software - (1,429) (3,454) (4)(5)
First Lien Delayed Draw Term
Loan, LIBOR+5.50% cash due
MRI Software LLC 2/10/2026 Application Software - (763) (1,568) (4)(5)
Total MRI Software LLC 1,614,980 1,599,109 1,570,932
First Lien Term Loan, LIBOR+4.00%
Navicure, Inc. cash due 10/22/2026 4.15% Health Care Technology 3,980,000 3,960,100 3,899,584
Northern Star Industries First Lien Term Loan, LIBOR+4.75% Electrical Components &
Inc. cash due 3/31/2025 5.75% Equipment 5,362,500 5,345,242 5,121,188
First Lien Term Loan, LIBOR+5.50% Integrated
Northwest Fiber, LLC cash due 4/30/2027 5.66%
Telecommunication Services 985,530 950,121 986,762 (4)
61
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Cash Interest
Portfolio Company Investment Type Rate (1)(2) Industry Principal Cost
Fair Value (3) Notes
First Lien Term Loan, LIBOR+5.00%
Novetta Solutions, LLC cash due 10/17/2022 6.00% Application Software
First Lien Term Loan, LIBOR+4.00%
OEConnection LLC cash due 9/25/2026 4.15% Application Software 3,727,256 3,709,171 3,685,325 (4)
First Lien Delayed Draw Term Loan,
OEConnection LLC LIBOR+4.00% cash due 9/25/2026 Application Software - (1,048) (2,654) (4)(5)
Total OEConnection LLC 3,727,256 3,708,123 3,682,671
First Lien Term Loan, LIBOR+6.50%
Olaplex, Inc. cash due 1/8/2026 7.50% Personal Products 2,962,500 2,910,467 2,962,500 (4)
First Lien Revolver, LIBOR+6.50%
Olaplex, Inc. cash due 1/8/2025 7.50% Personal Products 162,000 156,467 162,000 (4)(5)
Total Olaplex, Inc. 3,124,500 3,066,934 3,124,500
First Lien Term Loan, LIBOR+4.50%
Sabert Corporation cash due 12/10/2026 5.50% Metal & Glass Containers 1,885,500 1,866,645 1,860,366 (4)
First Lien Term Loan, LIBOR+3.00%
SHO Holding I Corporation cash PIK 2.25% due 4/27/2024 4.00% Footwear 6,239,067 6,212,276 4,382,944
First Lien Term Loan, LIBOR+4.50%
Signify Health, LLC cash due 12/23/2024 5.50% Health Care Services 5,850,000 5,813,914 5,645,250 (4)
First Lien Term Loan, LIBOR+4.25%
Sunshine Luxembourg VII SARL cash due 10/1/2026 5.25% Personal Products 6,451,250 6,418,993 6,427,573
First Lien Term Loan, LIBOR+3.75%
Supermoose Borrower, LLC cash due 8/29/2025 3.90% Application Software 2,878,863 2,692,385 2,595,483 (4)
First Lien Term Loan, LIBOR+3.25%
Surgery Center Holdings, Inc. cash due 9/3/2024 4.25% Health Care Facilities 4,961,637 4,942,580 4,690,806
First Lien Term Loan, LIBOR+4.50% Human Resource &
Tribe Buyer LLC cash due 2/16/2024 5.50% Employment Services 1,616,127 1,613,862 1,224,798
First Lien Term Loan, LIBOR+3.25%
UFC Holdings, LLC cash due 4/29/2026 4.25% Movies & Entertainment 1,557,649 1,540,707 1,534,775 (4)
First Lien Term Loan, LIBOR+4.50%
Verscend Holding Corp. cash due 8/27/2025 4.65% Health Care Technology 1,733,723 1,720,364 1,722,238 (4)
First Lien Term Loan, LIBOR+3.25% Data Processing &
VM Consolidated, Inc. cash due 2/28/2025 3.40% Outsourced Services 4,771,728 4,756,892 4,682,258
Integrated
First Lien Term Loan, LIBOR+6.25% Telecommunication
Windstream Services II, LLC cash due 9/21/2027 7.25% Services 4,987,500 4,788,469 4,839,970 (4)
Second Lien Term Loan, LIBOR+7.75%
WP CPP Holdings, LLC cash due 4/30/2026 8.75% Aerospace & Defense 3,000,000 2,978,243 2,340,000 (4)
Total Portfolio Investments $ 143,138,964 $ 140,599,644 $ 130,760,749
__________
(1) Represents the interest rate as of September 30, 2020 . All interest rates
are payable in cash, unless otherwise noted.
(2) The interest rate on the principal balance outstanding for all floating rate
loans is indexed to LIBOR and/or an alternate base rate (e.g., prime rate),
which typically resets semi-annually, quarterly, or monthly at the borrower's
option. The borrower may also elect to have multiple interest reset periods for
each loan. For each of these loans, we have provided the applicable margin over
LIBOR or the alternate base rate based on each respective credit agreement and
the cash interest rate as of period end. All LIBOR shown above is in U.S.
dollars. As of September 30, 2020 , the reference rates for the OCSI Glick JV's
variable rate loans were the 30-day LIBOR at 0.15%, the 60-day LIBOR at 0.19%,
the 90-day LIBOR at 0.22% and the 180-day LIBOR at 0.27%. Most loans include an
interest floor, which generally ranges from 0% to 1%.
(3) Represents the current determination of fair value as of September 30, 2020
utilizing a similar technique as us in accordance with ASC 820. However, the
determination of such fair value is not included in our Board of Directors'
valuation process described elsewhere herein.
(4) This investment is held by both us and the OCSI Glick JV as of September 30,
2020 .
(5) Investment has undrawn commitments. Unamortized fees are classified as
unearned income which reduces cost basis, which may result in a negative cost
basis. A negative fair value may result from the unfunded commitment being
valued below par.
(6) This investment was on cash non-accrual status as of September 30, 2020 .
Cash non-accrual is inclusive of PIK and other non-cash income where applicable.
62
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OCSI Glick JV Portfolio as of September 30, 2019
Cash Interest
Portfolio Company Investment Type Rate (1)(2) Industry Principal Cost Fair Value (3) Notes AI Ladder (Luxembourg) First Lien Term Loan, LIBOR+4.50% Electrical components & Subco S.a.r.l. cash due 7/9/2025 6.60% equipment$ 2,718,993 $ 2,651,270 $
2,504,016 (4)
First Lien Term Loan, LIBOR+4.75% IT consulting & other
Air Newco LP cash due 5/31/2024 6.79% services 7,425,000 7,406,438 7,437,400
First Lien Term Loan, LIBOR+5.50% Oil & gas storage &
AL Midcoast Holdings LLC cash due 8/1/2025 7.60% transportation 6,930,000 6,860,699 6,834,712 (4)
Integrated
First Lien Term Loan, LIBOR+4.00% telecommunication
Altice France S.A. cash due 8/14/2026 6.03% services 2,977,500 2,912,809 2,975,639
First Lien Term Loan, LIBOR+4.75%
Alvogen Pharma US, Inc. cash due 4/1/2022 6.79% Pharmaceuticals 5,359,286 5,359,286 4,874,270
First Lien Term Loan, LIBOR+7.00%
Ancile Solutions, Inc. cash due 6/30/2021 9.10% Application software 3,395,374 3,377,463 3,327,467 (4)
First Lien Term Loan, LIBOR+5.50% Computer & electronics
Aptos, Inc. cash due 7/23/2025 7.70% retail 2,977,500 2,947,725 2,940,281 (4)
First Lien Term Loan, LIBOR+4.00% Oil & gas equipment &
Brazos Delaware II, LLC cash due 5/21/2025 6.05% services 4,937,500 4,917,589 4,570,273
cash due 8/23/2022 8.53% Restaurants 4,850,000 4,838,318 4,349,868
First Lien Term Loan, LIBOR+5.00% Oil & gas refining &
CITGO Petroleum Corp. cash due 3/28/2024 7.10% marketing 3,980,000 3,940,200 4,004,875 (4)
First Lien Term Loan, LIBOR+4.50%
Connect U.S. Finco LLC cash due 9/23/2026 7.10%
Alternative Carriers 5,000,000 4,900,000 4,930,075 (4)
First Lien Term Loan, LIBOR+4.00% Oil & gas equipment &
Covia Holdings Corporation cash due 6/1/2025 6.31% services 6,912,500 6,912,500 5,673,745
First Lien Term Loan, LIBOR+4.00%
Curium Bidco S.à r.l. cash due 7/9/2026 6.10% Biotechnology 5,000,000 4,962,500 5,025,000 (4)
First Lien Term Loan, LIBOR+4.00%
Ellie Mae, Inc. cash due 4/17/2026 6.04%
Application software 1,000,000 995,000 1,002,920 (4) Falmouth Group Holdings First Lien Term Loan, LIBOR+6.75% Corp.
cash due 12/14/2021 8.95% Specialty chemicals 4,658,544 4,626,032 4,632,004
Integrated
Frontier Communications First Lien Term Loan, LIBOR+3.75% telecommunications
Corporation cash due 6/15/2024 5.80% services 5,468,222 5,365,594 5,466,281 (4)
First Lien Term Loan, LIBOR+4.25%
Gigamon, Inc. cash due 12/27/2024 6.29% Systems software 5,895,000 5,850,631 5,732,888
Second Lien Term Loan, LIBOR+7.50% Research & consulting
Guidehouse LLP cash due 5/1/2026 9.54% services 5,000,000 4,979,290 4,937,500 (4)
First Lien Term Loan, LIBOR+4.50%
Indivior Finance S.a.r.l. cash due 12/19/2022 6.76% Pharmaceuticals 4,340,941 4,326,851 3,997,290 (4)
First Lien Term Loan, LIBOR+5.75%
Integro Parent, Inc. cash due 10/31/2022 7.80% Insurance brokers 4,813,924 4,744,243 4,681,541
Intelsat Jackson Holdings First Lien Term Loan, LIBOR+3.75% S.A.
cash due 11/27/2023 5.80% Alternative Carriers 5,000,000 4,939,169 5,021,100
McDermott Technology First Lien Term Loan, LIBOR+5.00% Oil & gas equipment & (Americas), Inc. cash due 5/9/2025 7.10% services 1,429,306 1,406,187 913,565 (4) MHE Intermediate Holdings, First Lien Term Loan, LIBOR+5.00% Diversified support LLC cash due 3/8/2024 7.10% services 4,143,750 4,089,029
4,060,875 (4)
First Lien Delayed Draw Term Loan, Diversified support
LIBOR+5.00% cash due 3/8/2024 7.10% services 837,128 826,823 820,385 (4)
Total MHE Intermediate
Holdings, LLC 4,980,878 4,915,852 4,881,260
First Lien Term Loan, LIBOR+4.00%
Navicure, Inc. cash due 9/18/2026 6.13%
Healthcare technology 4,000,000 3,980,000 4,005,000
Northern Star Industries First Lien Term Loan, LIBOR+4.50% Electrical components &
Inc. cash due 3/31/2025 6.56% equipment 5,417,500 5,396,178 5,336,238
First Lien Term Loan, LIBOR+5.00%
Novetta Solutions, LLC cash due 10/17/2022 7.05%
Application software 5,868,628 5,824,577 5,760,440
63
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Cash Interest
Portfolio Company Investment Type Rate (1)(2) Industry Principal Cost
Fair Value (3) Notes
First Lien Term Loan, LIBOR+4.00%
OCI Beaumont LLC cash due 3/13/2025 6.10% Commodity chemicals
First Lien Term Loan, LIBOR+4.00%
OEConnection LLC cash due 9/24/2026 6.13% Application software 3,655,914 3,637,634 3,649,059 (4)
First Lien Delayed Draw Term Loan,
LIBOR+4.00% cash due 9/24/2026 Application software - (1,720) (645) (4)(5)
Total OEConnection LLC 3,655,914 3,635,914 3,648,414
First Lien Term Loan, LIBOR+3.00% Interactive media &
Red Ventures, LLC cash due 11/8/2024 5.04% services 3,989,924 3,970,677 4,010,712
First Lien Term Loan, LIBOR+4.25% Trading companies &
RSC Acquisition, Inc. cash due 11/30/2022 6.29% distributors 3,849,574 3,835,594 3,820,702
First Lien Term Loan, PRIME+2.50% Specialized consumer
Servpro Borrower, LLC cash due 3/26/2026 7.50% services 3,980,000 3,970,050 3,984,975
First Lien Term Loan, LIBOR+5.00%
SHO Holding I Corporation cash due 10/27/2022 7.26% Footwear 6,256,250 6,227,881 5,943,438
First Lien Term Loan, LIBOR+4.50%
Signify Health, LLC cash due 12/23/2024 6.60% Healthcare services 5,910,000 5,864,902 5,902,613 (4)
First Lien Term Loan, LIBOR+4.25%
Sunshine Luxembourg VII SARL cash due 9/25/2026 6.59% Personal products 6,500,000 6,467,500 6,538,610 (4)
First Lien Term Loan, LIBOR+4.50% Human resources &
Tribe Buyer LLC cash due 2/16/2024 6.54% employment services 3,114,779 3,109,120 2,907,133 (4)
Fixed Rate Bond 144A 9.0% Toggle
Triple Royalty Sub LLC PIK cash due 4/15/2033 Pharmaceuticals 3,000,000 3,000,000 3,105,000
First Lien Term Loan, LIBOR+3.25%
UFC Holdings, LLC cash due 4/29/2026 5.30% Movies & entertainment 2,493,573 2,493,573 2,503,099 (4)
First Lien Term Loan, LIBOR+3.75% Data processing &
Verra Mobility, Corp. cash due 2/28/2025 5.79% outsourced services 4,929,950 4,913,436 4,956,645 (4)
Second Lien Term Loan, LIBOR+7.75%
WP CPP Holdings, LLC cash due 4/30/2026 10.01% Aerospace & defense 3,000,000 2,974,333 2,987,490 (4)
Total Portfolio Investments $ 177,911,560 $ 176,687,612 $ 173,028,098
__________
(1) Represents the interest rate as of September 30, 2019 . All interest rates
are payable in cash, unless otherwise noted.
(2) The interest rate on the principal balance outstanding for all floating rate
loans is indexed to LIBOR and/or an alternate base rate (e.g., prime rate),
which typically resets semi-annually, quarterly, or monthly at the borrower's
option. The borrower may also elect to have multiple interest reset periods for
each loan. For each of these loans, we have provided the applicable margin over
LIBOR or the alternate base rate based on each respective credit agreement and
the cash interest rate as of period end. All LIBOR shown above is in U.S.
dollars. As of September 30, 2019 , the reference rates for the OCSI Glick JV's
variable rate loans were the 30-day LIBOR at 2.04%, the 60-day LIBOR at 2.09%,
the 90-day LIBOR at 2.10%, the 180-day LIBOR at 2.06% and the PRIME at 5.00%.
Most loans include an interest floor, which generally ranges from 0% to 1%.
(3) Represents the current determination of fair value as of September 30, 2019
utilizing a similar technique as us in accordance with ASC 820. However, the
determination of such fair value is not included in our Board of Directors'
valuation process described elsewhere herein.
(4) This investment is held by both us and the OCSI Glick JV as of September 30,
2019 .
(5) Investment has undrawn commitments. Unamortized fees are classified as
unearned income which reduces cost basis, which may result in a negative cost
basis. A negative fair value may result from the unfunded commitment being
valued below par.
The cost and fair value of our aggregate investment in the OCSI Glick JV was
$72.2 million and $49.4 million , respectively, as of September 30, 2020 and
$73.2 million and $54.3 million , respectively, as of September 30, 2019 . As of
September 30, 2020 , our investment in the Subordinated Notes was on cash
non-accrual status. For the years ended September 30, 2020 , 2019 and 2018, we
earned interest income of $1.4 million , 5.9 million and $6.1 million ,
respectively, on our investment in the Subordinated Notes, of which $0.0
million , $0.0 million and $2.2 million was PIK interest income, respectively. We
did not earn any dividend income for the years ended September 30, 2020 , 2019
and 2018 with respect to our investment in the LLC equity interests of the OCSI
Glick JV.
During the year ended September 30, 2020 , in order to realign the OCSI Glick JV
for current market conditions, we and GF Debt Funding amended the Subordinated
Notes to (1) decrease the interest rate to 1-month LIBOR plus 4.5% per annum,
(2) extend the maturity date from October 20, 2021 to October 20, 2028 and (3)
provide that the Subordinated Notes will not pay interest on its previously
scheduled April 15, 2020 , July 15, 2020 , October 15, 2020 or January 15, 2021
coupon dates. As of September 30, 2019 , the Subordinated Notes bore an interest
rate of 1-month LIBOR plus 6.5% per annum.
64
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Below is certain summarized financial information for the OCSI Glick JV as of
September 30, 2020 and September 30, 2019 and for the years ended September 30,
2020 , 2019 and 2018:
September 30, 2020 September 30, 2019
Selected Balance Sheet Information:
Investments at fair value (cost
$ 130,760,749 $ 173,028,098 Cash and cash equivalents 3,574,960 1,096,498 Restricted cash 1,106,829 2,616,125 Other assets 2,475,078 2,937,681 Total assets$ 137,917,616 $ 179,678,402 Senior credit facility payable$ 80,681,939 $ 91,881,939 Subordinated notes payable at fair value (proceedsSeptember 30, 2020 :$74,337,772 ; proceeds September 30, 2019:$75,517,614 ) 56,469,250 62,087,348 Other liabilities 766,427 25,709,115 Total liabilities$ 137,917,616 $ 179,678,402 Members' equity - - Total liabilities and members' equity$ 137,917,616 $ 179,678,402 Year ended Year ended Year ended September 30, September 30, September 30, 2020 2019 2018 Selected Statements of Operations Information: Interest income$ 9,994,321 $ 12,446,772 $ 9,823,972 Fee income 301,288 29,999 77,999 Total investment income 10,295,609 12,476,771 9,901,971 Interest expense 5,585,942 11,597,998 11,433,877 Other expenses 159,836 176,358 211,874 Total expenses (1) 5,745,778 11,774,356 11,645,751 Net unrealized appreciation (depreciation) (382,788) (183,384) 10,626,928 Realized gain (loss) (4,167,043) (519,031) (8,883,148) Net income (loss) $ - $ - $ - __________ (1) There are no management fees or incentive fees charged at the OCSI Glick JV. The OCSI Glick JV has elected to fair value the Subordinated Notes issued to us and GF Debt Funding under FASB ASC Topic 825, Financial Instruments - Fair Value Option. The Subordinated Notes are valued based on the total assets less the liabilities senior to the Subordinated Notes of the OCSI Glick JV in an amount not exceeding par under the enterprise value technique. During the years endedSeptember 30, 2020 , 2019 and 2018, we did not sell any debt investments to the OCSI Glick JV. Discussion and Analysis of Results and Operations Results of Operations Net increase (decrease) in net assets resulting from operations includes net investment income, net realized gains (losses) and net unrealized appreciation (depreciation). Net investment income is the difference between our income from interest, dividends and fees and total expenses. Net realized gains (losses) is the difference between the proceeds received from dispositions of investment related assets and liabilities and their stated costs. Net unrealized appreciation (depreciation) is the net change in the fair value of our investment related assets and liabilities carried at fair value during the reporting period, including the reversal of previously recorded unrealized appreciation (depreciation) when gains or losses are realized. 65 -------------------------------------------------------------------------------- Comparison of Years EndedSeptember 30, 2020 andSeptember 30, 2019 Total Investment Income Total investment income includes interest on our investments, fee income and dividend income. Total investment income for the years endedSeptember 30, 2020 and 2019 was$39.5 million and$49.6 million , respectively. For the year endedSeptember 30, 2020 , this amount primarily consisted of$38.4 million of interest income from portfolio investments (which included$2.0 million of PIK interest) and$1.2 million of fee income. For the year endedSeptember 30, 2019 , this amount consisted of$49.0 million of interest income from portfolio investments and$0.6 million of fee income. The decrease of$10.1 million in our total investment income for the year endedSeptember 30, 2020 , as compared to the year endedSeptember 30, 2019 , was primarily due to a$10.6 million decrease in interest income, which was the result of a lower average yield on our debt investments due to decreases in LIBOR, our investment in the OCSI Glick JV being on cash non-accrual status and a smaller overall portfolio size, partially offset by a$0.5 million increase in fee income, which was attributable to higher amendment fees and structuring fees earned. Expenses Net expenses (expenses net of fee waivers) for the year endedSeptember 30, 2020 and 2019 were$23.3 million and$28.5 million , respectively. The decrease of$5.2 million in our net expenses for the year endedSeptember 30, 2020 , as compared to the year endedSeptember 30, 2019 , was primarily due to a$2.3 million decrease in Part I incentives fees (net of waivers), which was primarily attributable to lower pre-incentive fee net investment income, a$2.1 million decrease in interest expense resulting from decreases in LIBOR and a$0.6 million decrease in professional fees, general and administrative expenses and administrator expenses. Net Investment Income As a result of the$10.1 million decrease in total investment income and the$5.2 million decrease in net expenses, net investment income for the year endedSeptember 30, 2020 decreased by approximately$4.9 million , as compared to the year endedSeptember 30, 2019 . Realized Gain (Loss) Realized gains or losses are measured by the difference between the net proceeds from the sale or redemption of investments and foreign currency and the cost basis without regard to unrealized appreciation or depreciation previously recognized and includes investments written-off during the period, net of recoveries. Realized losses may also be recorded in connection with our determination that certain investments are considered worthless securities and/or meet the conditions for loss recognition per the applicable tax rules. During the years endedSeptember 30, 2020 and 2019, we recorded net realized losses of$10.3 million and$0.5 million in connection with the exit of various investments. See "Note 9. Realized Gains or Losses and Net Unrealized Appreciation or Depreciation" in the notes to the accompanying Consolidated Financial Statements for more details regarding investment realization events for the years endedSeptember 30, 2020 and 2019. Net Unrealized Appreciation (Depreciation) Net unrealized appreciation or depreciation is the net change in fair value of our investments and foreign currency during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized. For the years endedSeptember 30, 2020 and 2019, we recorded net unrealized depreciation of$7.2 million and$13.7 million , respectively. For the year endedSeptember 30, 2020 , this consisted of$10.8 million of unrealized depreciation of debt investments and$0.2 million of unrealized depreciation on foreign currency forward contracts, offset by$3.8 million of net unrealized appreciation from exited investments (a portion of which resulted in a reclassification to realized losses). For the year endedSeptember 30, 2019 , this consisted of$12.4 million of unrealized depreciation of debt investments and$1.3 million of net unrealized depreciation related to exited investments (a portion of which resulted in a reclassification to realized gains), offset by$0.1 million of unrealized appreciation of equity investments. Comparison of Years EndedSeptember 30, 2019 andSeptember 30, 2018 The comparison of the fiscal years endedSeptember 30, 2019 and 2018 can be found within Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our annual report on Form 10-K for the fiscal year endedSeptember 30, 2019 which is incorporated by reference herein. 66 -------------------------------------------------------------------------------- Financial Condition, Liquidity and Capital Resources We have a number of alternatives available to fund our investment portfolio and our operations, including raising equity, increasing or refinancing debt and funding from operational cash flow. We generally expect to fund the growth of our investment portfolio through additional debt and equity capital, which may include securitizing a portion of our investments. We cannot assure you, however, that our efforts to grow our portfolio will be successful. For example, our common stock has generally traded at prices below net asset value for the past several years, and we are currently limited in our ability to raise additional equity at prices below the then-current net asset value per share. We intend to continue to generate cash primarily from cash flows from operations, including interest earned, and future borrowings. We intend to fund our future distribution obligations through operating cash flow or with funds obtained through future equity and debt offerings or credit facilities, as we deem appropriate. Our primary uses of funds are investments in our targeted asset classes and cash distributions to holders of our common stock. At a special meeting of our stockholders held onJuly 10, 2018 , our stockholders approved the application of the reduced asset coverage requirements in Section 61(a)(2) of the Investment Company Act to us effective as ofJuly 11, 2018 . As a result of the effectiveness of the 150% reduced asset coverage requirements, we can incur$2 of debt for each$1 of equity as compared to$1 of debt for each$1 of equity. As ofSeptember 30, 2020 , our debt to equity ratio was 1.00x. Under current market conditions, we generally expect to target a debt to equity ratio of 1.00x to 1.40x (i.e.,one dollar of equity for each$1.00 to$1.40 of debt outstanding). As ofSeptember 30, 2020 , we had$267.6 million in senior securities outstanding and our asset coverage ratio was 199.7%. For the year endedSeptember 30, 2020 , we experienced a net increase in cash and cash equivalents and restricted cash of$15.4 million . During that period,$59.6 million of cash was provided by operating activities, primarily consisting of$304.7 million of principal payments and proceeds from the sale of investments and the cash activities related to$16.2 million of net investment income, partially offset by cash used to fund$224.0 million of investments and a decrease in net payables from unsettled transactions of$36.3 million . During the same period, cash used in financing activities was$44.3 million , primarily consisting of$38.0 million of net repayments under our credit facilities and$16.2 million of cash distributions paid to our stockholders, partially offset by proceeds from secured borrowings of$10.9 million . For the year endedSeptember 30, 2019 , we experienced a net decrease in cash and cash equivalents and restricted cash of$2.4 million . During that period,$3.7 million of cash was used by operating activities, primarily consisting of cash used to fund$249.1 million of investment purchases, partially offset by$197.0 million of principal payments and proceeds from the sale of investments, an increase in net payables from unsettled transactions of$28.8 million and the cash activities related to$21.1 million of net investment income. During the same period, cash provided by financing activities was$1.3 million , primarily consisting of$19.6 million of net borrowings under our credit facilities and partially offset by$18.1 million of cash distributions paid to our stockholders. For the year endedSeptember 30, 2018 , we experienced a net decrease in cash and cash equivalents and restricted cash of$26.6 million . During that period,$18.3 million of cash was used in operating activities, primarily consisting of cash used to fund$455.0 million of investment purchases and a$44.7 million decrease in net payables from unsettled transactions, partially offset by$464.3 million of principal payments and proceeds from the sale of investments and the cash activities related to$19.8 million of net investment income. During the same period, cash used in financing activities was$8.2 million , primarily consisting of$192.1 million of net borrowings under our credit facilities,$180 million of net repayments of notes under our$309.0 million debt securitization completed onMay 28, 2015 , or the 2015 Debt Securitization, and$18.3 million of cash distributions paid to our stockholders and$1.8 million of deferred financing costs paid. As ofSeptember 30, 2020 , we had$29.5 million of cash and cash equivalents (including$4.4 million of restricted cash), portfolio investments (at fair value) of$502.3 million ,$1.3 million of interest, dividends and fees receivable,$83.3 million of undrawn capacity under our credit facilities (subject to borrowing base and other limitations),$3.7 million of net receivables from unsettled transactions,$256.7 million of borrowings outstanding under our revolving credit facilities,$10.9 million of secured borrowings and unfunded commitments of$33.7 million . Pursuant to the terms of the Citibank Facility, we were restricted in terms of access to$2.0 million of cash until the occurrence of the periodic distribution dates and, in connection therewith, our submission of our required periodic reporting schedules and verifications of our compliance with the terms of the credit agreement. As ofSeptember 30, 2020 ,$2.1 million of cash was restricted due to the obligation to pay interest under the terms of the Deutsche Bank Facility, and$0.3 million was held atU.S. Bank National Association as collateral in connection with the ISDA Master Agreement withJPMorgan Chase Bank N.A . As ofSeptember 30, 2020 , we have analyzed cash and cash equivalents, availability under our credit facilities, the ability to rotate out of certain assets and amounts of unfunded commitments that could be drawn and believe our liquidity and capital resources are sufficient to take advantage of market opportunities in the current economic climate. 67 -------------------------------------------------------------------------------- As ofSeptember 30, 2019 , we had$14.1 million of cash and cash equivalents (including$8.4 million of restricted cash), portfolio investments (at fair value) of$597.1 million ,$3.8 million of interest, dividends and fees receivable,$160.3 million of undrawn capacity under our credit facilities (subject to borrowing base and other limitations),$32.6 million of net payables from unsettled transactions,$294.7 million of borrowings outstanding under our revolving credit facilities and unfunded commitments of$24.2 million . Pursuant to the terms of the Citibank Facility, we were restricted in terms of access to$3.4 million of cash until the occurrence of the periodic distribution dates and, in connection therewith, our submission of our required periodic reporting schedules and verifications of our compliance with the terms of the credit agreement. As ofSeptember 30, 2019 ,$4.3 million of cash was restricted due to the obligation to pay interest under the terms of the Deutsche Bank Facility. As ofSeptember 30, 2019 ,$0.8 million was restricted due to minimum balance requirements under the East West Bank Facility (as defined below). Significant Capital Transactions The following table reflects the quarterly distributions per share that we have paid, including shares issued under our dividend reinvestment plan, or DRIP, on our common stock sinceOctober 1, 2017 : Amount Cash DRIP Shares
DRIP Shares
Date Declared Record Date Payment Date per Share Distribution Issued (1) Value
August 7, 2017 December 15, 2017 December 29, 2017 $ 0.19 $ 5,439,519 18,809 $ 159,167
February 5, 2018 March 15, 2018 March 30, 2018 0.14 4,091,583 4,204 33,764
May 3, 2018 June 15, 2018 June 29, 2018 0.145 4,232,547 4,829 40,134
August 1, 2018 September 15, 2018 September 28, 2018 0.155 4,518,677 5,620 48,672
November 19, 2018 December 17, 2018 December 28, 2018 0.155 4,513,238 6,888 54,111
February 1, 2019 March 15, 2019 March 29, 2019 0.155 4,516,806 6,187 50,543
May 3, 2019 June 14, 2019 June 28, 2019 0.155 4,514,262 6,314 53,088
August 2, 2019 September 13, 2019 September 30, 2019 0.155 4,510,023 6,961 57,325
November 12, 2019 December 13, 2019 December 31, 2019 0.155 4,503,016 7,793 64,334
January 31, 2020 March 13, 2020 March 31, 2020 0.155 4,489,700 14,852 77,648
April 30, 2020 June 15, 2020 June 30, 2020 0.125 3,589,622 14,977 93,725
July 31, 2020 September 15, 2020 September 30, 2020 0.125 3,627,206 8,490 56,141
______________
(1) Shares were purchased on the open market and distributed.
Indebtedness
See "Note 6. Borrowings" in the Consolidated Financial Statements for more
details regarding our indebtedness.
Citibank Facility
As of September 30, 2020 and September 30, 2019 , we were able to borrow $180
million (subject to borrowing base and other limitations) under the Citibank
Facility. As of September 30, 2020 , the reinvestment period under the Citibank
Facility is scheduled to expire on July 19, 2021 and the maturity date for the
Citibank Facility is July 18, 2023 .
As of September 30, 2020 , borrowings under the Citibank Facility are subject to
certain customary advance rates and accrue interest at a rate equal to LIBOR
plus 1.70% per annum on broadly syndicated loans and LIBOR plus 2.25% per annum
on all other eligible loans during the reinvestment period. Following
termination of the reinvestment period, borrowings under the Citibank Facility
will accrue interest at rates equal to LIBOR plus 3.50% per annum during the
first year after the reinvestment period and LIBOR plus 4.00% per annum during
the subsequent two years, respectively. In addition, as of September 30, 2020 ,
for the duration of the reinvestment period there is a non-usage fee payable of
0.50% per annum on the undrawn amount under the Citibank Facility. As of
September 30, 2020 , the minimum asset coverage ratio applicable to us under the
Citibank Facility is 150% as determined in accordance with the requirements of
the Investment Company Act.
As of September 30, 2020 and September 30, 2019 , we had $119.1 million and
$126.1 million outstanding under the Citibank Facility, respectively. Our
borrowings under the Citibank Facility bore interest at a weighted average
interest rate of 3.052%, 4.463% and 4.264% for the years ended September 30,
2020 , 2019 and 2018, respectively. For the years ended September 30, 2020 , 2019
and 2018, we recorded interest expense (inclusive of fees) of $4.6 million , $6.4
million and $4.2 million , respectively, related to the Citibank Facility.
Deutsche Bank Facility
On September 24, 2018 , OCSI Senior Funding Ltd. , our wholly-owned subsidiary,
entered into the Deutsche Bank Facility. As of September 30, 2020 , (a) OCSI
Senior Funding Ltd. may request drawdowns under the under the Deutsche Bank
Facility until September 30, 2021 (the "revolving period") unless there is an
earlier termination or event of default, (b) the maturity date of the Deutsche
Bank Facility is the earliest of March 30, 2022 , the occurrence of an event of
default or completion of a securitization transaction, (c) the size of
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the Deutsche Bank Facility is $160 million (subject to borrowing base and other
limitations) and (d) the interest rate is three-month LIBOR plus 2.65% through
September 30, 2021 , following which the interest rate will reset to three-month
LIBOR plus 2.80% for the remaining term of the Deutsche Bank Facility, in each
case with a 0.25% LIBOR floor. There is a non-usage fee of 0.50% per annum
payable on the undrawn amount under the Deutsche Bank Facility, and, as of
September 30, 2020 , a minimum utilization fee should the drawn amount under the
Deutsche Bank Facility fall below 80%.
As of September 30, 2020 , the Deutsche Bank Facility includes a waiver period
(which extends through January 3, 2021 ) during which the facility agent is
restricted from revaluing certain collateral obligations where the change in
valuation is caused by or results from a business disruption due primarily to
the COVID-19 pandemic (subject to our ability to earlier terminate such period
in certain circumstances).
The Deutsche Bank Facility is secured by all of the assets held by OCSI Senior
Funding Ltd. OCSI Senior Funding Ltd. has made customary representations and
warranties and is required to comply with various affirmative and negative
covenants, reporting requirements and other customary requirements for similar
credit facilities. Our borrowings, including indirectly under the Deutsche Bank
Facility, are subject to the leverage restrictions contained in the Investment
Company Act.
As of September 30, 2020 and September 30, 2019 , we had $137.6 million and
$157.6 million outstanding under the Deutsche Bank Facility, respectively. For
the years ended September 30, 2020 , 2019 and for the period from September 24,
2018 through September 30, 2018 , our borrowings under the Deutsche Bank Facility
bore interest at a weighted average interest rate of 3.634%, 4.524%, and 4.266%,
respectively. For the years ended September 30, 2020 and 2019 and for the period
from September 24, 2018 through September 30, 2018 , we recorded interest expense
(inclusive of fees) of $7.1 million , $7.5 million and $0.1 million ,
respectively.
East West Bank Facility
On January 6, 2016 , we entered into a five-year, $25 million senior secured
revolving credit facility (subject to borrowing base and other limitations) with
the lenders referenced therein, U.S. Bank National Association , as custodian,
and East West Bank as secured lender, or, as amended, the East West Bank
Facility. On September 30, 2020 , we repaid all amounts outstanding under the
East West Bank Facility, following which the facility was terminated. Prior to
its termination on September 30, 2020 , borrowings under the East West Bank
Facility bore an interest rate of either (i) LIBOR plus 2.85% per annum or (ii)
East West Bank's prime rate, in each case with a 3.5% floor. The East West Bank
Facility would have otherwise matured on January 6, 2021 . Prior to its
termination on September 30, 2020 , the minimum asset coverage ratio applicable
to us under the East West Bank Facility was 150% as determined in accordance
with the requirements of the Investment Company Act. The East West Bank Facility
required us to comply with certain affirmative and negative covenants and other
customary requirements for similar credit facilities.
As of September 30, 2020 , we had no borrowings outstanding under the East West
Bank Facility. As of September 30, 2019 , we had $11.0 million of borrowings
outstanding under the East West Bank Facility. Our borrowings under the East
West Bank Facility bore interest at a weighted average interest rate of 4.059%,
5.407% and 4.949% for the years ended September 30, 2020 , 2019 and 2018,
respectively. For the years ended September 30, 2020 , 2019 and 2018, we recorded
interest expense of $0.7 million , $0.6 million and $0.6 million , respectively,
related to the East West Bank Facility.
2015 Debt Securitization
In connection with entry into the Deutsche Bank Facility, on September 24, 2018 ,
FS Senior Funding Ltd. and FS Senior Funding CLO LLC redeemed all outstanding
senior secured notes issued in the 2015 Debt Securitization pursuant to the
terms of the indenture governing the senior secured notes and the revocable
notice issued by us on August 14, 2018 . Following such redemption, the
agreements governing the 2015 Debt Securitization were terminated and FS Senior
Funding Ltd. was merged with and into OCSI Senior Funding Ltd. with OCSI Senior
Funding Ltd. continuing as the surviving entity. The senior secured notes would
have otherwise matured on May 28, 2025 .
Prior to September 24, 2018 , the 2015 Debt Securitization consisted of $126.0
million Class A-T Senior Secured 2015 Notes which bore interest at three-month
LIBOR plus 1.80%; $29.0 million Class A-S Senior Secured 2015 Notes which bore
interest at a rate of three-month LIBOR plus 1.55%, until a step-up in spread to
2.10% occurred in October 2016 ; $20.0 million Class A-R Senior Secured Revolving
2015 Notes which bore interest at a rate of commercial paper, or CP, plus 1.80%,
or, collectively, the Class A 2015 Notes; and $25.0 million Class B Senior
Secured 2015 Notes which bore interest at a rate of three-month LIBOR plus 2.65%
per annum, which were issued in a private placement. Prior to September 24,
2018 , we retained the entire $22.6 million of Class C Senior Secured 2015 Notes
(which we purchased at 98.0% of par value) and the entire $86.4 million of
Subordinated 2015 Notes.
For the year ended September 30, 2018 , the components of interest expense, cash
paid for interest, average interest rates and average outstanding balances for
the 2015 Debt Securitization were as follows:
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Year ended
September 30, 2018
Interest expense $ 7,123,152
Loan administration fees 93,209
Amortization of debt issuance costs 2,224,132
Total interest and other debt financing expenses
$ 8,469,735 Annualized average interest rate 4.170 % Average outstanding balance$ 176,875,000 Secured Borrowings As ofSeptember 30, 2020 , we had$10.9 million of secured borrowings outstanding, which were recorded as a result of certain securities that were sold and simultaneously repurchased at a premium, with amounts payable to the counterparty due on the repurchase settlement date, which is generally within 60 days of the trade date. We had no secured borrowings outstanding as ofSeptember 30, 2019 . For the year endedSeptember 30, 2020 , we recorded less than$0.1 million of interest expense in connection with secured borrowings. Our secured borrowings bore interest at a weighted average rate of 3.27% for the year endedSeptember 30, 2020 . Off-Balance Sheet Arrangements We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. As ofSeptember 30, 2020 andSeptember 30, 2019 , our only off-balance sheet arrangements consisted of$33.7 million and$24.2 million , respectively, of unfunded commitments to provide debt and equity financing to certain of our portfolio companies. Such commitments are subject to our portfolio companies' satisfaction of certain financial and nonfinancial covenants and may involve, to varying degrees, elements of credit risk in excess of the amount recognized in our Consolidated Statements of Assets and Liabilities. A list of unfunded commitments by investment (consisting of revolvers, term loans with delayed draw components and Subordinated Notes and LLC equity interests of the OCSI Glick JV) as ofSeptember 30, 2020 andSeptember 30, 2019 is shown in the table below: September 30, 2020 September 30, 2019 OCSI Glick JV LLC (1)$ 13,998,029 $ 13,998,029 Athenex, Inc. 5,316,815 - MHE Intermediate Holdings, LLC 5,254,516 4,466,338 MRI Software LLC 2,721,132 - NeuAG, LLC 1,059,000 - Ardonagh Midco 3 PLC 1,002,320 - Mindbody, Inc. 952,381 952,381 Accupac, Inc. 716,984 - Apptio, Inc. 692,308 692,308 OEConnection LLC 501,353 731,183 Olaplex, Inc. 486,000 - Coyote Buyer, LLC 391,267 - iCIMs, Inc. 294,118 294,118 Immucor, Inc. 189,438 - GKD Index Partners, LLC 88,889 444,444 Ministry Brands, LLC 42,500 80,000 PaySimple, Inc. - 2,450,000 4 Over International, LLC - 60,629 Total$ 33,707,050 $ 24,169,430 ___________
(1) This investment was on cash non-accrual status as of
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--------------------------------------------------------------------------------Contractual Obligations The following table reflects information pertaining to our debt outstanding under the Citibank Facility, the East West Bank Facility, the Deutsche Bank Facility and Secured Borrowings:
Weighted average debt Maximum debt
Debt Outstanding Debt Outstanding outstanding for the outstanding for the
as of September 30, as of September 30, year ended year ended September
2019 2020 September 30, 2020 30, 2020
Citibank Facility $ 126,056,800 $ 119,056,800 $ 125,133,304 $ 129,056,800
Deutsche Bank Facility 157,600,000 137,600,000 167,188,798 181,600,000
East West Bank Facility 11,000,000 - 13,959,016 22,500,000
Secured Borrowings - 10,929,578 169,055 10,929,578
Total debt $ 294,656,800 $ 267,586,378 $ 306,450,173
The following table reflects our contractual obligations arising from the Citibank Facility, Deutsche Bank Facility and Secured Borrowings:
Payments due by period as of
Total < 1 year 1-3 years 3-5 years
Citibank Facility $ 119,056,800 $ - $ 119,056,800 $ -
Interest due on Citibank Facility 7,248,110 2,591,146 4,656,964 -
Deutsche Bank Facility 137,600,000 - 137,600,000 -
Interest due on Deutsche Bank Facility 6,020,660 4,024,800 1,995,860 -
Secured Borrowings 10,929,578 10,929,578 - -
Interest due on Secured Borrowings 50,557 50,557 - -
Total $ 280,905,705 $ 17,596,081 $ 263,309,624 $ -
Regulated Investment Company Status and Distributions
We have qualified and elected to be treated as a RIC under Subchapter M of the
Code for tax purposes. As long as we continue to qualify as a RIC, we will not
be subject to tax on our investment company taxable income (determined without
regard to any deduction for dividends paid) or realized net capital gains, to
the extent that such taxable income or gains is distributed, or deemed to be
distributed as dividends, to stockholders on a timely basis.
Taxable income generally differs from net income for financial reporting
purposes due to temporary and permanent differences in the recognition of income
and expenses, and generally excludes net unrealized appreciation or
depreciation. Distributions declared and paid by us in a taxable year may differ
from taxable income for that taxable year as such distributions may include the
distribution of taxable income derived from the current taxable year or the
distribution of taxable income derived from the prior taxable year carried
forward into and distributed in the current taxable year. Distributions also may
include returns of capital.
To maintain RIC tax treatment, we must, among other things, distribute
dividends, with respect to each taxable year, of an amount at least equal to 90%
of our investment company taxable income (i.e., our net ordinary income and our
realized net short-term capital gains in excess of realized net long-term
capital losses, if any) determined without regard to any deduction for dividends
paid. As a RIC, we are also subject to a federal excise tax, based on
distribution requirements of our taxable income on a calendar year basis. We
anticipate timely distribution of our taxable income in accordance with tax
rules. We did not incur a U.S. federal excise tax for calendar years 2018 and
2019. We may incur a federal excise tax in future years.
We intend to distribute at least 90% of our annual taxable income (which
includes our taxable interest and fee income) to our stockholders. The covenants
under the respective documents governing the Citibank Facility and the Deutsche
Bank Facility could, under certain circumstances, hinder our ability to satisfy
the distribution requirement associated with our ability to be subject to tax as
a RIC. In addition, we may retain for investment some or all of our net capital
gains (i.e., realized net long-term capital gains in excess of realized net
short-term capital losses) and treat such amounts as deemed distributions to our
stockholders. If we do this, our stockholders will be treated as if they
received actual distributions of the capital gains we retained and then
reinvested the net after-tax proceeds in our common stock. Our stockholders also
may be eligible to claim tax credits (or, in certain circumstances, tax refunds)
equal to their allocable share of the tax we paid on the capital gains deemed
distributed to them. To the extent our taxable earnings for a fiscal and taxable
year fall below the total amount of our distributions for that fiscal and
taxable year, a portion of those distributions may be deemed a return of capital
to our stockholders.
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We may not be able to achieve operating results that will allow us to make
distributions at a specific level or to increase the amount of these
distributions from time to time. In addition, we may be limited in our ability
to make distributions due to the asset coverage test for borrowings applicable
to us as a Business Development Company under the Investment Company Act and due
to provisions in our credit facilities and debt instruments. If we do not
distribute a certain percentage of our taxable income annually, we will suffer
adverse tax consequences, including possible loss of our ability to be subject
to tax as a RIC. We cannot assure stockholders that they will receive any
distributions or distributions at a particular level.
A RIC may treat a distribution of its own stock as fulfilling its RIC
distribution requirements if each stockholder elects to receive his or her
entire distribution in either cash or stock of the RIC, subject to certain
limitations regarding the aggregate amount of cash to be distributed to all
stockholders. If these and certain other requirements are met, for U.S federal
income tax purposes, the amount of the dividend paid in stock will be equal to
the amount of cash that could have been received instead of stock.
We may generate qualified net interest income or qualified net short-term
capital gains that may be exempt from U.S. withholding tax when distributed to
foreign stockholders. A RIC is permitted to designate distributions of qualified
net interest income and qualified short-term capital gains as exempt from U.S.
withholding tax when paid to non-U.S. shareholders with proper documentation.
The following table, which may be subject to change as we finalize our annual
tax filings, lists the percentage of qualified net interest income and qualified
short-term capital gains for the year ended September 30, 2020 , our last tax
year end.
Qualified Net Qualified Short-Term
Year Ended Interest Income Capital Gains
September 30, 2020 94.7 % -
We have adopted a DRIP that provides for the reinvestment of any distributions
that we declare in cash on behalf of our stockholders, unless a stockholder
elects to receive cash. As a result, if our Board of Directors declares a cash
distribution, then our stockholders who have not "opted out" of the DRIP will
have their cash distributions automatically reinvested in additional shares of
our common stock, rather than receiving a cash distribution. If our shares are
trading at a premium to net asset value, we typically issue new shares to
implement the DRIP, with such shares issued at the greater of the most recently
computed net asset value per share of our common stock or 95% of the current
market value per share of our common stock on the payment date for such
distribution. If our shares are trading at a discount to net asset value, we
typically purchase shares in the open market in connection with our obligations
under the DRIP.
Related Party Transactions
We have entered into the Investment Advisory Agreement with Oaktree and the
Administration Agreement with Oaktree Administrator, an affiliate of Oaktree.
Mr. John B. Frank , an interested member of our Board of Directors, has an
indirect pecuniary interest in Oaktree. Oaktree is a registered investment
adviser under the Advisers Act of 1940,that is partially and indirectly owned by
OCG. See "Note 11. Related Party Transactions - Investment Advisory Agreement"
and "- Administrative Services" in the notes to the accompanying Consolidated
Financial Statements.
Recent Developments
Distribution Declaration
On November 13, 2020 , our Board of Directors declared a quarterly distribution
of $0.145 per share, payable in cash on December 31, 2020 to stockholders of
record on December 15, 2020 .
Merger Agreement
On October 28, 2020 , we entered into the Merger Agreement, which provides that,
subject to the conditions set forth in the Merger Agreement, Merger Sub will
merge with and into us, with us continuing as the surviving company and as
OCSL's wholly-owned subsidiary and, immediately thereafter, we will merge with
and into OCSL, with OCSL continuing as the surviving company. Both our Board of
Directors and the Board of Directors of OCSL, including all of the respective
independent directors, in each case, on the recommendation of a special
committee comprised solely of certain independent directors of us or OCSL, as
applicable, have approved the Merger Agreement and the transactions contemplated
thereby.
At the Effective Time, each share of our common stock issued and outstanding
immediately prior to the Effective Time (other than Cancelled Shares) will be
converted into the right to receive a number of shares of OCSL Common Stock
equal to the Exchange Ratio (as defined below), plus any cash (without interest)
in lieu of fractional shares.
As of a mutually agreed date no earlier than 48 hours (excluding Sundays and
holidays) prior to the Effective Time, which we refer as the "Determination
Date", each of us and OCSL will deliver to the other a calculation of its net
asset value as of such date, in each case
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using a pre-agreed set of assumptions, methodologies and adjustments. We refer
to such calculation with respect to us as the "Closing OCSI Net Asset Value" and
with respect to OCSL as the "Closing OCSL Net Asset Value". Based on such
calculations, the parties will calculate the "OCSI Per Share NAV", which will be
equal to (i) the Closing OCSI Net Asset Value divided by (ii) the number of
shares of our common stock issued and outstanding as of the Determination Date
(excluding any Cancelled Shares), and the "OCSL Per Share NAV", which will be
equal to (A) the Closing OCSL Net Asset Value divided by (B) the number of
shares of OCSL Common Stock issued and outstanding as of the Determination Date.
The "Exchange Ratio" will be equal to the quotient (rounded to four decimal
places) of (i) the OCSI Per Share NAV divided by (ii) the OCSL Per Share NAV.
We and OCSL will update and redeliver the Closing OCSI Net Asset Value or the
Closing OCSL Net Asset Value, respectively, in the event of a material change to
such calculation between the Determination Date and the closing of the Mergers
and if needed to ensure that the calculation is determined within 48 hours
(excluding Sundays and holidays) prior to the Effective Time.
The Merger Agreement contains customary representations and warranties by each
of us, OCSL and Oaktree. The Merger Agreement also contains customary covenants,
including, among others, covenants relating to the operation of each of our and
OCSL's businesses during the period prior to the closing of the Mergers.
Consummation of the Mergers, which is currently anticipated to occur during the
first half of calendar year 2021, is subject to certain closing conditions,
including requisite approvals of our and OCSL's stockholders and certain other
closing conditions.
The Merger Agreement also contains certain termination rights in favor of us and
OCSL, including if the Mergers are not completed on or before July 28, 2021 or
if the requisite approvals of our or OCSL's stockholders are not obtained. The
Merger Agreement provides that, upon the termination of the Merger Agreement
under certain circumstances, a third party acquiring us may be required to pay
OCSL a termination fee of approximately $5.7 million . The Merger Agreement
provides that, upon the termination of the Merger Agreement under certain
circumstances, a third party acquiring OCSL may be required to pay to us a
termination fee of approximately $20.0 million .
The foregoing description of the Merger Agreement does not purport to be
complete and is qualified in its entirety by reference to the full text of the
Merger Agreement. The representations, warranties, covenants and agreements
contained in the Merger Agreement were made only for purposes of the Merger
Agreement and as of specific dates; were solely for the benefit of the parties
to the Merger Agreement (except as may be expressly set forth in the Merger
Agreement); may be subject to limitations agreed upon by the parties, including
being qualified by confidential disclosures made for the purposes of allocating
contractual risk between the parties to the Merger Agreement instead of
establishing these matters as facts; and may be subject to standards of
materiality applicable to the contracting parties that differ from those
applicable to investors. Investors and security holders should not rely on such
representations, warranties, covenants or agreements, or any descriptions
thereof, as characterizations of the actual state of facts or condition of any
of the parties to the Merger Agreement or any of their respective subsidiaries
or affiliates. Moreover, information concerning the subject matter of the
representations, warranties, covenants and agreements may change after the date
of the Merger Agreement, which subsequent information may or may not be fully
reflected in public disclosures by the parties to the Merger Agreement.
Citibank Facility Amendment
On October 27, 2020 , OCSI Senior Funding II LLC , our wholly owned subsidiary,
entered into an amendment to the documents governing the Citibank Facility,
which provides that (1) consummation of the Mergers will not cause a change of
control under the Citibank Facility or violate the no merger covenant in the
Citibank Facility and (2) OCSL will become the collateral manager under the
Citibank Facility upon closing of the Mergers. The other material terms of the
Citibank Facility were unchanged.
Deutsche Bank Facility Amendment
On October 27, 2020 , OCSI Senior Funding Ltd. , our wholly owned subsidiary,
entered into an amendment to the documents governing the Deutsche Bank Facility
that provides that consummation of the Mergers will not cause a change of
control under the Deutsche Bank Facility or violate the no merger covenant in
the Deutsche Bank Facility. The other material terms of the Deutsche Bank
Facility were unchanged.
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