Investcorp Credit Management BDC, Inc. (formerly known as CM Finance Inc), a Maryland corporation, is a
closed-end, externally managed, non-diversified management investment company that has elected to be treated as a business development company under the Investment
Company Act of 1940, as amended (the “1940 Act”). Our primary investment objective is to maximize the total return to stockholders in the form of current income and capital appreciation by investing in debt and related equity investments
of privately held middle-market companies
We are offering $15,000,000 in aggregate principal amount of 6.125% notes due 2023, which we
refer to as the “Notes.” The Notes will mature on July 1, 2023. We will pay interest on the Notes on January 1, April 1, July 1 and October 1, beginning on January 1, 2020. The Notes offered hereby are a
further issuance of the 6.125% notes due 2023 that we issued on July 2, 2018 and July 12, 2018 in the aggregate principal amount of $34,500,000 (the “Existing Notes”). The Notes offered hereby will be treated as a single series
with the Existing Notes under the indenture and will have the same terms as the Existing Notes. The Notes offered hereby will have the same CUSIP number and will be fungible and rank equally with the Existing Notes. Upon the issuance of the Notes
offered hereby, the outstanding aggregate principal amount of our 6.125% notes due 2023 will be $49,500,000 (or $51,750,000 if the overallotment option is exercised in full by the underwriters).
We may redeem the Notes in whole or in part at any time, or from time to time on or after July 1, 2020, at the redemption price of par,
plus accrued interest, as discussed under the caption “Description of the Notes—Optional Redemption.” The Notes will be issued in minimum denominations of $25 and integral multiples of $25 in excess thereof.
The underwriters have agreed to purchase the Notes from us at 96.875% of the aggregate principal amount of the Notes (resulting in
approximately $14,531,250 in aggregate proceeds to us, before deducting expenses payable by us), plus accrued and unpaid interest from October 1, 2019 up to, but not including, the date of delivery. The underwriters propose to offer the Notes for
sale, from time to time, in one or more negotiated transactions, at prices that may be different than par, plus accrued and unpaid interest from October 1, 2019 up to, but not including, the date of delivery. These sales may occur at market
prices prevailing at the time of sale, at prices related to such prevailing market prices or at prices negotiated by the book-running manager or with approval from the book-running manager.
The underwriters may also purchase up to an additional $2,250,000 aggregate principal amount of Notes offered hereby, within 30 days of
the date of this prospectus supplement. If the underwriters exercise this option to purchase additional Notes in full, the total aggregate proceeds to us, before deducting expenses payable by us, will be $16,710,938.
The Notes will be our direct unsecured obligations and rank pari passu, which means equal in right of payment, with all outstanding and future
unsecured, unsubordinated indebtedness issued by us, including the Existing Notes. Because the Notes will not be secured by any of our assets, they will be effectively subordinated to all of our existing and future secured indebtedness (or any
indebtedness that is initially unsecured as to which we subsequently grant a security interest), to the extent of the value of the assets securing such indebtedness. The Notes will be structurally subordinated to all existing and future indebtedness
and other obligations of any of our subsidiaries and financing vehicles, including, without limitation, borrowings under our term secured financing facility (the “Term Financing”) and our senior secured revolving financing facility (the
“Revolving Financing”) with UBS AG, London Branch (“UBS”), of which we had $122.0 million and $19.0 million outstanding, respectively, as of October 11, 2019. The Notes will be obligations exclusively of Investcorp
Credit Management BDC, Inc. and not of any of our subsidiaries. None of our subsidiaries is a guarantor of the Notes and the Notes will not be required to be guaranteed by any subsidiary we may acquire or create in the future.
As of the offering date of the Notes, the Notes will rank pari passu with, or equal to,
$34.5 million in aggregate principal amount of the Existing Notes, plus accrued interest. The Notes will also rank pari passu with, or equal to, our general liabilities, which consist of trade and other payables, including any outstanding
dividend payable, base and incentive management fees payable, interest and debt fees payable, vendor payables and accrued expenses such as auditor fees, legal fees, director fees, etc. In total, these general liabilities were $28 million as of
June 30, 2019. We currently do not have outstanding debt that is subordinated to the Notes and do not currently intend to issue indebtedness that expressly provides that it is subordinated to the Notes. Therefore, the Notes will not be senior
to any of our indebtedness or obligations.
The Existing Notes are listed on the NASDAQ Global Select Market and trade under the symbol
“CMFNL.” On October 11, 2019, the last reported sale price of the Existing Notes on the NASDAQ Global Select Market was $25.54. We intend to list the Notes offered hereby on the NASDAQ Global Select Market under the same trading
symbol. The Notes are expected to trade “flat.” This means that purchasers will not pay, and sellers will not receive, any accrued and unpaid interest on the Notes that is not included in the trading price.
Please read this prospectus supplement and the accompanying prospectus and the documents incorporated by reference herein and therein before
investing and keep it for future reference. This prospectus supplement and the accompanying prospectus contain, including the information incorporated by reference therein, important information about us that a prospective investor should know
before investing in our Notes. We file annual, quarterly and current reports, proxy statements and other information about us with the Securities and Exchange Commission, or SEC. The SEC also maintains a website at http://www.sec.gov that
contains such information. This information is also available free of charge by contacting us at 65 East 55th Street, 15th Floor, New York, New York 10022, or by calling us at (212) 257-5199 or on our website at www.icmbdc.com. The information on our website is not incorporated by reference into this prospectus supplement or the accompanying prospectus, and you should not consider that
information to be part of this prospectus supplement or the accompanying prospectus. The SEC also maintains a website at www.sec.gov that contains such information.
Delivery of the Notes in book-entry form only through The Depository Trust Company will
be made on or about October 18, 2019.
You should rely only on the information contained in this prospectus supplement and the
accompanying prospectus, the documents incorporated by reference in this prospectus supplement and the accompanying prospectus, or any other information to which we have referred you. We have not authorized any dealer, salesperson or other person to
provide you with different information or to make representations as to matters not stated in this prospectus supplement or the accompanying prospectus. If anyone provides you with different or inconsistent information, you should not rely on it.
This prospectus supplement is not an offer to sell, or a solicitation of an offer to buy, any securities by any person in any jurisdiction where it is unlawful for that person to make such an offer or solicitation or to any person in any
jurisdiction to whom it is unlawful to make such an offer or solicitation. The information in this prospectus supplement, the accompanying prospectus and any information incorporated by reference herein is accurate only as of their respective dates,
and under no circumstances should the delivery of this prospectus supplement or the accompanying prospectus, or the sale of any securities imply that the information in this prospectus supplement, the accompanying prospectus or any information
incorporated by reference herein is accurate as of any later date or any date other than the date of the document incorporated by reference containing such information, or that the affairs of Investcorp Credit Management BDC, Inc., have not changed
since the date hereof or thereof. We will update the information in these documents to reflect material changes only as required by law.
This document is in two parts. The first part is the prospectus supplement, which describes the terms of this offering of Notes and also adds
to and updates information contained in the accompanying prospectus and the documents incorporated by reference into this prospectus supplement and the accompanying prospectus. The second part is the accompanying prospectus, which gives more general
information and disclosure about the securities which we may offer from time to time, some of which may not apply to the Notes offered by this prospectus supplement. For information about the Notes, see “Summary of the Specific Terms of the
Notes and the Offering” and “Description of the Notes” in this prospectus supplement and “Description of Our Debt Securities” in the accompanying prospectus.
To the extent the information contained in this prospectus supplement differs from or adds to the information contained in the accompanying
prospectus or the information included in any document filed prior to the date of this prospectus supplement and incorporated by reference in this prospectus supplement and the accompanying prospectus, you should rely only on the information
included or incorporated by reference in this prospectus supplement or the accompanying prospectus that relates to this offering of the Notes. The information contained in this prospectus supplement supersedes any inconsistent information included
in the accompanying prospectus. In various places in this prospectus supplement and the accompanying prospectus, we refer you to other sections of such documents for additional information by indicating the caption heading of such other sections.
The page on which each principal caption included in this prospectus supplement and the accompanying prospectus can be found is listed in the table of contents above. All such cross references in this prospectus supplement are to captions contained
in this prospectus supplement and not in the accompanying prospectus, unless otherwise stated.
Please carefully read this prospectus
supplement and the accompanying prospectus, including the information incorporated by reference therein, together with the additional information described under the headings “Available Information”, “Supplementary Risk Factors”
and “Incorporation by Reference” included in this prospectus supplement and under “Available Information”, “Risk Factors” and “Incorporation by Reference” in the accompanying prospectus and in our most recent
Annual Report filed on Form 10-K, and under similar headings in the other documents that are filed after the date hereof and incorporated by reference into this prospectus supplement and the accompanying
prospectus before investing in the Notes.
U.S. Bank National Association, the trustee under the indenture governing the Notes, has not
participated in the preparation of this prospectus supplement and assumes no responsibility for its content.
SUPPLEMENTARY RISK FACTORS
Investing in the Notes involves a number of significant risks. In addition to the other information contained in this prospectus
supplement, the accompanying prospectus, our most recent Annual Report on Form 10-K, as well as in subsequent filings with the SEC, which are incorporated by reference into this prospectus supplement and the
accompanying prospectus in their entirety, you should consider carefully the following information before making an investment. The risks set out below are not the only risks we face. Additional risks and uncertainties not presently known to us or
not presently deemed material by us might also impair our operations and performance. If any of the following events occur, our business, financial condition and results of operations could be materially and adversely affected. In such case, you may
lose all or part of your investment.
Risks Related to the Notes
The Notes will be unsecured and therefore will be effectively subordinated to any secured indebtedness we have currently incurred or may incur in the
future and will rank pari passu with, or equal to, all outstanding and future unsecured indebtedness issued by us and our general liabilities.
The Notes will not be secured by any of our assets or any of the assets of any of our subsidiaries. As a result, the Notes will be effectively
subordinated to any secured indebtedness we or our subsidiaries have outstanding as of the date of this prospectus supplement (including the Financing Facilities) or that we or our subsidiaries may incur in the future (or any indebtedness that is
initially unsecured as to which we subsequently grant a security interest) to the extent of the value of the assets securing such indebtedness. In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our
secured indebtedness or secured indebtedness of our subsidiaries may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors,
including the holders of the Notes.
As of October 11, 2019, we had, through CM SPV, $122.0 million and $19.0 million in
outstanding indebtedness under the Term Financing and the Revolving Financing, respectively, which are secured by the assets held at CM SPV. The indebtedness under the Financing Facilities is effectively senior to the Notes to the extent of the
value of the assets securing such indebtedness. The Notes will also rank pari passu with, or equal to, our general liabilities, which consist of trade and other payables, including any outstanding dividend payable, base and incentive management fees
payable, interest and debt fees payable, vendor payables and accrued expenses such as auditor fees, legal fees, director fees, etc. In total, these general liabilities were $28 million as of June 30, 2019.
The Notes will be structurally subordinated to the indebtedness and other liabilities of our subsidiaries.
The Notes will be obligations exclusively of Investcorp Credit Management BDC, Inc., and not of any of our subsidiaries. None of our
subsidiaries will be a guarantor of the Notes, and the Notes will not be required to be guaranteed by any subsidiary we may acquire or create in the future. Any assets of our subsidiaries will not be directly available to satisfy the claims of our
creditors, including holders of the Notes. Except to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors of our subsidiaries will have priority over our equity interests in such entities (and
therefore the claims of our creditors, including holders of the Notes) with respect to the assets of such entities. Even if we are recognized as a creditor of one or more of these entities, our claims would still be effectively subordinated to any
security interests in the assets of any such current or future subsidiary and to any indebtedness or other liabilities of any such current or future subsidiary senior to our claims, including under the Financing Facilities. Consequently, the Notes
will be structurally subordinated to all indebtedness and other liabilities, including trade payables, of any of our existing or future subsidiaries.
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The indenture under which the Notes will be issued contains limited protection for holders of the Notes.
The indenture under which the Notes will be issued offers limited protection to holders of the Notes. The terms of the indenture
and the Notes do not restrict our or any of our subsidiaries’ ability to engage in, or otherwise be a party to, a variety of corporate transactions, circumstances or events that could have a material adverse impact on your investment in the
Notes. In particular, the terms of the indenture and the Notes will not place any restrictions on our or our subsidiaries’ ability to:
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issue securities or otherwise incur additional indebtedness or other obligations, including (1) any
indebtedness or other obligations that would be equal in right of payment to the Notes, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to the Notes to the extent of the
values of the assets securing such debt, (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries and which therefore is structurally senior to the Notes and (4) securities, indebtedness or obligations issued or
incurred by our subsidiaries that would be senior to our equity interests in those entities and therefore rank structurally senior to the Notes with respect to the assets of our subsidiaries, in each case other than an incurrence of indebtedness or
other obligation that would cause a violation of Section 18(a)(1)(A) as modified by such provisions of Section 61(a) of the 1940 Act as may be applicable to us from time to time or any successor provisions, whether or not we continue to be
subject to such provisions of the 1940 Act, but giving effect, in each case, to any exemptive relief granted to us by the SEC. Currently, these provisions generally prohibit us from making additional borrowings, including through the issuance of
additional debt or the sale of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at least 150% after such borrowings. See “Risk Factors—Regulations governing our operation as a BDC affect our ability
to, and the way in which we raise additional capital. As a BDC, the necessity of raising additional capital may expose us to risks, including the typical risks associated with leverage” in the accompanying prospectus;
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pay dividends on, or purchase or redeem or make any payments in respect of, capital stock or other securities
ranking junior in right of payment to the Notes, including subordinated indebtedness, in each case other than dividends, purchases, redemptions or payments that would cause our asset coverage to fall below the threshold specified in
Section 18(a)(1)(B) as modified by such provisions of Section 61(a) of the 1940 Act as may be applicable to us from time to time or any successor provisions, giving effect to (i) any exemptive relief granted to us by the SEC and (ii) no-action relief granted by the SEC to another BDC (or to us if we determine to seek such similar no-action or other relief) permitting the BDC to declare any cash
dividend or distribution notwithstanding the prohibition contained in Section 18(a)(1)(B) as modified by such provisions of Section 61(a) of the 1940 Act as may be applicable to us from time to time in order to maintain the BDC’s
status as a RIC under Subchapter M of the Code. These provisions generally prohibit us from declaring any cash dividend or distribution upon any class of our capital stock, or purchasing any such capital stock if our asset coverage, as defined in
the 1940 Act, is below 150% at the time of the declaration of the dividend or distribution or the purchase and after deducting the amount of such dividend, distribution or purchase;
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sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or
substantially all of our assets);
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enter into transactions with affiliates;
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create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions;
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create restrictions on the payment of dividends or other amounts to us from our subsidiaries.
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In addition, the indenture (as defined in “Description of the Notes”) will not require us to make an offer to
purchase the Notes in connection with a change of control or any other event.
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Furthermore, the terms of the indenture and the Notes do not protect holders of the Notes in the
event that we experience changes (including significant adverse changes) in our financial condition, results of operations or credit ratings, if any, as they do not require that we or our subsidiaries adhere to any financial tests or ratios or
specified levels of net worth, revenues, income, cash flow or liquidity.
Our ability to recapitalize, incur additional debt (including
additional debt that matures prior to the maturity of the Notes) and take a number of other actions that are not limited by the terms of the Notes may have important consequences for you as a holder of the Notes, including making it more difficult
for us to satisfy our obligations with respect to the Notes or negatively affecting the trading value of the Notes.
Other debt we issue
or incur in the future could contain more protections for its holders than the indenture and the Notes, including additional covenants and events of default. The issuance or incurrence of any such debt with incremental protections could affect the
market for trading levels and prices of the Notes.
While a trading market developed after issuing the Existing Notes, we cannot assure you that an
active trading market for the Notes will be maintained.
While a trading market developed after issuing the Existing Notes, we
cannot assure you that an active and liquid market for the Notes will be maintained. Although the underwriters have informed us that they intend to continue to make a market in the Notes, as permitted by applicable laws and regulations, they are not
obligated to do so and may discontinue market making activities at their sole discretion at any time without notice. In addition, any market-making activity will be subject to limits imposed by law. The liquidity of the trading market in the Notes,
and the market price quoted for the Notes, may be adversely affected by changes in the overall market for this type of security and by changes in our financial performance or prospects or in the prospects for companies in our industry generally or
other factors. Accordingly, we cannot assure you that an active trading market for the Notes will be maintained, that you will be able to sell your Notes at a particular time or that the price you receive when you sell will be favorable. If an
active trading market is not maintained, the market price and liquidity of the Notes may be adversely affected. The Notes are not listed on any securities exchange or quoted on any automated dealer quotation system, and we do not intend to apply for
a listing of the Notes on any securities exchange or any automated dealer quotation system.
Our amount of debt outstanding will increase as a
result of this offering, and if we default on our obligations to pay our other indebtedness, we may not be able to make payments on the Notes.
As of October 11, 2019, we had $34.5 million in aggregate principal amount of the Existing Notes outstanding, plus accrued interest,
and $122.0 million and $19.0 million in outstanding indebtedness under the Term Financing and the Revolving Financing, respectively. Any default under the agreements governing our indebtedness, including a default under the Term Financing
or the Revolving Financing or other indebtedness to which we may be a party that is not waived by the required lenders, and the remedies sought by lenders or the holders of such indebtedness could make us unable to pay principal, premium, if any,
and interest on the Notes and substantially decrease the market value of the Notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and
interest on our indebtedness, or if we otherwise fail to comply with the various covenants in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness, including the Notes. In
the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under the Financing Facilities or other debt we may
incur in the future could elect to terminate their commitment, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation.
Our ability to generate sufficient cash flow in the future is, to some extent, subject to general economic, financial, competitive,
legislative and regulatory factors as well as other factors that are beyond our control. We
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cannot assure you that our business will generate cash flow from investment activities, or that future borrowings will be available to us under the Financing Facilities or otherwise, in an amount
sufficient to enable us to meet our payment obligations under the Notes, our other debt, and to fund other liquidity needs.
If our
operating performance declines and we are not able to generate sufficient cash flow to service our debt obligations, we may in the future need to refinance or restructure our debt, including any Notes sold, sell assets, reduce or delay capital
investments, seek to raise additional capital or seek to obtain waivers from the lenders under the Financing Facilities or other debt that we may incur in the future to avoid being in default. If we are unable to implement one or more of these
alternatives, we may not be able to meet our payment obligations under the Notes and our other debt. If we breach our covenants under the Financing Facilities or any of our other debt and seek a waiver, we may not be able to obtain a waiver from the
required lenders or holders thereof. If this occurs, we would be in default under the Financing Facilities or other debt, the lenders or holders could exercise rights as described above, and we could be forced into bankruptcy or liquidation. If we
are unable to repay debt, lenders having secured obligations could proceed against the collateral securing the debt, including the Financing Facilities. Because the Financing Facilities have, and any future credit facilities will likely have,
customary cross-default provisions, if we have a default under the terms of the Notes, the obligations under the Financing Facilities or any future credit facility may be accelerated and we may be unable to repay or finance the amounts due.
We may choose to redeem the Notes when prevailing interest rates are relatively low.
On or after July 1, 2020, we may choose to redeem the Notes from time to time, especially if prevailing interest rates are lower than the
rate borne by the Notes. If prevailing rates are lower at the time of redemption, and we redeem the Notes, you likely would not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as the
interest rate on the Notes being redeemed. Our redemption right also may adversely impact your ability to sell the Notes as the optional redemption date or period approaches.
A downgrade, suspension or withdrawal of the credit rating assigned by a rating agency to us or our securities could cause the liquidity or market value
of the Notes to decline significantly.
Our credit ratings are an assessment by rating agencies of our ability to pay our debts
when due. Consequently, real or anticipated changes in our credit ratings will generally affect the market value of the Notes. These credit ratings may not reflect the potential impact of risks relating to the structure or marketing of the Notes.
Credit ratings are not a recommendation to buy, sell or hold any security, and may be revised or withdrawn at any time by the issuing organization in its sole discretion.
Neither we nor any underwriter undertakes any obligation to maintain our credit ratings or to advise holders of Notes of any changes in our
credit ratings. There can be no assurance that our credit ratings will remain for any given period of time or that such credit ratings will not be lowered or withdrawn entirely by the rating agency if in their judgment future circumstances relating
to the basis of the credit ratings, such as adverse changes in our company, so warrant.
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FORWARD-LOOKING STATEMENTS
Some of the statements included or incorporated by reference in this prospectus supplement and the accompanying prospectus may constitute
forward-looking statements, which relate to future events or our future performance or financial condition. The matters discussed in this prospectus supplement, the accompanying prospectus and our most recent Annual Report on Form 10-K, which is incorporated by reference herein, including the documents we incorporate by reference herein and therein, as well as in future oral and written statements by management of the Company that are
forward-looking statements are based on current management expectations that involve substantial risks and uncertainties which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking
statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,”
“plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or
“continue” or the negative of these terms or other similar words. Important assumptions include our ability to acquire or originate new investments, achieve certain margins and levels of profitability, the availability of additional
capital, and the ability to maintain certain debt to asset ratios. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this prospectus supplement and the accompanying prospectus should not be
regarded as a representation by us that our plans or objectives will be achieved. The forward-looking statements contained or incorporated by reference in this prospectus supplement and the accompanying prospectus include statements as to:
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our future operating results;
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our business prospects and the prospects of our portfolio companies;
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the effect of investments that we expect to make;
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our contractual arrangements and relationships with third parties;
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actual and potential conflicts of interest with the Adviser;
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the dependence of our future success on the general economy and its effect on the industries in which we invest;
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the ability of our portfolio companies to achieve their objectives;
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the use of borrowed money to finance a portion of our investments;
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the adequacy of our financing sources and working capital;
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the timing of cash flows, if any, from the operations of our portfolio companies;
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the ability of the Adviser to locate suitable investments for us and to monitor and administer our investments;
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the ability of the Adviser to attract and retain highly talented professionals;
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our ability to qualify and maintain our qualification as a RIC and as a BDC
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our contractual arrangements and relationship with Investcorp; and
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the effect of 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.
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There are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated by such
forward-looking statements. For a discussion of factors that could cause our actual results to differ from forward-looking statements contained in this prospectus supplement, the accompanying prospectus and our Annual Report on Form 10-K, which is incorporated by reference herein,
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please see the discussion under “Supplementary Risk Factors” in this prospectus supplement, “Risk Factors” in the accompanying prospectus and “Risk Factors” in our
Annual Report on Form 10-K, as well as the other information included in this prospectus supplement and the accompanying prospectus, including the documents we incorporate by reference herein and therein. You
should not place undue reliance on these forward-looking statements. The forward-looking statements made in this prospectus supplement, the accompanying prospectus and our Annual Report on Form 10-K, which is
incorporated by reference herein, including any documents incorporated by reference, relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or
circumstances occurring after the date of this prospectus supplement or the accompanying prospectus.
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USE OF PROCEEDS
We estimate that the net proceeds we will receive from the sale of $15,000,000 aggregate principal amount of the Notes will be approximately
$14,276,250 (or approximately $16,455,938 if the underwriters exercise their over-allotment option in full), in each case based on the purchase price paid by the underwriters of 96.875% of the aggregate principal amount of the Notes, after deducting
estimated offering expenses of approximately $255,000 payable by us. We may change the size of this offering based on demand and market conditions.
We intend to use a portion of the net proceeds from this offering to repay outstanding indebtedness under the Revolving Financing. However, we
may re-borrow under the Revolving Financing and use such borrowings to invest in middle market companies in accordance with our investment objective and strategies and for working capital and general corporate
purposes. As of October 11, 2019, there were $19.0 million in borrowings outstanding under the Revolving Financing, which generally bears interest at a rate per annum equal to one-month LIBOR plus 3.15%.
As of June 30, 2019, the Revolving Financing bore interest at a rate per annum equal to 5.03178%. Any amounts borrowed under the Revolving Financing will mature, and all accrued and unpaid interest will be due and payable, on December 7,
2020. As of October 11, 2019, indebtedness under the Term Financing was $122.0 million and borrowings under the Term Financing bear interest a) with respect to the $102.0 million (i) at a rate per annum equal to one-month LIBOR plus 2.55% through December 4, 2019, and (ii) at a rate per annum equal to one-month LIBOR plus 3.55% from December 5,
2019 through December 4, 2020, and (iii) at a rate per annum equal to one-month LIBOR plus 3.15% (if the Option is not exercised) or 2.90% (if the Option is exercised) from
December 5, 2020 through December 5, 2021, and (b) with respect to the additional $20.0 million under the Term Financing, (i) at a rate per annum equal
to one-month LIBOR plus 3.15% through October 14, 2019, which is the date before the Option Exercise Date, and (ii) at a rate per annum equal
to one-month LIBOR plus 2.90% from the Option Exercise Date through December 5, 2021. As of June 30, 2019, the Term Financing bore interest at a rate per annum equal to 5.03178%. Any
amounts borrowed under the Term Financing will mature, and all accrued and unpaid interest will be due and payable, on December 5, 2021. We intend to use any remaining net proceeds from this offering to fund investments in middle market
companies in accordance with our investment objective and for other general corporate purposes. We anticipate that substantially all of the net proceeds of the offering of the Notes pursuant to this prospectus supplement will be used for the above
purposes within six months of any such offering, depending on the availability of appropriate investment opportunities consistent with our investment objective and strategies and market conditions.
Pending the uses described above, we intend to invest the net proceeds of the offering in cash, cash equivalents, U.S. government securities
or high-quality debt securities maturing in one year or less from the time of investment. These securities may earn yields substantially lower than the income that we anticipate receiving once we are fully invested in accordance with our investment
objective. See “Regulation—Temporary Investments” in the accompanying prospectus for additional information about temporary investments we may make while waiting to make longer-term investments in pursuit of our investment objective.
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CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2019, actual and as adjusted for the sale of $15,000,000 aggregate
principal amount of the Notes offered hereby (assuming no exercise of the option to purchase additional Notes) based on the purchase price paid by the underwriters of 96.875% of the aggregate principal amount of the Notes, excluding accrued
interest, after deducting estimated offering expenses of approximately $255,000 payable by us and giving effect to the use of proceeds. The estimated offering expenses includes fees and expenses reimbursable to the underwriters pursuant to the
underwriting agreement. This table should be read in conjunction with “Use of Proceeds” included in this prospectus supplement and our most recent financial statements and notes thereto included or incorporated by reference elsewhere in
this prospectus supplement or the accompanying prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
|
As Adjusted for
this Offering
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Non-controlled,
non-affiliated investments, at fair value (amortized cost of $321,504,359 and $302,647,282, respectively)
|
|
$
|
306,390,993
|
|
|
$
|
306,390,993
|
|
|
Derivatives, at fair value (cost $0 and $0, respectively)
|
|
|
—
|
|
|
|
—
|
|
|
Cash
|
|
|
19,706,281
|
|
|
|
22,995,861
|
|
|
Cash, restricted
|
|
|
6,589,901
|
|
|
|
6,589,901
|
|
|
Receivable for investments sold
|
|
|
820,332
|
|
|
|
820,332
|
|
|
Interest receivable
|
|
|
3,090,639
|
|
|
|
3,090,639
|
|
|
Deferred offering costs
|
|
|
121,922
|
|
|
|
121,922
|
|
|
Other receivables
|
|
|
—
|
|
|
|
—
|
|
|
Prepaid expenses and other assets
|
|
|
227,924
|
|
|
|
227,924
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
336,947,992
|
|
|
$
|
340,197,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Notes payable:
|
|
|
|
|
|
|
|
|
|
Term Financing
|
|
$
|
122,000,000
|
|
|
$
|
122,000,000
|
|
|
Revolving Financing(1)
|
|
|
11,026,670
|
|
|
|
—
|
|
|
Notes Payable(2)
|
|
|
34,500,000
|
|
|
|
49,500,000
|
|
|
Deferred debt issuance costs
|
|
|
(2,000,262
|
)
|
|
|
(2,469,012
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable, net
|
|
|
165,526,408
|
|
|
|
169,030,988
|
|
|
Payable for investments purchased
|
|
|
22,276,343
|
|
|
|
22,276,343
|
|
|
Dividend payable
|
|
|
3,404,923
|
|
|
|
3,404,923
|
|
|
Deferred financing costs payable
|
|
|
1,037,000
|
|
|
|
1,037,000
|
|
|
Income-based incentive fees payable
|
|
|
545,991
|
|
|
|
545,991
|
|
|
Base management fees payable
|
|
|
—
|
|
|
|
—
|
|
|
Accrued provision for taxes
|
|
|
13,778
|
|
|
|
13,778
|
|
|
Derivatives, at fair value (cost $0 and $0, respectively)
|
|
|
—
|
|
|
|
—
|
|
|
Interest payable
|
|
|
724,222
|
|
|
|
724,222
|
|
|
Directors’ fees payable
|
|
|
95,240
|
|
|
|
95,240
|
|
|
Accrued expenses and other liabilities
|
|
|
240,197
|
|
|
|
240,197
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
193,864,102
|
|
|
|
197,368,682
|
|
|
|
|
|
|
|
|
|
|
|
S-26
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
|
As Adjusted for
this Offering
|
|
|
|
|
|
|
Net Assets
|
|
|
|
|
|
|
|
|
|
Common stock, par value $0.001 per share (100,000,000 shares authorized, 13,649,504 and 13,619,690
shares issued and outstanding, respectively)
|
|
|
13,620
|
|
|
|
13,620
|
|
|
Additional paid-in capital
|
|
|
198,398,831
|
|
|
|
198,398,831
|
|
|
Distributable earnings (loss)
|
|
|
(55,328,561
|
)
|
|
|
(55,583,561
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Assets
|
|
|
143,083,890
|
|
|
|
142,828,890
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Net Assets
|
|
$
|
336,947,992
|
|
|
$
|
340,197,572
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Asset Value Per Share
|
|
$
|
10.51
|
|
|
$
|
10.49
|
|
|
1
|
As of October 11, 2019, we had approximately $19.0 million outstanding under the Revolving Financing. This
table has not been adjusted to reflect changes in our outstanding borrowings under the Revolving Financing subsequent to June 30, 2019.
|
|
2
|
Excludes up to $2,250,000 total aggregate principal amount of Notes issuable by us upon exercise of the
underwriter’s over-allotment option.
|
S-27
SENIOR SECURITIES
Information about our senior securities is shown in the following table for the fiscal years ended June 30, 2019, 2018, 2017, 2016, 2015,
2014 and 2013, respectively. The report of RSM US LLP, our independent registered public accounting firm, on the senior securities table as of fiscal year ended June 30, 2019, is attached as an exhibit to the registration statement of which
this prospectus is a part. The report of Ernst & Young LLP, our former independent registered public accounting firm, on the senior securities table as of fiscal year ended June 30, 2017, is attached as an exhibit to the registration
statement of which this prospectus is a part.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class and Year
|
|
Total Amount
Outstanding
Exclusive of
Treasury
Securities(1)
|
|
|
Asset
Coverage per
Unit(2)
|
|
|
Involuntary
Liquidating
Preference
per Unit(3)
|
|
|
Average Market
Value per
Unit(4)
|
|
|
UBS Financing Facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year ended June 30, 2019
|
|
$
|
133,026,670
|
(5)
|
|
$
|
2,329
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal Year ended June 30, 2018
|
|
$
|
119,823,000
|
(5)
|
|
$
|
2,431
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal Year ended June 30, 2017
|
|
$
|
102,000,000
|
|
|
$
|
2,666
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal Year ended June 30, 2016
|
|
$
|
132,478,329
|
(6)
|
|
$
|
2,229
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal Year ended June 30, 2015
|
|
$
|
150,847,459
|
(6)
|
|
$
|
2,306
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal Year ended June 30, 2014
|
|
$
|
85,591,314
|
(6)
|
|
$
|
3,339
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal Year ended June 30, 2013
|
|
$
|
76,500,000
|
|
|
$
|
1,860
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Citi Revolving Financing(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year ended June 30, 2019
|
|
$
|
—
|
|
|
|
N/A
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal Year ended June 30, 2018
|
|
$
|
—
|
|
|
|
N/A
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal Year ended June 30, 2017
|
|
$
|
—
|
|
|
|
N/A
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Notes due 2023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year ended June 30, 2019
|
|
$
|
34,500,000
|
|
|
$
|
8,969
|
|
|
|
—
|
|
|
$
|
1,036
|
|
|
(1)
|
Total amount of senior securities outstanding at the end of the period presented.
|
|
(2)
|
Asset coverage per unit is the ratio of the carrying value of our total assets, less all liabilities and
indebtedness not represented by senior securities, in relation to the aggregate amount of senior securities representing indebtedness. Asset coverage per unit is expressed in terms of dollar amounts per $1,000 of indebtedness.
|
|
(3)
|
The amount to which such class of senior security would be entitled upon the involuntary liquidation of the
issuer in preference to any security junior to it. The “—” indicates information which the SEC expressly does not require to be disclosed for certain types of senior securities.
|
|
(4)
|
Not applicable, except for the Existing Notes, which are publicly traded. The Average Market Value Per Unit is
calculated by taking the daily average closing price during the period and dividing it by twenty-five dollars per share and multiplying the result by one thousand to determine a unit price per thousand consistent with Asset Coverage Per Unit.
|
|
(5)
|
Includes senior securities outstanding under the Revolving Financing and the Term Financing.
|
|
(6)
|
Includes senior securities under our prior revolving financing with UBS (the “2013 UBS Revolving
Financing”) and the Term Financing. In connection with the expiration of the 2013 UBS Revolving Financing in accordance with its terms on December 5, 2016, we repaid in full all indebtedness, liabilities and other obligations thereunder.
|
|
(7)
|
On December 8, 2017, we repaid in full all indebtedness, liabilities and other obligations under, and
terminated, the Citi Revolving Financing.
|
S-28
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes certain U.S. federal income tax consequences applicable to an investment in the Notes. This summary does not
purport to be a complete description of the income tax considerations applicable to such an investment. The summary is based upon the Code, U.S. Treasury regulations, and administrative and judicial interpretations, each as of the date of this
prospectus supplement and all of which are subject to change, potentially with retroactive effect, or to different interpretations. We cannot assure you that the IRS will not challenge one or more of the tax consequences described in this summary,
and we have not obtained, nor do we intend to obtain, any ruling from the IRS or opinion of counsel with respect to the tax consequences of an investment in the Notes. Investors should consult their own tax advisors with respect to tax
considerations that pertain to their investment in the Notes.
This summary discusses only Notes held as capital assets within the meaning
of the Code (generally, property held for investment purposes) and does not purport to address persons in special tax situations, such as banks and other financial institutions, insurance companies, controlled foreign corporations, passive foreign
investment companies, real estate investment trusts and regulated investment companies (and shareholders of such corporations), dealers in securities or currencies, traders in securities, former citizens of the United States, persons holding the
Notes as a position in a “straddle,” “hedge,” “constructive sale transaction,” “conversion transaction,” “wash sale” or other integrated transaction for U.S. federal income tax purposes, entities
that are tax-exempt for U.S. federal income tax purposes, retirement plans, individual retirement accounts, tax-deferred accounts, persons subject to the alternative
minimum tax, pass-through entities (including partnerships and entities and arrangements classified as partnerships for U.S. federal income tax purposes) and beneficial owners of pass-through entities, or U.S. holders (as defined below) whose
functional currency (as defined in the Code) is not the U.S. dollar. It does not address beneficial owners of the Notes other than original purchasers of the Notes who acquire the Notes in this offering for cash at a price equal to their issue price
(i.e., the first price at which a substantial amount of the Notes is sold for money to investors (other than to bond houses, brokers or similar persons or organizations acting in the capacity of underwriters, placements agents or
wholesalers)). It also does not address the U.S. federal income tax consequences to beneficial owners of the Notes subject to the special tax accounting rules under Section 451(b) of the Code. In addition, this summary only addresses U.S.
federal income tax consequences, and, except as otherwise noted below, does not address other U.S. federal tax consequences, including, for example, estate or gift tax consequences. This summary also does not address any U.S. state or local or non-U.S. tax consequences. Investors considering purchasing the Notes should consult their own tax advisors concerning the application of the U.S. federal income tax laws to their individual circumstances, as well
as any consequences to such investors relating to purchasing, owning and disposing of the Notes under the laws of any state, local, foreign or other taxing jurisdiction.
If a partnership (including an entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds any Notes, the U.S.
federal income tax treatment of a partner of the partnership generally will depend upon the status of the partner, the activities of the partnership and certain determinations made at the partner level. Partnerships holding Notes, and persons
holding interests in such partnerships, should each consult their own tax advisors as to the consequences of investing in the Notes in their individual circumstances.
Taxation of U.S. Holders
For purposes of
this discussion, the term “U.S. holder” means a beneficial owner of a Note that is, for U.S. federal income tax purposes:
|
|
•
|
|
an individual who is a citizen or resident of the United States;
|
|
|
•
|
|
a corporation created or organized in or under the laws of the United States, any state thereof, or the District
of Columbia;
|
S-29
|
|
•
|
|
a trust (i) the administration of which is subject to the primary supervision of a U.S. court and that has
one or more “United States persons” (within the meaning of the Code) that have the authority to control all substantial decisions of the trust or (ii) that has made a valid election under applicable U.S. Treasury regulations to be
treated as a “United States person” (within the meaning of the Code); or
|
|
|
•
|
|
an estate the income of which is subject to U.S. federal income taxation regardless of its source.
|
Pre-Issuance Accrued Interest
A portion of the price paid for the Notes is attributable to the amount of unpaid interest on the Notes accrued from October 1, 2019,
which, for purposes of this discussion, is referred to as “pre-issuance accrued interest.” Pursuant to certain U.S. Treasury regulations, for U.S. federal income tax purposes, we intend to
treat a portion of the first interest payment on the Notes as a return of the pre-issuance accrued interest, rather than an amount payable on such Notes. A U.S. Holder should be able to treat a portion of the
first interest payment on the Notes as a non-taxable return of the pre-issuance accrued interest paid by the U.S. Holder, rather than as taxable interest, as if the U.S.
Holder purchased a debt instrument on the secondary market between interest payment dates. U.S. Holders should consult their own tax advisors concerning the tax treatment of the pre-issuance accrued interest
on the Notes.
Payments of Interest
Payments or accruals of interest (other than pre-issuance accrued interest as described above) on a
Note generally will be taxable to a U.S. holder as ordinary interest income at the time they are received (actually or constructively) or accrued, in accordance with the U.S. holder’s regular method of tax accounting.
Qualified Reopening
We intend to treat,
for U.S. federal income tax purposes, the issuance of the Notes as a “qualified reopening” of our Existing Notes, which had an issue price of par. Accordingly, we intend to treat the Notes offered hereby as having the same issue date and
the same issue price as those previously issued Existing Notes. Because the Existing Notes were not issued with “original issue discount” (“OID”) for U.S. federal income tax purposes, the Notes in this offering also do not have
OID. However, depending on a holder’s purchase price, the Notes may have market discount or bond premium (discussed below). If the issuance of the Notes is not treated as a “qualified reopening”, the issue date and the issue price of
the Notes would differ from the issue date and issue price of the Existing Notes for U.S. federal income tax purposes and, as a result, may be treated as having OID. The remainder of this summary assumes that the issuance of the Notes will be
treated as a “qualified reopening.”
Acquisition Premium, Amortizable Bond Premium
If a U.S. holder purchases the Notes at a “premium” equal to the excess of the U.S. holder’s purchase price over the amount
payable at maturity, then the U.S. holder generally may elect to amortize the premium over the remaining term of the Notes on a constant yield method as an offset to interest when includible in income under the U.S. holder’s regular accounting
method. Any amortized amount of the premium for a taxable year generally will be treated first as a reduction of interest on the Notes includible in the U.S. holder’s gross income in such taxable year to the extent thereof, then as a deduction
allowed in that taxable year to the extent of the U.S. holder’s prior interest inclusions on the Notes, and finally as a carryforward allowable against the U.S. holder’s future interest inclusions on the Notes. If a U.S. holder makes this
election, the U.S. holder will be required to reduce the U.S. holder’s adjusted tax basis in the Notes by the amount of the premium amortized. If a U.S. holder does not elect to amortize the premium, that premium will decrease the gain or
increase the loss the U.S. holder would otherwise recognize on disposition of the Notes. An election to amortize premium on a constant yield method will also apply to all other taxable debt instruments held or subsequently acquired by a U.S. holder
on or
S-30
after the first day of the first taxable year for which the election is made. Such an election may not be revoked without the consent of the IRS. U.S. holders should consult their own tax
advisors about this election.
Market Discount
If a U.S. holder purchases the Notes for an amount that is less than the amount payable at maturity, the amount of such difference is treated
as “market discount” for U.S. federal income tax purposes to such U.S. holder, unless such difference is considered to be de minimis (generally, 0.25% of the stated redemption price at maturity times the number of complete years to
maturity after the acquisition of the Notes), in which case market discount will be considered to be zero. Under the market discount rules of the Code, a U.S. holder is required to treat any gain on the sale, exchange, redemption or other
disposition of the Notes as ordinary income to the extent of the market discount that has not previously been included in income. In addition, a U.S. holder may be required to defer, until the maturity of the Notes or their earlier disposition in a
taxable transaction, the deduction of all or a portion of the interest expense on any indebtedness incurred or continued to purchase or carry the Notes. In general, market discount will be considered to accrue ratably during the period from the date
of the U.S. holder’s purchase of the Notes to the maturity date of the Notes, unless the U.S. holder makes an irrevocable election (on an instrument-by-instrument
basis) to accrue market discount under a constant yield method. A U.S. holder may elect to include market discount in income currently as it accrues. Such an election will also apply to all other taxable debt instruments held or subsequently
acquired by a U.S. holder on or after the first day of the first taxable year for which the election is made and may not be revoked without the consent of the IRS. A U.S. holder’s adjusted tax basis in the Notes is increased by the amount of
market discount included in the U.S. holder’s income under the election. U.S. holders whose Notes have or may have market discount should consult their own tax advisors as to the effects of these market discount rules.
Sale, Exchange, Redemption, Retirement or Other Taxable Disposition of a Note
Upon the sale, exchange, redemption, retirement or other taxable disposition of a Note, a U.S. holder generally will recognize capital gain or
loss equal to the difference between the amount realized on the sale, exchange, redemption, retirement or other taxable disposition (excluding amounts representing accrued and unpaid interest, including
pre-issuance accrued interest, as discussed above, which are treated as ordinary interest income to the extent not previously included in income) and the U.S. holder’s adjusted tax basis in the Note. A
U.S. holder’s adjusted tax basis in a Note generally will equal the U.S. holder’s initial investment in the Note (excluding any amount attributable to the pre-issuance accrued interest described
above), reduced by any previously amortized premium or increased by any market discount previously included in the U.S. holder’s income. Capital gain or loss generally will be long-term capital gain or loss if the Note was held for more than
one year. Long-term capital gains recognized by individuals and certain other non-corporate U.S. holders generally are eligible for reduced rates of taxation. The deductibility of capital losses is subject to
limitations under the Code.
Additional Tax on Net Investment Income
An additional tax of 3.8% is imposed on certain “net investment income” (or “undistributed net investment income,” in the
case of certain U.S. holders that are estates and trusts) received by certain U.S. holders with adjusted gross income above certain threshold amounts. “Net investment income” generally includes interest payments on, and gain
recognized from the sale, exchange, redemption, retirement or other taxable disposition of, the Notes, less certain deductions. U.S. holders should consult their own tax advisors regarding the effect, if any, of this tax on their ownership and
disposition of the Notes.
Backup Withholding and Information Reporting
In general, a U.S. holder will be subject to U.S. federal backup withholding tax at the applicable rate with respect to payments on the Notes
and the proceeds of a sale, exchange, redemption, retirement or other taxable
S-31
disposition of the Notes, unless the U.S. holder is an exempt recipient and appropriately establishes that exemption, or provides its taxpayer identification number to the paying agent and
certifies, under penalty of perjury, that it is not subject to backup withholding on an IRS Form W-9 and otherwise complies with the applicable requirements of the backup withholding rules. Backup withholding
is not an additional tax. The amount of any backup withholding from a payment to a U.S. holder may be allowed as a credit against such U.S. holder’s U.S. federal income tax liability and may entitle such U.S. holder to a refund, provided the
required information is furnished to the IRS in a timely manner. In addition, payments on the Notes made to, and the proceeds of a sale, exchange, redemption, retirement or other taxable disposition by, a U.S. holder generally will be subject to
information reporting requirements, unless such U.S. holder is an exempt recipient and appropriately establishes that exemption.
Taxation of Non-U.S. Holders
For purposes of this discussion, the term
“non-U.S. holder” means a beneficial owner of a Note that is neither a U.S. holder nor a partnership for U.S. federal income tax purposes.
Interest on the Notes
For purposes of
this discussion, interest does not include any pre-issuance accrued interest excluded from the purchase price of the Notes. However, to the extent any interest is subject to U.S. federal withholding
tax as described below, the applicable withholding agent may withhold such tax on all payments of interest, including payment of pre-issuance accrued interest, if the withholding agent is unable to
determine which portion of the payments is attributable to pre-issuance accrued interest.
Subject to the discussions of backup withholding and Foreign Account Tax Compliance Act, or FATCA, withholding below, payments to a non-U.S. holder of interest on the Notes generally will not be subject to U.S. federal income tax and will be exempt from withholding of U.S. federal income tax under the “portfolio interest” exemption if
such non-U.S. holder properly certifies as to such non-U.S. holder’s foreign status, as described below, and:
|
|
•
|
|
such non-U.S. holder does not own, actually or constructively, 10% or
more of the total combined voting power of all classes of our stock entitled to vote;
|
|
|
•
|
|
such non-U.S. holder is not a “controlled foreign corporation”
that is related to us (actually or constructively);
|
|
|
•
|
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such non-U.S. holder is not a bank whose receipt of interest on the Notes
is in connection with an extension of credit made pursuant to a loan agreement entered into in the ordinary course of such non-U.S. holder’s trade or business; and
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interest on the Notes is not effectively connected with such non-U.S.
holder’s conduct of a U.S. trade or business (or, in the case of an applicable income tax treaty, such interest is not attributable to a permanent establishment maintained by such non-U.S. holder in the
United States).
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The portfolio interest exemption generally applies only if a
non-U.S. holder also appropriately certifies as to such non-U.S. holder’s foreign status. A non-U.S. holder can generally
meet the certification requirement by providing a properly executed IRS Form W-8BEN or IRS Form W-8BEN-E (or applicable successor
form) to the applicable withholding agent. If a non-U.S. holder holds the Notes through a financial institution or other agent acting on such non-U.S. holder’s
behalf, such non-U.S. holder may be required to provide appropriate certifications to the agent. Such non-U.S. holder’s agent will then generally be required to
provide appropriate certifications to the applicable withholding agent, either directly or through other intermediaries.
If a non-U.S. holder cannot satisfy the requirements described above, payments of interest made to such non-U.S. holder will be subject to U.S. federal withholding tax at a 30%
rate, unless (i) such non-U.S. holder
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provides the applicable withholding agent with a properly executed IRS Form W-8BEN or IRS Form W-8BEN-E (or applicable successor form) claiming an exemption from (or a reduction of) withholding under the benefits of an income tax treaty, or (ii) the payments of such interest are effectively
connected with such non-U.S. holder’s conduct of a trade or business in the United States and such non-U.S. holder meets the certification requirements described
below under “—Income or Gain Effectively Connected with a U.S. Trade or Business”.
Disposition of the Notes
Subject to the discussions of backup withholding and FATCA withholding below, a non-U.S. holder
generally will not be subject to U.S. federal income tax on any gain realized on the sale, redemption, exchange, retirement, or other taxable disposition of a Note unless:
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the gain is effectively connected with the conduct by such non-U.S.
holder of a U.S. trade or business (and, if required by an applicable income tax treaty, such non-U.S. holder maintains a permanent establishment in the United States to which such gain is attributable); or
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such non-U.S. holder is a
non-resident alien individual who has been present in the United States for 183 days or more in the taxable year of disposition and certain other requirements are met.
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If a non-U.S. holder’s gain is described in the first bullet point above, such non-U.S. holder generally will be subject to U.S. federal income tax in the manner described under “—Income or Gain Effectively Connected with a U.S. Trade or Business” below. A non-U.S. holder described in the second bullet point above will be subject to a flat 30% (or lower applicable income tax treaty rate) U.S. federal income tax on the gain derived from the sale or other disposition,
which may be offset by certain U.S. source capital losses.
To the extent that any portion of the amount realized on a sale, redemption,
exchange, retirement or other taxable disposition of a Note is attributable to accrued but unpaid interest on the Note, this amount generally will be taxed in the same manner as described above in “—Interest on the Notes.”
Income or Gain Effectively Connected with a U.S. Trade or Business
If any interest on the Notes or gain from the sale, redemption, exchange, retirement, or other taxable disposition of the Notes is effectively
connected with a non-U.S. holder’s conduct of a U.S. trade or business (and, if required by an applicable income tax treaty, such non-U.S. holder maintains a
permanent establishment in the United States to which such interest or gain is attributable), then the interest income or gain will be subject to U.S. federal income tax at regular income tax rates generally in the same manner as if such non-U.S. holder were a U.S. holder (but without regard to the additional tax on net investment income described above). Effectively connected interest income will not be subject to U.S. federal withholding tax if a non-U.S. holder satisfies certain certification requirements by providing to the applicable withholding agent a properly executed IRS Form W-8ECI (or successor form). In
addition, if a non-U.S. holder is a corporation, that portion of such non-U.S. holder’s earnings and profits that are effectively connected with such non-U.S. holder’s conduct of a U.S. trade or business may also be subject to a “branch profits tax” at a 30% rate, unless an applicable income tax treaty provides for a lower rate. For this purpose,
interest received on a Note and gain recognized on the disposition of a Note will be included in earnings and profits if the interest or gain is effectively connected with the conduct by such non-U.S. holder
of a U.S. trade or business.
Backup Withholding and Information Reporting
Under current U.S. Treasury regulations, the amount of interest paid to a non-U.S. holder and the
amount of tax withheld, if any, from those payments must be reported annually to the IRS and each non-U.S. holder. These reporting requirements apply regardless of whether U.S. withholding tax on such payments
was reduced or eliminated by any applicable tax treaty or otherwise. Copies of the information returns reporting those payments and the amounts withheld may also be made available to the tax authorities in the country where a non-U.S. holder is a resident under the provisions of an applicable income tax treaty or agreement.
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Backup withholding generally will not apply to payments of interest to a non-U.S. holder on a Note if the certification described above in “—Interest on the Notes” is duly provided or such non-U.S. holder otherwise establishes an
exemption.
Additionally, the gross proceeds from a non-U.S. holder’s disposition of Notes
may be subject under certain circumstances to information reporting and backup withholding unless the non-U.S. holder provides an IRS Form W-8BEN or W-8BEN-E (or other applicable form) certifying that the non-U.S. holder is not a United States person or otherwise qualifies for an
exemption.
Non-U.S. holders should consult their own tax advisors regarding application of the
backup withholding rules to their particular circumstances and the availability of and procedure for obtaining an exemption from backup withholding. Backup withholding is not an additional tax and any amounts withheld under the backup withholding
rules may be credited against a non-U.S. holder’s U.S. federal income tax liability (which may result in such non-U.S. holder being entitled to a refund of U.S.
federal income tax), provided that the required information is timely provided to the IRS.
Estate Tax
A Note that is held by an individual who, at the time of death, is not a citizen or resident of the United States (as specially defined
for U.S. federal estate tax purposes) generally will not be subject to the U.S. federal estate tax, unless, at the time of death, (i) such individual directly or indirectly, actually or constructively, owns ten percent or more of the total
combined voting power of all classes of our stock entitled to vote within the meaning of Section 871(h)(3) of the Code and the Treasury Regulations thereunder or (ii) such individual’s interest in the Notes is effectively connected
with the individual’s conduct of a United States trade or business.
FATCA
Legislation commonly referred to as the “Foreign Account Tax Compliance Act,” or “FATCA,” generally imposes a 30%
withholding tax on payments of certain types of income to foreign financial institutions (“FFIs”) unless such FFIs either (i) enter into an agreement with the U.S. Treasury to report certain required information with respect to
accounts held by U.S. persons (or held by foreign entities that have U.S. persons as substantial owners) or (ii) reside in a jurisdiction that has entered into an intergovernmental agreement (“IGA”) with the United States to
collect and share such information and are in compliance with the terms of such IGA and any enabling legislation or regulations. The types of income subject to the tax include U.S. source interest (including interest on a Note) and dividends. While
existing U.S. Treasury regulations would also require withholding on payments of the gross proceeds from the sale, exchange, redemption, retirement or other taxable disposition of property of a type that can produce U.S. source interest or
dividends, the U.S. Treasury has indicated in subsequent proposed regulations its intent to eliminate this requirement. The information required to be reported includes the identity and taxpayer identification number of each account holder that is a
U.S. person and transaction activity within the holder’s account. In addition, subject to certain exceptions, this legislation also imposes a 30% withholding on payments to foreign entities that are not FFIs unless the foreign entity certifies
that it does not have a greater than 10% U.S. owner or provides the withholding agent with identifying information on each greater than 10% U.S. owner. Depending on the status of a beneficial owner and the status of the intermediary through which it
holds the Notes, a beneficial owner could be subject to this 30% withholding tax with respect to interest paid on the Notes and potentially proceeds from the sale of the Notes. Under certain circumstances, a beneficial owner might be eligible for a
refund or credit of such taxes.
Holders and beneficial owners should consult their own tax advisors regarding FATCA and whether it may be
relevant to their acquisition, ownership and disposition of the Notes.
You should consult your own tax advisor with respect to the
particular tax consequences to you of an investment in the Notes, including the possible effect of any pending legislation or proposed regulations.
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DESCRIPTION OF THE NOTES
The Notes will be issued under a base indenture, dated as of July 2, 2018, and a first supplemental indenture thereto, dated as of
July 2, 2018, between us and U.S. Bank National Association, as trustee. We refer to the indenture and the first supplemental indenture collectively as the “indenture” and to U.S. Bank National Association as the “trustee.”
The Notes offered hereby are a further issuance of the Existing Notes. The Notes offered hereby will be treated as a single series with the Existing Notes under the indenture and will have the same terms as the Existing Notes. The Notes offered
hereby will have the same CUSIP number and will be fungible and rank equally with the Existing Notes. Upon the issuance of the Notes offered hereby, the outstanding aggregate principal amount of our 6.125% notes due 2023 will be $49,500,000 (or
$51,750,000 if the overallotment option is exercised in full by the underwriters). We refer to the “Notes” and the “Existing Notes” separately within this prospectus supplement since only the Notes are being offered hereby, but
any general discussion of the terms of the Notes would also apply to the Existing Notes since they are treated as the same under the indenture.
The Notes are governed by the indenture, as required by federal law for all bonds and notes of companies that are publicly offered. An
indenture is a contract between us and the financial institution acting as trustee on your behalf, and is subject to and governed by the Trust Indenture Act of 1939, as amended. The trustee has two main roles. First, the trustee can enforce your
rights against us if we default. There are some limitations on the extent to which the trustee acts on your behalf, described in the second paragraph under “—Events of Default—Remedies if an Event of Default Occurs” below.
Second, the trustee performs certain administrative duties for us with respect to the Notes.
This section includes a summary description
of the material terms of the Notes and the indenture. Because this section is a summary, however, it does not describe every aspect of the Notes and the indenture. We urge you to read the indenture because it, and not this description, defines your
rights as a holder of the Notes. The base indenture has been attached as an exhibit to the registration statement of which this prospectus supplement is a part and the first supplemental indenture will be attached as an exhibit to a post-effective
amendment to the registration statement of which this prospectus supplement is a part, in each case, as filed with the SEC. See “Available Information” in this prospectus supplement for information on how to obtain a copy of the indenture.
General
The Notes will mature on
July 1, 2023. The principal payable at maturity will be 100% of the aggregate principal amount. The interest rate of the Notes is 6.125% per year and will be paid every January 1, April 1, July 1 and October 1, commencing on
January 1, 2020, and the regular record dates for interest payments will be every December 15, March 15, June 15, and September 15, commencing on December 15, 2019. If an interest payment date falls on a non-business day, the applicable interest payment will be made on the next business day and no additional interest will accrue as a result of such delayed payment. The initial interest period will be the
period from and including October 1, 2019, to, but excluding, the next interest payment date, and the subsequent interest periods will be the periods from and including an interest payment date to, but excluding, the next interest payment date
or the stated maturity date, as the case may be.
We will issue the Notes in denominations of $25 and integral multiples of $25 in excess
thereof. The Notes will not be subject to any sinking fund and holders of the Notes will not have the option to have the Notes repaid prior to the stated maturity date.
The indenture does not limit the amount of debt (including secured debt) that may be issued by us or our subsidiaries under the indenture or
otherwise, but does contain a covenant regarding our asset coverage that would have to be satisfied at the time of our incurrence of additional indebtedness. See “—Covenants” and “—Events of Default.” Other than as
described under “—Covenants” below, the indenture does not restrict us from paying dividends or issuing or repurchasing our other securities. Other than restrictions described
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under “—Merger or Consolidation” below, the indenture does not contain any covenants or other provisions designed to afford holders of the Notes protection in the event of a
highly leveraged transaction involving us or if our credit rating declines as the result of a takeover, recapitalization, highly leveraged transaction or similar restructuring involving us that could adversely affect your investment in the Notes.
We have the ability to issue indenture securities with terms different from the Notes and, without the consent of the holders of the
Notes, to reopen the Notes and issue additional Notes.
Covenants
In addition to any other covenants described in this prospectus supplement and the accompanying prospectus, as well as standard covenants
relating to payment of principal and interest, maintaining an office where payments may be made or securities can be surrendered for payment and related matters, the following covenants will apply to the Notes:
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We agree that for the period of time during which Notes are outstanding, we will not violate
Section 18(a)(1)(A) as modified by such provisions of Section 61(a) of the 1940 Act as may be applicable to the Company from time to time or any successor provisions, whether or not we continue to be subject to such provisions of the 1940
Act, but giving effect, in either case, to any exemptive relief granted to us by the SEC. Currently, these provisions generally prohibit us from incurring additional borrowings, including through the issuance of additional debt securities, unless
our asset coverage, as defined in the 1940 Act, equals at least 150% after such borrowings. See “Risk Factors—Regulations governing our operation as a BDC affect our ability to, and the way in which we raise additional capital. As a BDC,
the necessity of raising additional capital may expose us to risks, including the typical risks associated with leverage” in the accompanying prospectus;
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We agree that for the period of time during which Notes are outstanding, the Company will not declare any
dividend (except a dividend payable in stock of the issuer), or declare any other distribution, upon a class of the capital stock of the Company, or purchase any such capital stock, unless, in every such case, at the time of the declaration of any
such dividend or distribution, or at the time of any such purchase, the Company has an asset coverage (as defined in the 1940 Act) of at least the threshold specified in Section 18(a)(1)(B) as modified by such provisions of Section 61(a)
of the 1940 Act as may be applicable to the Company from time to time or any successor provisions thereto of the 1940 Act, as such obligation may be amended or superseded, after deducting the amount of such dividend, distribution or purchase price,
as the case may be, and in each case giving effect to (i) any exemptive relief granted to the Company by the Commission, and (ii) any SEC no-action relief granted by the Commission to another BDC (or
to the Company if it determines to seek such similar no-action or other relief) permitting the BDC to declare any cash dividend or distribution notwithstanding the prohibition contained in
Section 18(a)(1)(B) as modified by such provisions of Section 61(a) of the 1940 Act as may be applicable to the Company from time to time, as such obligation may be amended or superseded, in order to maintain such BDC’s status as a
regulated investment company under Subchapter M of the Code; and
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If, at any time, we are not subject to the reporting requirements of Sections 13 or 15(d) of the Exchange Act to
file any periodic reports with the SEC, we agree to furnish to holders of the Notes and the trustee, for the period of time during which the Notes are outstanding, our audited annual consolidated financial statements, within 90 days of our fiscal
year end, and unaudited interim consolidated financial statements, within 45 days of our fiscal quarter end (other than our fourth fiscal quarter). All such financial statements will be prepared, in all material respects, in accordance with
applicable U.S. GAAP.
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Optional Redemption
The Notes may be redeemed in whole or in part at any time or from time to time at our option on or after July 1, 2020, upon not less than
30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount of the Notes to be redeemed plus accrued and unpaid interest payments otherwise
payable thereon for the then-current quarterly interest period accrued to, but excluding, the date fixed for redemption.
You may be
prevented from exchanging or transferring the Notes when they are subject to redemption. In case any Notes are to be redeemed in part only, the redemption notice will provide that, upon surrender of such Note, you will receive, without a charge, a
new Note or Notes of authorized denominations representing the principal amount of your remaining unredeemed Notes. Any exercise of our option to redeem the Notes will be done in compliance with the 1940 Act, to the extent applicable.
If we redeem only some of the Notes, the trustee or, with respect to global securities, DTC, will determine the method for selection of the
particular Notes to be redeemed, in accordance with the indenture and the 1940 Act, to the extent applicable, and in accordance with the rules of any national securities exchange or quotation system on which the Notes are listed. Unless we default
in payment of the redemption price, on and after the date of redemption, interest will cease to accrue on the Notes called for redemption.
Global
Securities
Each Note will be issued in book-entry form and represented by a global security that we deposit with and register in the
name of DTC or its nominee. A global security may not be transferred to or registered in the name of anyone other than the depositary or its nominee, unless special termination situations arise. As a result of these arrangements, the depositary, or
its nominee, will be the sole registered owner and holder of all the Notes represented by a global security, and investors will be permitted to own only beneficial interests in a global security. For more information about these arrangements, see
“—Book-Entry Procedures” below.
Termination of a Global Security
If a global security is terminated for any reason, interests in it will be exchanged for certificates in
non-book-entry form (certificated securities). After that exchange, the choice of whether to hold the certificated Notes directly or in street name will be up to the investor. Investors must consult their own
banks or brokers to find out how to have their interests in a global security transferred on termination to their own names, so that they will be holders.
Conversion and Exchange
The Notes are
not convertible into or exchangeable for other securities.
Payment and Paying Agents
We will pay interest to the person listed in the trustee’s records as the owner of the Notes at the close of business on a particular day
in advance of each due date for interest, even if that person no longer owns the Note on the interest due date. That day, usually about two weeks in advance of the interest due date, is called the “record date.” Because we will pay all the
interest for an interest period to the holders on the record date, holders buying and selling the Notes must work out between themselves the appropriate purchase price. The most common manner is to adjust the sales price of the Notes to prorate
interest fairly between buyer and seller based on their respective ownership periods within the particular interest period. This prorated interest amount is called “accrued interest.”
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Payments on Global Securities
We will make payments on the Notes so long as they are represented by a global security in accordance with the applicable policies of the
depositary as in effect from time to time. Under those policies, we will make payments directly to the depositary, or its nominee, and not to any indirect holders who own beneficial interests in the global security. An indirect holder’s right
to those payments will be governed by the rules and practices of the depositary and its participants, as described under “—Book-Entry Procedures” below.
Payments on Certificated Securities
In
the event the Notes become represented by certificated securities, we will make payments on the Notes as follows. We will pay interest that is due on an interest payment date to the holder of the Notes as shown on the trustee’s records as of
the close of business on the regular record date. We will make all payments of principal and premium, if any, by check at the office of the applicable trustee in New York, New York and/or at other offices that may be specified in the indenture or a
notice to holders against surrender of the Note.
Alternatively, if the holder asks us to do so, we will pay any amount that becomes due
on the debt security by wire transfer of immediately available funds to an account at a bank in New York City, on the due date. To request payment by wire, the holder must give the applicable trustee or other paying agent appropriate transfer
instructions at least 15 business days before the requested wire payment is due. In the case of any interest payment due on an interest payment date, the instructions must be given by the person who is the holder on the relevant regular record date.
Any wire instructions, once properly given, will remain in effect unless and until new instructions are given in the manner described above.
Payment
When Offices Are Closed
If any payment is due on the Notes on a day that is not a business day, we will make the payment on the next
day that is a business day. Payments made on the next business day in this situation will be treated under the indenture as if they were made on the original due date. Such payment will not result in a default under the Notes or the indenture, and
no interest will accrue on the payment amount from the original due date to the next day that is a business day.
Book-entry and other
indirect holders should consult their banks or brokers for information on how they will receive payments on the Notes.
Events of Default
You will have rights if an Event of Default occurs in respect of the Notes and the Event of Default is not cured, as described later in this
subsection.
The term “Event of Default” in respect of the Notes means any of the following:
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We do not pay the principal of any Note when due and payable at maturity;
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We do not pay interest on any Note when due and payable, and such default is not cured within 30 days of its due
date;
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We remain in breach of any other covenant in respect of the Notes for 60 days after we receive a written notice
of default stating we are in breach (the notice must be sent by either the trustee or holders of at least 25% of the principal amount of the outstanding Notes);
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We file for bankruptcy or certain other events of bankruptcy, insolvency or reorganization occur and remain
undischarged or unstayed for a period of 60 days; or
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On the last business day of each of twenty-four consecutive calendar months, the Notes have an asset coverage (as
such term is defined in the 1940 Act) of less than 100%, giving effect to any exemptive relief granted to us by the SEC.
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An Event of Default for the Notes may, but does not necessarily, constitute an Event of Default for any other series of debt securities issued
under the same or any other indenture. The trustee may withhold notice to the holders of the Notes of any default, except in the payment of principal or interest, if it in good faith considers the withholding of notice to be in the best interests of
the holders.
Remedies if an Event of Default Occurs
If an Event of Default has occurred and is continuing, the trustee or the holders of not less than 25% in principal amount of the Notes may
declare the entire principal amount of all the Notes to be due and immediately payable, but this does not entitle any holder of Notes to any redemption payout or redemption premium. This is called a declaration of acceleration of maturity. In
certain circumstances, a declaration of acceleration of maturity may be canceled by the holders of a majority in principal amount of the Notes if (1) we have deposited with the trustee all amounts due and owing with respect to the Notes (other
than principal or any payment that has become due solely by reason of such acceleration) and certain other amounts, and (2) any other Events of Default have been cured or waived.
Except in cases of default, where the trustee has some special duties, the trustee is not required to take any action under the indenture at
the request of any holders unless the holders offer the trustee protection from expenses and liability reasonably satisfactory to it (called an “indemnity”). If indemnity reasonably satisfactory to the trustee is provided, the holders of a
majority in principal amount of the Notes may direct the time, method and place of conducting any lawsuit or other formal legal action seeking any remedy available to the trustee. The trustee may refuse to follow those directions in certain
circumstances. No delay or omission in exercising any right or remedy will be treated as a waiver of that right, remedy or Event of Default.
Before you are allowed to bypass the trustee and bring your own lawsuit or other formal legal action or take other steps to enforce your
rights or protect your interests relating to the Notes, the following must occur:
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You must give the trustee written notice that an Event of Default has occurred and remains uncured;
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The holders of at least 25% in principal amount of all the Notes must make a written request that the trustee
take action because of the default and must offer the trustee indemnity, security, or both, reasonably satisfactory to it against the cost and other liabilities of taking that action;
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The trustee must not have taken action for 60 days after receipt of the above notice and offer of indemnity
and/or security; and
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The holders of a majority in principal amount of the Notes must not have given the trustee a direction
inconsistent with the above notice during that 60-day period.
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However, you are
entitled at any time to bring a lawsuit for the payment of money due on your Notes on or after the due date.
Book-entry and other
indirect holders should consult their banks or brokers for information on how to give notice or direction to or make a request of the trustee and how to declare or cancel an acceleration of maturity.
Each year, we will furnish to the trustee a written statement of certain of our officers certifying that to their knowledge we are in
compliance with the indenture and the Notes, or else specifying any default.
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Waiver of Default
The holders of a majority in principal amount of the Notes may waive any past defaults other than a default:
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in the payment of principal (or premium, if any) or interest; or
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in respect of a covenant that cannot be modified or amended without the consent of each holder of the Notes.
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Merger or Consolidation
Under the terms of the indenture, we are generally permitted to consolidate or merge with another entity. We are also permitted to sell all or
substantially all of our assets to another entity. However, we may not take any of these actions unless all the following conditions are met:
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where we merge out of existence or convey or transfer our assets substantially as an entirety, the resulting
entity must agree to be legally responsible for our obligations under the Notes;
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immediately after giving effect to the transaction, no default or Event of Default shall have occurred and be
continuing; and
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we must deliver certain certificates and documents to the trustee.
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Modification or Waiver
There are three
types of changes we can make to the indenture and the Notes issued thereunder:
Changes Requiring Your Approval
First, there are changes that we cannot make to your Notes without your specific approval. The following is a list of those types of changes:
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change the stated maturity of the principal of (or premium, if any, on) or any installment of principal of,
or interest on, the Notes;
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reduce any amounts due on the Notes or reduce the rate of interest on the Notes;
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reduce the amount of principal payable upon acceleration of the maturity of a Note following a default;
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change the place or currency of payment on a Note;
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impair your right to sue for payment;
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reduce the percentage of holders of Notes whose consent is needed to modify or amend the indenture; and
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reduce the percentage of holders of Notes whose consent is needed to waive compliance with certain provisions of
the indenture or to waive certain defaults or reduce the percentage of holders of Notes required to satisfy quorum or voting requirements at a meeting of holders of the Notes.
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Changes Not Requiring Approval
The
second type of change does not require any vote by the holders of the Notes. This type is limited to clarifications and certain other changes that would not adversely affect holders of the Notes in any material respect.
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Changes Requiring Majority Approval
Any other change to the indenture and the Notes would require the following approval:
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if the change affects only the Notes, it must be approved by the holders of a majority in principal amount of the
Notes; and
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if the change affects more than one series of debt securities issued under the same indenture, it must be
approved by the holders of a majority in principal amount of all of the series affected by the change, with all affected series voting together as one class for this purpose.
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In each case, the required approval must be given by written consent.
The holders of a majority in principal amount of all of the series of debt securities issued under an indenture, voting together as one class
for this purpose, may waive our compliance with some of our covenants in that indenture. However, we cannot obtain a waiver of a payment default or of any of the matters covered by the bullet points included above under “—Changes Requiring
Your Approval.”
Further Details Concerning Voting
When taking a vote, we will use the following rules to decide how much principal to attribute to the Notes:
The Notes will not be considered outstanding, and therefore not eligible to vote, if we have deposited or set aside in trust money for their
payment or redemption or if we or any affiliate of ours own any Notes. The Notes will also not be eligible to vote if they have been fully defeased as described later under “—Defeasance—Full Defeasance” below.
We will generally be entitled to set any day as a record date for the purpose of determining the holders of the Notes that are entitled to
vote or take other action under the indenture. However, the record date may not be earlier than 30 days before the date of the first solicitation of holders to vote on or take such action and not later than the date such solicitation is completed.
If we set a record date for a vote or other action to be taken by holders of the Notes, that vote or action may be taken only by persons who are holders of the Notes on the record date and must be taken within eleven months following the record
date.
Book-entry and other indirect holders should consult their banks or brokers for information on how approval may be granted or
denied if we seek to change the indenture or the Notes or request a waiver.
Satisfaction and Discharge
The indenture will be discharged and will cease to be of further effect with respect to the Notes when:
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all the Notes that have been authenticated have been delivered to the trustee for cancellation; or
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all the Notes that have not been delivered to the trustee for cancellation:
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have become due and payable, or
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will become due and payable at their stated maturity within one year, or
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•
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are to be called for redemption within one year,
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and we, in the case of the first, second and third sub-bullets above, have irrevocably deposited or caused to be
deposited with the trustee as trust funds in trust solely for the benefit of the holders of the Notes, in amounts as will be sufficient, to pay and discharge the entire indebtedness (including all principal, premium, if any, and
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interest) on such Notes delivered to the trustee for cancellation (in the case of Notes that have become due and payable on or prior to the date of such deposit) or to the stated maturity or
redemption date, as the case may be;
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we have paid or caused to be paid all other sums payable by us under the indenture with respect to the Notes; and
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we have delivered to the trustee an officers’ certificate and legal opinion, each stating that all
conditions precedent provided for in the indenture relating to the satisfaction and discharge of the indenture and the Notes have been complied with.
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Defeasance
The following provisions will
be applicable to the Notes. “Defeasance” means that, by depositing with a trustee an amount of cash and/or government securities sufficient to pay all principal and interest, if any, on the Notes when due and satisfying any additional
conditions noted below, we will be deemed to have been discharged from our obligations under the Notes. In the event of a “covenant defeasance,” upon depositing such funds and satisfying similar conditions discussed below we would be
released from certain covenants under the indenture relating to the Notes.
Covenant Defeasance
Under current U.S. federal income tax law and the indenture, we can make the deposit described below and be released from some of the
restrictive covenants in the indenture under which the Notes were issued. This is called “covenant defeasance.” In that event, you would lose the protection of those restrictive covenants but would gain the protection of having money and
government securities set aside in trust to repay your Notes. In order to achieve covenant defeasance, the following must occur:
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Since the Notes are denominated in U.S. dollars, we must deposit in trust for the benefit of all holders of the
Notes a combination of cash and U.S. government or U.S. government agency notes or bonds that will generate enough cash to make interest, principal and any other payments on the Notes on their various due dates;
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We must deliver to the trustee a legal opinion of our counsel confirming that, under current U.S. federal income
tax law, we may make the above deposit without causing you to be taxed on the Notes any differently than if we did not make the deposit;
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We must deliver to the trustee a legal opinion of our counsel stating that the above deposit does not require
registration by us under the 1940 Act, and a legal opinion and officers’ certificate stating that all conditions precedent to covenant defeasance have been complied with;
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Defeasance must not result in a breach or violation of, or result in a default under, the indenture or any of our
other material agreements or instruments; and
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No default or Event of Default with respect to the Notes shall have occurred and be continuing and no defaults or
events of default related to bankruptcy, insolvency or reorganization shall occur during the next 90 days.
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If we
accomplish covenant defeasance, you can still look to us for repayment of the Notes if there were a shortfall in the trust deposit or the trustee is prevented from making payment. In fact, if one of the remaining Events of Default occurred (such as
our bankruptcy) and the Notes became immediately due and payable, there might be a shortfall. Depending on the event causing the default, you may not be able to obtain payment of the shortfall.
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Full Defeasance
If there is a change in U.S. federal income tax law, as described below, we can legally release ourselves from all payment and other
obligations on the Notes (called “full defeasance”) if we put in place the following other arrangements for you to be repaid:
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Since the Notes are denominated in U.S. dollars, we must deposit in trust for the benefit of all holders of the
Notes a combination of money and U.S. government or U.S. government agency notes or bonds that will generate enough cash to make interest, principal and any other payments on the Notes on their various due dates;
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We must deliver to the trustee a legal opinion confirming that there has been a change in current U.S. federal
tax law or an Internal Revenue Service (“IRS”) ruling that allows us to make the above deposit without causing you to be taxed on the Notes any differently than if we did not make the deposit;
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We must deliver to the trustee a legal opinion of our counsel stating that the above deposit does not require
registration by us under the 1940 Act, and a legal opinion and officers’ certificate stating that all conditions precedent to defeasance have been complied with;
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Defeasance must not result in a breach or violation of, or constitute a default under, the indenture or any of
our other material agreements or instruments; and
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No default or Event of Default with respect to the Notes shall have occurred and be continuing and no defaults or
events of default related to bankruptcy, insolvency or reorganization shall occur during the next 90 days.
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If we ever
did accomplish full defeasance, as described above, you would have to rely solely on the trust deposit for repayment of the Notes. You could not look to us for repayment in the unlikely event of any shortfall. Conversely, the trust deposit would
most likely be protected from claims of our lenders and other creditors if we ever became bankrupt or insolvent.
Form, Exchange and Transfer of
Certificated Registered Securities
If registered Notes cease to be issued in book-entry form, they will be issued:
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only in fully registered certificated form;
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without interest coupons; and
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unless we indicate otherwise, in denominations of $25 and amounts that are multiples of $25.
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Holders may exchange their certificated securities for Notes of smaller denominations or combined into fewer Notes of
larger denominations, as long as the total principal amount is not changed and as long as the denomination is equal to or greater than $25.
Holders may exchange or transfer their certificated securities at the office of the trustee. We have appointed the trustee to act as our agent
for registering Notes in the names of holders transferring Notes. We may appoint another entity to perform these functions or perform them ourselves.
Holders will not be required to pay a service charge to transfer or exchange their certificated securities, but they may be required to pay
any tax or other governmental charge associated with the transfer or exchange. The transfer or exchange will be made only if our transfer agent is satisfied with the holder’s proof of legal ownership.
We may appoint additional transfer agents or cancel the appointment of any particular transfer agent. We may also approve a change in the
office through which any transfer agent acts.
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If any certificated securities of a particular series are redeemable and we redeem less than all
the Notes, we may block the transfer or exchange of those Notes selected for redemption during the period beginning 15 days before the day we mail the notice of redemption and ending on the day of that mailing, in order to freeze the list of holders
to prepare the mailing. We may also refuse to register transfers or exchanges of any certificated Notes selected for redemption, except that we will continue to permit transfers and exchanges of the unredeemed portion of any Note that will be
partially redeemed.
If registered Notes are issued in book-entry form, only the depositary will be entitled to transfer and exchange the
Notes as described in this subsection, since it will be the sole holder of the Notes.
Resignation of Trustee
The trustee may resign or be removed with respect to the Notes provided that a successor trustee is appointed to act with respect to the Notes.
In the event that two or more persons are acting as trustee with respect to different series of indenture securities under the indenture, each of the trustees will be a trustee of a trust separate and apart from the trust administered by any other
trustee.
Governing Law
The
indenture and the Notes will be governed by and construed in accordance with the laws of the State of New York.
Indenture Provisions—Ranking
The Notes will be our direct unsecured obligations and will rank:
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pari passu, which means equal in right of payment, with all outstanding and future unsecured,
unsubordinated indebtedness issued by us, including the Existing Notes (which have an aggregate principal amount of approximately $34.5 million, plus accrued interest, as of the offering date of the Notes);
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senior to any of our future indebtedness that expressly provides it is subordinated to the Notes;
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effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that is
initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness; and
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structurally subordinated to all existing and future indebtedness and other obligations of any of our
subsidiaries, including, without limitation, outstanding borrowings, as of October 11, 2019, under the Term Financing and the Revolving Financing of $122.0 million and $19.0 million, respectively, which are secured by the assets held at CM
SPV.
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See “Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources” in our Annual Report on Form 10-K for the year ended June 30, 2019, filed with the SEC on September 13, 2019 and incorporated by reference
herein, for a general discussion of our indebtedness.
The Trustee under the Indenture
U.S Bank National Association serves as the trustee, paying agent and security registrar under the indenture. Separately, our securities are
held by U.S. Bank National Association pursuant to a custody agreement.
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Book-Entry Procedures
The Notes will be represented by global securities that will be deposited and registered in the name of DTC or its nominee. This means that,
except in limited circumstances, you will not receive certificates for the Notes. Beneficial interests in the Notes will be represented through book-entry accounts of financial institutions acting on behalf of beneficial owners as direct and
indirect participants in DTC. Investors may elect to hold interests in the Notes through either DTC, if they are a participant, or indirectly through organizations that are participants in DTC.
The Notes will be issued as fully registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such
other name as may be requested by an authorized representative of DTC. One fully registered certificate will be issued for each issuance of the Notes, in the aggregate principal amount thereof, and will be deposited with DTC. Interests in the Notes
will trade in DTC’s Same Day Funds Settlement System, and any permitted secondary market trading activity in such Notes will, therefore, be required by DTC to be settled in immediately available funds. None of the Company, the trustee or the
paying agent will have any responsibility for the performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations.
DTC is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the
New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A
of the Exchange Act. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity, corporate and municipal debt issues, and money market instruments from over 100
countries that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic
computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and
non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. DTC is a wholly owned subsidiary of The Depository Trust & Clearing Corporation
(“DTCC”).
DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation,
all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers
and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has a Standard &
Poor’s Ratings Services’ rating of AA+. The DTC Rules applicable to its participants are on file with the SEC. More information about DTC can be found at www.dtcc.com and www.dtc.org.
Purchases of the Notes under the DTC system must be made by or through Direct Participants, which will receive a credit for the Notes on
DTC’s records. The ownership interest of each actual purchaser of each security, or the “Beneficial Owner,” is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written
confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant
through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Notes are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial
Owners will not receive certificates representing their ownership interests in the Notes, except in the event that use of the book-entry system for the Notes is discontinued.
To facilitate subsequent transfers, all Notes deposited by Direct Participants with DTC are registered in the name of DTC’s partnership
nominee, Cede & Co. or such other name as may be requested by an authorized
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representative of DTC. The deposit of the Notes with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC
has no knowledge of the actual Beneficial Owners of the Notes; DTC’s records reflect only the identity of the Direct Participants to whose accounts the Notes are credited, which may or may not be the Beneficial Owners. The Direct and Indirect
Participants will remain responsible for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other
communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to time.
Redemption notices shall be sent to DTC. If less than all of the Notes
within an issue are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.
Redemption proceeds, distributions and interest payments on the Notes will be made to Cede & Co., or such other nominee as may be
requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from us or the trustee on the payment date in accordance with
their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form
or registered in “street name,” and will be the responsibility of such Participant and not of DTC nor its nominee, the trustee, or us, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of
redemption proceeds, distributions, and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of us or the trustee, but disbursement of such payments to
Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.
DTC may discontinue providing its services as securities depository with respect to the Notes at any time by giving reasonable notice to us or
to the trustee. Under such circumstances, in the event that a successor securities depository is not obtained, certificates are required to be printed and delivered. We may decide to discontinue use of the system of book-entry-only transfers through
DTC (or a successor securities depository). In that event, certificates will be printed and delivered to DTC.
The information in this
section concerning DTC and DTC’s book-entry system has been obtained from sources that we believe to be reliable, but we take no responsibility for its accuracy.
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UNDERWRITING
Ladenburg Thalmann & Co. Inc. is acting as the representative of the underwriters for this offering. Subject to the terms and
conditions set forth in an underwriting agreement dated October 16, 2019 between us and the underwriters, we have agreed to sell to the underwriters, and the underwriters have severally agreed to purchase from us, the aggregate principal amount
of Notes indicated in the table below:
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Underwriters
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Principal Amount of Notes
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Ladenburg Thalmann & Co. Inc.
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$
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8,000,000
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BB&T Capital Markets, a division of BB&T Securities, LLC
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$
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3,500,000
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Janney Montgomery Scott LLC
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$
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3,500,000
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Total
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$
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15,000,000
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Ladenburg Thalmann & Co. Inc., BB&T Capital Markets, a division of BB&T Securities, LLC and Janney
Montgomery Scott LLC, are acting as book-running managers of this offering.
The underwriting agreement provides that the obligations of
the several underwriters are subject to certain conditions precedent such as the receipt by the underwriters of officers’ certificates and legal opinions. The underwriting agreement provides that the underwriters will purchase all of the Notes
(other than those covered by the over-allotment option described below) if they purchase any of the Notes. If an underwriter defaults, the underwriting agreement provides that, under the circumstances, the purchase commitments of the non-defaulting underwriters may be increased or the underwriting agreement may be terminated. We and our investment advisor have each agreed to indemnify the underwriters and certain of their controlling
persons against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities.
The underwriters have advised us that they currently intend to make a market in the Notes. However, the underwriters are not obligated to
do so and may discontinue any market-making activities at any time without notice. No assurance can be given as to the liquidity of the trading market for the Notes. If an active public trading market for the Notes does not develop, the market price
and liquidity of the Notes may be adversely affected.
The underwriters are offering the Notes, subject to their acceptance of the Notes
from us and subject to prior sale. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.
The underwriters have agreed to purchase the Notes from us at 96.875% of the aggregate principal amount of the Notes, which will result in
aggregate proceeds to us of $14,531,250, assuming no exercise of the underwriters’ option to purchase additional Notes, and before deducting expenses payable by us, plus accrued and unpaid interest from October 1, 2019 up to, but not
including, the date of delivery, and $16,710,938, assuming full exercise of the underwriters’ option to purchase additional Notes.
The underwriters propose to offer the Notes for sale, from time to time, in one or more negotiated transactions, at prices that may be
different than par, plus accrued and unpaid interest from October 1, 2019 up to, but not including, the date of delivery. These sales may occur at market prices prevailing at the time of sale, at prices related to such prevailing market prices
or at negotiated prices. The underwriters may effect such transactions by selling the Notes to or through dealers and such dealers may receive compensation in the form of discounts, concessions or commissions from the underwriters and/or purchasers
of Notes for whom they may act as agents or to whom they may sell as principal. The difference between the price at which the underwriters purchase Notes and the closing trading price of the Existing Notes on the date of this prospectus may be
deemed to be underwriting compensation.
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We have agreed to pay certain fees and expenses incurred by Ladenburg Thalmann & Co. Inc., as
representative to the several underwriters, in an amount up to $50,000. We estimate expenses payable by us in connection with this offering, other than the underwriting discounts and commissions referred to above, will be approximately $255,000.
Listing
The Existing Notes are
listed on The NASDAQ Global Select Market under the trading symbol “CMFNL.” We intend to list the Notes offered hereby under the same trading symbol and maintain the listing of the Notes on The NASDAQ Global Select Market.
Over-Allotment Option
We have granted to
the underwriters an option, exercisable for 30 days from the date of this prospectus supplement, to purchase from us up to an additional $2,250,000 aggregate principal amount of the Notes at the price set forth on the cover of this prospectus
supplement. The underwriters may exercise the option solely for the purpose of covering over-allotments, if any, in connection with this offering. If the underwriters exercise this overallotment option, each will be obligated, subject to the
specified conditions, to purchase a number of additional Notes proportionate to that underwriter’s principal amount reflected in the table above.
No Sales of Similar Securities
We have
agreed not to, directly or indirectly, sell, offer to sell, enter into any agreement to sell, or otherwise dispose of, any debt securities or securities convertible into such debt securities of the Company for a period of 90 days after the date of
this prospectus supplement without first obtaining the written consent of Ladenburg Thalmann & Co. Inc.
Stabilization
The underwriters have advised us that, pursuant to Regulation M under the Exchange Act, certain persons participating in the offering may
engage in transactions including over-allotment, covering transactions and stabilizing transactions, which may have the effect of stabilizing or maintaining the market price of the Notes at a level above that which might otherwise prevail in the
open market. Over-allotment involves syndicate sales of securities in excess of the aggregate principal amount of securities to be purchased by the underwriters in the offering, which creates a short position for the underwriters. Covering
transactions involve purchases of the securities in the open market after the distribution has been completed in order to cover short positions.
A stabilizing bid is a bid for the purchase of Notes on behalf of the underwriters for the purpose of fixing or maintaining the price of the
Notes. A syndicate covering transaction is the bid for or the purchase of Notes on behalf of the underwriters to reduce a short position incurred by the underwriters in connection with the offering. Similar to other purchase transactions, the
underwriter’s purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of the Notes or preventing or retarding a decline in the market price of the Notes. As a result, the price of the Notes
may be higher than the price that might otherwise exist in the open market. A penalty bid is an arrangement permitting the underwriters to reclaim the selling concession otherwise accruing to a syndicate member in connection with the offering if the
Notes originally sold by such syndicate member are purchased in a syndicate covering transaction and therefore have not been effectively placed by such syndicate member. The underwriters may conduct these transactions on The NASDAQ Global Select
Market, in the over-the-counter market or otherwise.
Neither we, nor any of the underwriters makes any representation or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Notes. The underwriters are not obligated to engage in these activities and, if commenced, any of the activities may be discontinued at any time.
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Electronic Distribution
A prospectus in electronic format may be made available by e-mail or on the web
sites or through online services maintained by one or more of the underwriters and/or selling group members participating in this offering, or by their affiliates. In those cases, prospective investors may view offering terms online and, depending
upon the particular underwriter or selling group member, prospective investors may be allowed to place orders online. The underwriters may agree with us to allocate a limited principal amount of the Notes for sale to online brokerage account
holders. Any such allocation for online distributions will be made by the underwriters on the same basis as other allocations. Other than the prospectus in electronic format, information on the underwriters’ web sites and any information
contained in any other web site maintained by any of the underwriters or selling group members is not part of this prospectus supplement or the registration statement of which this prospectus supplement is a part, has not been approved and/or
endorsed by us or the underwriters and should not be relied on by investors.
Other Relationships
Certain of the underwriters and their affiliates have provided in the past and may provide from time to time in the future in the ordinary
course of their business certain commercial banking, financial advisory, investment banking and other services to us, our portfolio companies or our affiliates for which they have received or will be entitled to receive separate fees. In particular,
the underwriters or their affiliates may execute transactions with us, on behalf of us, any of our portfolio companies or our affiliates. In addition, the underwriters or their affiliates may act as arrangers, underwriters or placement agents for
companies whose securities are sold to or whose loans are syndicated to us, our portfolio companies or our affiliates.
The underwriters
or their affiliates may also trade in our securities, securities of our portfolio companies or other financial instruments related thereto for their own accounts or for the account of others and may extend loans or financing directly or through
derivative transactions to us, any of our portfolio companies or our affiliates.
After the date of this prospectus supplement, the
underwriters and their affiliates may from time to time obtain information regarding specific portfolio companies or us that may not be available to the general public. Any such information is obtained by the underwriters and their affiliates in the
ordinary course of their business and not in connection with the offering of the Notes. In addition, after the offering period for the sale of the Notes, the underwriters or their affiliates may develop analyses or opinions related to us or our
portfolio companies and buy or sell interests in one or more of our portfolio companies on behalf of their proprietary or client accounts and may engage in competitive activities. There is no obligation on behalf of these parties to disclose their
respective analyses, opinions or purchase and sale activities regarding any portfolio company or regarding us to holders of the Notes or any other persons.
In the ordinary course of their various business activities, the underwriters and their respective affiliates may make or hold a broad array
of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers. Such investments and securities
activities may involve securities and/or instruments of ours or our affiliates. Certain of the underwriters and their affiliates that may have a lending relationship with us may routinely hedge their credit exposure to us consistent with their
customary risk management policies. Typically, such underwriters and their affiliates would hedge such exposure by entering into transactions that consist of either the purchase of credit default swaps or the creation of short positions in our
securities, including potentially the Notes offered by this prospectus supplement and the accompanying prospectus. Any such short positions could adversely affect future trading prices of the Notes offered hereby. The underwriters and their
affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that they acquire, long and/or short positions in
such securities and instruments.
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The principal business address of the underwriters is: Ladenburg Thalmann & Co. Inc., 277
Park Avenue, 26th Floor, New York, New York 10172; BB&T Capital Markets, a division of BB&T Securities, LLC, 901 East Byrd Street, 3rd Floor, Richmond, VA 23219; and Janney Montgomery Scott LLC, 1717 Arch Street, Philadelphia, PA 19103.
Other Jurisdictions
The Notes
offered by this prospectus supplement and the accompanying prospectus may not be offered or sold, directly or indirectly, nor may this prospectus supplement, the accompanying prospectus or any other offering material or advertisements in connection
with the offer and sale of any such Notes be distributed or published, in any jurisdiction except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this
prospectus supplement and the accompanying prospectus come are advised to inform themselves about and to observe any restriction relating to the offering and the distribution of this prospectus supplement and the accompanying prospectus. This
prospectus supplement and the accompanying prospectus do not constitute an offer to sell or a solicitation of an offer to buy the Notes offered by this prospectus supplement and the accompanying prospectus in any jurisdiction in which such an offer
or a solicitation is unlawful.
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LEGAL MATTERS
Certain legal matters regarding the securities offered by this prospectus supplement and the accompanying prospectus will be passed upon for
us by Eversheds Sutherland (US) LLP, Washington, D.C. Certain legal matters in connection with an offering will be passed upon for the underwriters by Dechert LLP.
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INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
RSM US LLP, our independent registered public accounting firm, has audited our consolidated financial statements as of June 30, 2019 and
2018, and for the years ended June 30, 2019 and 2018, as included in this prospectus supplement. RSM US LLP’s principal business address is 4 Times Square, 151 West 42nd Street, 19th Floor, New York, NY 10036.
Ernst & Young LLP, our former independent registered public accounting firm, has audited our consolidated financial statements as of
June 30, 2017, and for the year ended June 30, 2017, as included in this prospectus supplement. Ernst & Young LLP’s principal business address is 5 Times Square, New York, New York 10036.
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INCORPORATION BY REFERENCE
This prospectus supplement is part of a registration statement that we have filed with the SEC. Pursuant to the Small Business Credit
Availability Act, we are allowed to “incorporate by reference” the information that we file with the SEC, which means that we can disclose important information to you by referring you to such information incorporated by reference. The
information incorporated by reference is considered to comprise a part of this prospectus supplement. Any reports filed by us with the SEC subsequent to the date of this prospectus supplement will automatically update and, where applicable,
supersede any information contained in this prospectus supplement or incorporated by reference herein.
We incorporate by reference into
this prospectus supplement our filings listed below and any future filings that we may file with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, subsequent to the date of this prospectus supplement until all of the
securities offered by this prospectus supplement and the accompanying prospectus have been sold or we otherwise terminate the offering of these securities; provided, however, that information “furnished” under Item 2.02 or
Item 7.01 of Form 8-K or other information “furnished” to the SEC that is not deemed filed is not incorporated by reference in this prospectus supplement.
This prospectus supplement incorporates by reference the documents set forth below that have been previously filed with the SEC:
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our Annual Report on Form 10-K for the fiscal year ended
June 30, 2019, filed with the SEC on September 13, 2019;
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our Definitive Proxy Statement on Schedule 14A filed with the SEC on July 12, 2019;
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our Definitive Proxy Statement on Schedule 14A filed with the SEC on October 9, 2019; and
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our Current Reports on Form 8-K (other than information furnished rather than filed) filed with the SEC on
July 1, 2019, August 28, 2019 and September 3, 2019.
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To obtain copies of this filing, see
“Available Information.”
S-53
AVAILABLE INFORMATION
We maintain a website at www.icmbdc.com and make all of our annual, quarterly and current reports, proxy statements and other
publicly filed information available, free of charge, on or through our website. Information contained on our website is not incorporated into this prospectus, and you should not consider information on our website to be part of this prospectus. You
may also obtain such information by contacting us in writing at 65 East 55th Street, 15th Floor, New York, NY 10022, Attention:
Investor Relations. The SEC also maintains a website that contains reports, proxy statements and other information regarding registrants, including us, that file such information electronically with the SEC. The address of the SEC’s
website is http://www.sec.gov. Information contained on our website or on the SEC’s website about us is not incorporated into this prospectus supplement and the accompanying prospectus and you should not consider information
contained on our website or on the SEC’s website to be part of this prospectus supplement and the accompanying prospectus.
S-54
$500,000,000
CM Finance Inc
Common
Stock
Preferred Stock
Debt Securities
Warrants
Subscription Rights
We may offer,
from time to time in one or more offerings, up to $500,000,000 of our common stock, preferred stock, debt securities, subscription rights or warrants to purchase common stock, preferred stock or debt securities, which we refer to, collectively, as
the “securities.” Our securities may be offered at prices and on terms to be disclosed in one or more supplements to this prospectus. In addition, this prospectus relates to 6,000,004 shares of our common stock that may be sold by the
selling stockholders identified under “Selling Stockholders.” You should read this prospectus and the applicable prospectus supplement carefully before you invest in our securities.
Our securities may be offered directly to one or more purchasers through agents designated from time to time by us, or to or through
underwriters or dealers. The prospectus supplement relating to the offering will identify any agents or underwriters involved in the sale of our securities, and will disclose any applicable purchase price, fee, commission or discount arrangement
between us and our agents or underwriters or among our underwriters or the basis upon which such amount may be calculated. See “Plan of Distribution.” We may not sell any of our securities through agents, underwriters or dealers without
delivery of a prospectus supplement describing the method and terms of the offering of such securities.
We are a specialty finance company
that invests primarily in the debt of U.S. middle-market companies. We seek to invest primarily in middle-market companies that have annual revenues of at least $50 million and earnings before interest, taxes, depreciation and amortization
(“EBITDA”) of at least $15 million. Our primary investment objective is to maximize the total return to stockholders in the form of current income and capital appreciation by investing in debt and related equity investments of
privately held middle-market companies. The companies in which we invest typically are highly leveraged, and, in most cases, our investments in such companies are not rated by national rating agencies. If such investments were rated, we
believe that they would likely receive a rating which is often referred to as “junk.”
A majority of our debt portfolio
consists of debt securities for which issuers were not required to make principal payments until the maturity of such debt securities, which could result in a substantial loss to us if such issuers are unable to refinance or repay their debt at
maturity. In addition, a majority of our debt investments had variable interest rates that reset periodically based on benchmarks such as LIBOR. As a result, significant increases in such benchmarks in the future may make it more difficult for these
borrowers to service their obligations under the debt investments that we hold.
On April 5, 2019 the last reported sale price of our common
stock on the NASDAQ Global Select Market was $7.35. We are required to determine the net asset value per share of our common stock on a quarterly basis. On December 31, 2018, our net asset value per share was $11.49.
Shares of closed-end investment companies, including business development companies, frequently trade at a discount to their net asset value.
If our shares trade at a discount to our net asset value, it will likely increase the risk of loss for purchasers in this offering. In this regard, at a meeting initially convened on November 6, 2018 and reconvened on December 18, 2018, our
stockholders voted to allow us to issue common stock at a price below net asset value per share for the period ending on the earlier of the one year anniversary of the date of our 2017 Annual Meeting of Stockholders and the date of our 2018 Annual
Meeting of Stockholders, which we expect to be held in November 2019. Our stockholders did not specify a maximum discount below net asset value at which we are able to issue our common stock, although the number of shares sold in each offering may
not exceed 25% of our outstanding common stock immediately prior to such sale. In addition, we cannot issue shares of our common stock below net asset value unless our board of directors determines that it would be in our and our stockholders’
best interests to do so. Sales of common stock at prices below net asset value per share dilute the interests of existing stockholders, have the effect of reducing our net asset value per share and may reduce our market price per share. In addition,
continuous sales of common stock below net asset value may have a negative impact on total returns and could have a negative impact on the market price of our shares of common stock. See “Sales of Common Stock Below Net Asset Value.”
Investing in our securities may be speculative and involve a high degree of risk. Before buying any shares, you should read the discussion
of the material risks of investing in our common stock in “Risk Factors” beginning on page 22 of this prospectus.
This prospectus, and the accompanying prospectus supplement, contain important information you should know before investing in our common stock.
Please read this prospectus and the accompanying prospectus supplement before you invest and keep it for future reference. We file annual, quarterly and current reports, proxy statements and other information about us with the Securities and
Exchange Commission, or SEC. The SEC also maintains a website at http://www.sec.gov that contains such information. This information is also available free of charge by contacting us at 65 East
55th Street, 15th Floor, New York, NY 10022, or by calling us at (212) 257-5199 or on our website at http://cmfn-inc.com. Information
contained on our website is not incorporated by reference into this prospectus, and you should not consider that information to be part of this prospectus or the accompanying prospectus supplement.
The Securities and Exchange Commission has not approved or disapproved of these securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is April 10, 2019
TABLE OF CONTENTS
i
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we have filed with the SEC using the “shelf” registration process. Under
the shelf registration process, we may offer, from time to time, up to $500,000,000 of our securities on terms to be determined at the time of the offering. In addition, this prospectus relates to 6,000,004 shares of our common stock that may be
sold by the selling stockholders identified under “Selling Stockholders.” We will not receive any proceeds from the sale of common stock by any of the selling stockholders. This prospectus provides you with a general description of the
securities that we may offer. Each time we use this prospectus to offer securities, we will provide a prospectus supplement that will contain specific information about the terms of that offering. The prospectus supplement may also add, update or
change information contained in this prospectus. Please carefully read this prospectus and any accompanying prospectus supplement together with the additional information described under “Risk Factors”, “Available Information”
and “Incorporation by Reference” before you make an investment decision.
No dealer, salesperson or other person is authorized
to give any information or to represent anything not contained in this prospectus or any accompanying supplement to this prospectus. You must not rely on any unauthorized information or representations not contained in this prospectus or any
accompanying prospectus supplement as if we had authorized it. This prospectus and any accompanying prospectus supplement do not constitute an offer to sell or a solicitation of any offer to buy any security other than the registered securities to
which they relate, nor do they constitute an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction to any person to whom it is unlawful to make such an offer or solicitation in such jurisdiction. The information
contained in this prospectus and any accompanying prospectus supplement is accurate as of the dates on their covers. Our financial condition, results of operations and prospects may have changed since that date. To the extent required by law, we
will amend or supplement the information contained in this prospectus and any accompanying prospectus supplement to reflect any material changes to such information subsequent to the date of the prospectus and any accompanying prospectus supplement
and prior to the completion of any offering pursuant to the prospectus and any accompanying prospectus supplement.
ii
PROSPECTUS SUMMARY
This summary highlights some of the information in this prospectus. It is not complete and may not contain all of the information that you
may want to consider. You should read the more detailed information set forth under “Risk Factors” and the other information included in this prospectus carefully.
We were formed in February 2012 and commenced operations in March 2012 as CM Finance LLC, a Maryland limited liability company. Immediately
prior to the pricing of our initial public offering, CM Finance LLC was merged with and into CM Finance Inc, a Maryland corporation (the “CM Finance Merger”), that is an externally managed, non-diversified closed-end management investment
company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). Except as otherwise indicated, the terms “we,” “us,”
“our” and “CM Finance” refer to CM Finance LLC prior to the CM Finance Merger and CM Finance Inc after the CM Finance Merger; and “CM Investment Partners” and the “Adviser” refer to our investment adviser and
administrator, CM Investment Partners LLC.
We are a specialty finance company that invests primarily in the debt of U.S.
middle-market companies, which we generally define as those companies that have an enterprise value that represents the aggregate of debt value and equity value of the entity of less than $750 million. We are externally managed by CM Investment
Partners. The Adviser is led by Michael C. Mauer and Christopher E. Jansen, who together have over 50 years of experience in the leveraged debt markets. Our primary investment objective is to maximize total return to stockholders in the form of
current income and capital appreciation by investing in debt and related equity of privately held middle-market companies.
We seek to
invest primarily in middle-market companies that have annual revenues of at least $50 million and EBITDA of at least $15 million. We focus on companies with leading market positions, significant asset or franchise values, strong free cash flow and
experienced senior management teams, with emphasis on companies with high-quality sponsors. Our investments typically range in size from $5 million to $25 million. We expect that our portfolio companies will use our capital for organic growth,
acquisitions, market or product expansion, refinancings, and/or recapitalizations. We invest, and intend to continue to invest, in unitranche loans and standalone second and first lien loans, with an emphasis on floating rate debt. Unitranche loans
are loans structured as first lien loans with certain characteristics of mezzanine loan risk in one security. We also selectively invest in unsecured debt, bonds and in the equity of portfolio companies through warrants and other instruments, in
most cases taking such upside participation interests as part of a broader investment relationship.
We strive to maintain a strong focus
on credit quality, investment discipline and investment selectivity. We believe that investing in the debt of private middle-market companies generally provides a more attractive relative value proposition than investing in broadly syndicated debt
due to the conservative capital structures and superior default and loss characteristics typically associated with middle-market companies. We believe that, because private middle-market companies have limited access to capital providers, debt
investments in these companies typically carry above-market interest rates and include more favorable protections, resulting in attractive risk-adjusted returns across credit cycles while better preserving capital. The companies in which we invest
typically are highly leveraged, and, in most cases, our investments in such companies are not rated by national rating agencies. If such investments were rated, we believe that they would likely receive a rating which is often referred to as
“junk” and should be considered speculative.
We have, through CM Finance SPV Ltd. (“CM SPV”), our wholly owned
subsidiary, entered into a $102.0 million term secured financing facility (the “Term Financing”), due December 5, 2020 with UBS AG, London Branch (together with its affiliates “UBS”). The Term Financing is collateralized by a
portion of the debt investments in our portfolio. Borrowings under the Term Financing bear interest (i) at a rate per annum equal to
1
one-month LIBOR plus 2.75% through December 4, 2018, and (ii) at a rate per annum equal to one-month LIBOR plus 2.55% from December 5, 2018 through December 5, 2020. We also incur an annual fee
of approximately 1% of the outstanding borrowings under the Term Financing.
On November 20, 2017, we entered into a $50 million revolving
financing facility with UBS (the “2017 UBS Revolving Financing”, and together with the Term Financing, the “UBS Financing Facility”). Borrowings under the 2017 UBS Revolving Financing generally bear interest at a rate per annum
equal to one-month LIBOR plus 3.55%. We pay a fee on any undrawn amounts of 2.50% per annum; provided that if 50% or less of the 2017 UBS Revolving Financing is drawn, the fee will be 2.75% per annum. Any amounts borrowed under the 2017 UBS
Revolving Financing will mature, and all accrued and unpaid interest will be due and payable, on December 5, 2019. We refer to the Term Financing, the 2017 UBS Revolving Financing and our prior revolving credit facility with Citibank, N.A.,
discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financing Facilities,” together as the “Financing Facilities.”
On July 2, 2018, we closed the public offering of $30 million in aggregate principal amount of 6.125% notes due 2023 (the
“Notes”). On July 12, 2018, the underwriters exercised their over-allotment option to purchase an additional $4.5 million in aggregate principal amount of the Notes. The Notes will mature on July 1, 2023 and bear interest at
a rate of 6.125%.
The Notes may be redeemed in whole or in part at any time or from time to time at our option on or after July 1,
2020. Interest on the Notes is payable quarterly on January 1, April 1, July 1 and October 1 of each year. The Notes are listed on the NASDAQ Global Select Market under the trading symbol “CMFNL.” We may from time to
time repurchase Notes in accordance with the 1940 Act and the rules promulgated thereunder. As of December 31, 2018, the outstanding principal balance of the Notes was approximately $34.5 million. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Notes due 2023.”
On May 2, 2018, our board of directors,
including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of the board, approved the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act, as amended by the Small
Business Credit Availability Act. As a result, our asset coverage requirements for senior securities will be changed from 200% to 150%, effective as of May 2, 2019.
Portfolio Composition
As of December 31,
2018, our portfolio consisted of debt and equity investments in 29 portfolio companies with a fair value of $283.3 million. As of December 31, 2018, our portfolio consisted of 63.7% first lien investments, 31.7% second lien investments, 4.1%
unitranche first lien debt investments, and 0.5% equity securities, warrants and other positions. At December 31, 2018, the weighted average total yield of debt and income producing securities at amortized cost (which includes interest income and
amortization of fees and discounts) was 11.08% and the weighted average total yield on investments at amortized cost (which includes interest income and amortization of fees and discounts) was 10.83%. The weighted average total yield was computed
using an internal rate of return calculation of our debt investments based on contractual cash flows, including interest and amortization payments, and, for floating rate investments, the spot London Interbank Offered Rate (“LIBOR”), as of
December 31, 2018 of all of our debt investments. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. The weighted average total yield of our debt investments is not the same as a return on
investment for our stockholders but, rather, relates to a portion of our investment portfolio and is calculated before payment of all of our fees and expenses, including any sales load paid in connection with an offering of our securities. There can
be no assurance that the weighted average total yield will remain at its current level.
2
The industry composition of our portfolio at fair value at December 31, 2018 and June 30,
2018, respectively, was as follows:
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Percentage of
Total Portfolio
at December 31, 2018
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Percentage of
Total Portfolio
at June 30, 2018
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Professional Services
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15.01
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%
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13.98
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%
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Media
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12.77
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10.88
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Energy Equipment & Services
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10.57
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10.97
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Oil, Gas & Consumable Fuels
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8.48
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8.24
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Diversified Telecommunication Services
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7.74
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8.49
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Construction and Engineering
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7.73
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—
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Hotels, Restaurants & Leisure
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4.31
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11.36
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Commercial Services & Supplies
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4.24
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10.76
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Internet Software & Services
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3.86
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—
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IT Services
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3.86
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9.54
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Distributors
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3.49
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4.25
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Construction Materials
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3.48
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—
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Auto Components
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3.20
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—
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Technology Hardware, Storage and Peripherals
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3.11
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—
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Health Care Equipment & Supplies
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2.63
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2.55
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Containers & Packaging
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2.47
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—
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Chemicals
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1.96
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2.73
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Retail
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0.73
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—
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Wireless Telecommunication Services
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0.36
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0.16
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Health Care Providers & Services
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—
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3.85
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Electronic Equipment
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—
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2.24
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|
|
|
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100.00
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%
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100.00
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%
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CM Investment Partners LLC
CM Investment Partners, our external investment adviser, was formed in July 2013 and is a registered investment adviser under the Investment
Advisers Act of 1940 (the “Advisers Act”). The Adviser is responsible for sourcing investment opportunities, conducting industry research, performing diligence on potential investments, structuring our investments and monitoring our
portfolio companies on an ongoing basis. The Adviser is led by its Co-Chief Investment Officers, Michael C. Mauer and Christopher E. Jansen. Mr. Mauer also serves as the Chairman of our board of directors and our Chief Executive Officer, and
Mr. Jansen also serves as our President and Secretary and as a member of our board of directors. Mr. Mauer was formerly Global Co-Head of Leveraged Finance and Global Co-Head of Fixed Income Currency and Commodity Distribution at Citigroup
Inc. and a senior member of its credit committee responsible for all underwriting and principal commitments of leveraged finance capital worldwide. Mr. Jansen was a founding Managing Partner and Senior Portfolio Manager for Stanfield Capital
Partners and had a leading role in planning its strategic direction. At Stanfield, Mr. Jansen was responsible for the management of 15 different portfolios aggregating in excess of $7 billion in assets consisting of large corporate loans,
middle-market loans, second lien loans, high yield bonds and structured finance securities.
The Adviser’s investment team, led by
Messrs. Mauer and Jansen, is supported by three additional investment professionals, who, together with Messrs. Mauer and Jansen, we refer to as the “Investment Team.” The members of the Investment Team have over 100 combined years of
structuring customized debt solutions for middle-market companies, which we believe will enable us to generate favorable returns across credit cycles with
3
an emphasis on preserving capital. Messrs. Mauer and Jansen have developed an investment process for reviewing lending opportunities, structuring transactions and monitoring investments
throughout multiple credit cycles. The members of the Investment Team have extensive networks for sourcing investment opportunities through direct corporate relationships and relationships with private equity firms, investment banks, restructuring
advisors, law firms, boutique advisory firms and distressed/specialty lenders. The members of the Investment Team also have extensive experience across various industries, including aviation, cable, defense, healthcare, media, mining, oil and gas,
power, retail, telecommunications, trucking and asset-backed special situations. As a result, we believe we will be able to achieve appropriate risk-adjusted returns by investing in companies that have restructured but do not have sufficient track
records to receive traditional lending terms from a commercial bank or the broadly syndicated leveraged finance market. We believe the members of the Investment Team share a common investment philosophy built on a framework of rigorous business
assessment, extensive due diligence and disciplined risk valuation methodology.
Every initial investment by us requires the approval by a
majority of the Adviser’s investment committee and such majority must include both Messrs. Mauer and Jansen. Every follow-on investment decision in an existing portfolio company and every investment disposition require approval by a majority of
the Adviser’s investment committee. The Adviser’s investment committee currently consists of Messrs. Mauer and Jansen, the Co-Chief Investment Officers of the Adviser, Andrew Muns, a managing director of the Adviser, and Michael Nitka,
Stifel Venture Corp.’s (“Stifel”) designee to the Adviser’s investment committee.
We have entered into an investment
advisory agreement (the “Investment Advisory Agreement”) with the Adviser, pursuant to which we pay the Adviser a management fee equal to 1.75% of our gross assets, payable in arrears on a quarterly basis. In addition, pursuant to the
Investment Advisory Agreement, we pay the Adviser an Incentive Fee equal to 20.0% of pre-incentive fee net investment income, subject to an annualized hurdle rate of 8.0% with a “catch up” fee for returns between the 8.0% hurdle and 10.0%,
as well as 20.0% of net capital gains.
Under an administration agreement with the Adviser (the “Administration Agreement”), the
Adviser provides us with our chief financial officer, accounting and back-office professionals, equipment and clerical, bookkeeping, recordkeeping and other administrative services.
Market Opportunity
We believe that the
current investment environment presents a compelling case for investing in secured debt (including unitranche debt and standalone second and first lien loans) and unsecured debt (including mezzanine/structured equity) of middle-market companies. The
following factors represent the key drivers of our focus on this attractive market segment:
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Reduced Availability of Capital for Middle-Market Companies. We believe there are fewer providers of
financing and less capital available for middle-market companies compared to prior to the economic downturn that began in mid-2007. We believe that, as a result of that downturn:
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•
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many financing providers have chosen to focus on large, liquid corporate loans and syndicated capital markets
transactions rather than lending to middle-market businesses;
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•
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regulatory changes, including the introduction of international capital and liquidity requirements for banks
under the 2012 Basel III Accords, or Basel III, have decreased their capacity to hold non-investment grade leveraged loans, causing banks to curtail lending to middle-market companies;
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•
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hedge funds and collateralized loan obligation managers are less likely to pursue investment opportunities in our
target market as a result of reduced availability of funding for new investments; and
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4
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•
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consolidation of regional banks into money center banks has reduced their focus on middle-market lending.
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As a result, we believe that less competition facilitates higher quality deal flow and allows for greater selectivity
throughout the investment process.
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•
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Robust Demand for Debt Capital. According to Pitchbook, a market research firm, private equity firms had
approximately $874 billion of uncalled capital as of December 31, 2017. They have expanded their focus to include middle-market opportunities due to the lack of opportunities in large capital buyout transactions. We expect the large amount of
uninvested capital and the expanded focus on middle-market opportunities to drive buyout activity over the next several years, which should, in turn, continue to create lending opportunities for us.
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•
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Attractive Deal Pricing and Structures. We believe that, in general, middle-market debt investments are
priced more attractively to lenders than larger, more liquid, public debt financings, due to the more limited universe of lenders as well as the highly negotiated nature of these financings. Middle-market transactions tend to offer stronger covenant
packages, higher interest rates, lower leverage levels and better call protection compared to larger financings. In addition, middle-market loans typically offer other investor protections such as default penalties, lien protection, change of
control provisions and information rights for lenders.
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Specialized Lending Requirements. We believe that several factors render many U.S. financial institutions
ill-suited to lend to U.S. middle-market companies. For example, based on the Investment Team’s experience, lending to private U.S. middle-market companies is generally more labor-intensive than lending to larger companies due to the smaller
size of each investment and the fragmented nature of information for such companies. Lending to smaller capitalization companies requires due diligence and underwriting practices consistent with the demands and economic limitations of the
middle-market and may also require more extensive ongoing monitoring by the lender. As a result, middle-market companies historically have been served by a limited segment of the lending community.
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Competitive Strengths
We believe that
the Adviser’s disciplined approach to origination, portfolio construction and risk management should allow us to achieve favorable risk-adjusted returns while preserving our capital. We believe that the following competitive strengths provide
positive returns for our investors:
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•
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Large and Experienced Team with Substantial Resources. The Adviser and its Investment Team is led by
Messrs. Mauer and Jansen, each with over 20 years of experience investing in, providing corporate finance services to, restructuring and consulting with middle-market companies. Messrs. Mauer and Jansen are supported by three additional
investment professionals, who collectively have over 100 combined years of structuring strategic capital for business expansion, refinancings, capital restructuring, post-reorganization financing and servicing the general corporate needs of
middle-market companies. We believe that the Investment Team and its resources provide a significant advantage and contribute to the strength of our business and enhance the quantity and quality of investment opportunities available to us.
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•
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Capitalize on the Investment Team’s Extensive Relationships with Middle-Market Companies, Private Equity
Sponsors and Intermediaries. The members of the Investment Team have extensive networks for sourcing investment opportunities through corporate relationships and relationships with private equity firms, investment banks, restructuring advisors,
law firms, boutique advisory firms and distressed/specialty lenders. We believe that the strength of these relationships in conjunction with the Investment Team’s ability to structure financing solutions for companies that incorporate credit
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5
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protections at attractive returns for us provide us with a competitive advantage in identifying investment opportunities in our target market. In addition, pursuant to the terms of our
relationship with Stifel and subject to certain restrictions, Stifel must use its commercially reasonable efforts to present to the Adviser to review and bid on, Stifel Nicolaus & Company, Incorporated-originated leveraged finance and high
yield corporate debt opportunities consistent with our investment strategy.
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•
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Disciplined Underwriting Policies and Rigorous Portfolio Management. Messrs. Mauer and Jansen have an
established credit analysis and investment process to analyze investment opportunities thoroughly. This process, followed by the Investment Team, includes structuring loans with appropriate covenants and pricing loans based on our knowledge of the
middle-market and our rigorous underwriting standards. We focus on capital preservation by extending loans to portfolio companies with assets that we believe will retain sufficient value to repay us even in depressed markets or under liquidation
scenarios. Each investment is analyzed from its initial stages by either Mr. Mauer or Mr. Jansen, as the Adviser’s Co-Chief Investment Officers, and a senior investment professional of the Investment Team. Every initial investment
requires approval by a majority of the Adviser’s investment committee and such majority must include both Messrs. Mauer and Jansen. The Adviser’s investment committee consists of Messrs. Mauer, Jansen, Muns and Nitka. Every follow-on
investment decision in an existing portfolio company and every investment disposition require approval by at least a majority of the Adviser’s investment committee. Under the supervision of Messrs. Mauer and Jansen, the Investment Team’s
senior investment professionals also monitor the portfolio for developments on a daily basis, perform credit updates on each investment, review financial performance on at least a quarterly basis, and have regular discussions with the management of
portfolio companies. We believe the Adviser’s investment and monitoring process and the depth and experience of the Investment Team gives us a competitive advantage in identifying investments and evaluating risks and opportunities throughout
the life cycle of an investment.
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•
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Ability to Structure Investments Creatively. Our Investment Team has the expertise and ability to
structure investments across all levels of a company’s capital structure. These individuals have extensive experience in cash flow, asset-based lending, workout situations and investing in distressed debt, which should enable us to take
advantage of attractive investments in recently restructured companies. Furthermore, with the capital raised in our initial public offering, we believe we are in a better position to leverage the existing knowledge and relationships that the
Investment Team has developed to lead investments that meet our investment criteria. We believe that current market conditions allow us to structure attractively priced debt investments and may allow us to incorporate other return-enhancing
mechanisms such as commitment fees, original issue discounts, early redemption premiums, payment-in-kind (“PIK”) interest and certain forms of equity securities.
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Investment Strategy
We invest in
unitranche loans, standalone second and first lien loans, and selectively in unsecured debt, bonds and in the equity of portfolio companies through warrants and other instruments, in most cases taking advantage of a potential benefit from an
increase in the value of such portfolio company as part of an overall relationship. We seek to invest primarily in middle-market companies that have annual revenues of at least $50 million and EBITDA of at least $15 million. Our investments
typically range in size from $5 million to $25 million. We may invest in smaller or larger companies if there is an attractive opportunity, especially when there are dislocations in the capital markets, including the high yield and large syndicated
loan markets. During such dislocations, we expect to see more deep value investment opportunities offering prospective returns that are disproportionate to the associated risk profile. We focus on companies with leading market positions, significant
asset or franchise values, strong free cash flow and experienced senior management teams, with an emphasis on companies with high-quality sponsors.
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Our primary investment objective is to maximize current income and capital appreciation by
investing directly in privately held middle-market companies. The Adviser pursues investments for us with favorable risk-adjusted returns, including debt investments that offer cash origination fees and lower leverage levels. The Adviser seeks to
structure our debt investments with strong protections, including default penalties, information rights, and affirmative and negative financial covenants, such as lien protection and restrictions concerning change of control. We believe these
protections, coupled with the other features of our investments, allow us to reduce our risk of capital loss and achieve attractive risk-adjusted returns, although there can be no assurance that we are always able to structure our investments to
minimize risk of loss and achieve attractive risk-adjusted returns.
Investment Criteria
The Investment Team uses the following investment criteria and guidelines to evaluate prospective portfolio companies. However, not all of
these criteria and guidelines are used or met in connection with each of our investments.
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Established companies with a history of positive operating cash flow. We seek to invest in established
companies with sound historical financial performance. The Adviser typically focuses on companies with a history of profitability on an operating cash flow basis. We do not intend to invest in start-up companies or companies with speculative
business plans.
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Defensible and sustainable business. We seek to invest in companies with proven products and/or services
that provide a competitive advantage versus its competitors or new entrants. The Adviser places an emphasis on the strength of historical operations and profitability and the generation of free cash flow to reinvest in the business or to utilize for
debt service. The Adviser also focuses on the relative strength of the valuation and liquidity of collateral used to provide security for our investments, when applicable.
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Seasoned management team with meaningful equity ownership. The Adviser generally requires that our
portfolio companies have a seasoned management team, with strong corporate governance. The Adviser also seeks to invest in companies with management teams that have meaningful equity ownership. The Adviser believes that companies that have proper
incentives in place, including having significant equity interests, motivate management teams to enhance enterprise value, which will act in accordance with our interests.
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Significant Invested Capital. The Adviser seeks investments in portfolio companies where it believes that
the aggregate enterprise value significantly exceeds aggregate indebtedness, after consideration of our investment. The Adviser believes that the existence of significant underlying equity value (i.e., the amount by which the aggregate enterprise
value exceeds the aggregate indebtedness) provides important support to our debt investments.
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Investment Partnerships. We seek to invest where private equity sponsors have demonstrated capabilities in
building enterprise value. In addition, we seek to partner with specialty lenders and other financial institutions. The Adviser believes that private equity sponsors and specialty lenders can serve as committed partners and advisors that will
actively work with the Adviser, the company and its management team to meet company goals and create value.
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Ability to exert meaningful influence. We target investment opportunities in which we will be a
significant investor in the tranche and in which we can add value through active participation in the direction of the company, sometimes through advisory positions.
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Exit strategy. We generally seek to invest in companies that the Adviser believes possess attributes that
will provide us with the ability to exit our investments. We typically expect to exit our investments
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through one of three scenarios: (i) the sale of the company resulting in repayment of all outstanding debt, (ii) the recapitalization of the company through which our loan is replaced
with debt or equity from a third party or parties or (iii) the repayment of the initial or remaining principal amount of our loan then outstanding at maturity. In some investments, there may be scheduled amortization of some portion of our
loan, which would result in a partial exit of our investment prior to the maturity of the loan.
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Conflicts of Interests
As described more fully below, we have entered into certain agreements and arrangements with Stifel, Cyrus Capital Partners, L.P. (“Cyrus
Capital”) and certain funds (the “Cyrus Funds”) managed by Cyrus Capital that may cause conflicts of interest. In addition, as described more fully below, Stifel and the Cyrus Funds own, in the aggregate, approximately 44% of our
total outstanding common stock. The shares held by Stifel and the Cyrus Funds are generally freely tradable in the public market, subject to the volume limitations, applicable holding periods and other provisions of Rule 144 under the Securities
Act. Sales of substantial amounts of our common stock, the availability of such common stock for sale or the registration of such common stock for sale and the ability of our stockholders, including Stifel and the Cyrus Funds, to sell their
respective shares at a price per share that is below our then current net asset value per share could adversely affect the prevailing market prices for our common stock. If this occurs and continues, it could impair our ability to raise additional
capital through the sale of securities should we desire to do so and negatively impact the market of our common stock. See “Risk Factors—Risks Related to Our Common Stock—Sales of substantial amounts of our common stock in the public
market may have an adverse effect on the market price of our common stock.”
Stifel Arrangement
Stifel owns approximately 16% of our total outstanding common stock, and also owns a 20% interest in the Adviser. As a result, Stifel will
benefit from our performance and our investments. Pursuant to an irrevocable proxy, Stifel has granted us the right to vote the shares of our common stock held by it in excess of 4.9% of our total outstanding common stock in the same percentages as
our other stockholders. Stifel has the right to nominate for election a member of our board of directors, who will be considered “interested” (that is, not independent for purposes of the 1940 Act). Stifel has not exercised its right to
nominate for election a member of our board of directors. In addition, Stifel has the right to appoint a representative to the Adviser’s three-member board of managers. Stifel does not have any rights to exercise a controlling influence over
our day-to-day operations or the operations or investment management function of the Adviser.
Three members of the Investment Team are
dual employees of the Adviser and Stifel Nicolaus & Company, Incorporated or its affiliates pursuant to a personnel sharing arrangement with Stifel Nicolaus & Company, Incorporated. Although the members of the Investment Team that are dual
employees dedicate substantially all of their time to the business and activities of the Adviser, they may continue to engage in investment advisory activities for Stifel Nicolaus & Company, Incorporated and its affiliates from time to time.
This arrangement could result in a conflict of interest and may distract these investment professionals from their responsibilities to us. Messrs. Mauer and Jansen monitor the activities of the members of the Investment Team for any conflicts of
interest and will seek to resolve them on our behalf, subject to the oversight of our Board. In addition, Mr. Nitka, Stifel’s designee to the Adviser’s investment committee, is a managing director and head of the Credit Investments Group
at Stifel Nicolaus & Company, Incorporated. Should any conflicts arise as a result of Mr. Nitka’s membership on the Adviser’s investment committee and his role at Stifel Nicolaus & Company, Incorporated, Mr. Nitka will recuse
himself from consideration of any potential conflict related to Stifel Nicolaus & Company, Incorporated and its affiliates.
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Subject to certain restrictions, Stifel will use its commercially reasonable efforts to
present to the Adviser the opportunity to review and bid on all Stifel Nicolaus & Company, Incorporated-originated leveraged finance and high yield corporate debt opportunities consistent with our investment strategy. Subject to the approval of
our board of directors, as necessary under the 1940 Act, and certain other limitations, Stifel may invest in the same portfolio companies that we invest in, and (regardless of whether our investment arose from a Stifel-originated opportunity) Stifel
may, through such investments, have interests that conflict with ours, including receiving fees from the portfolio company directly as well as through its interest in the Adviser. We believe that we may co-invest with Stifel and its affiliates upon
approval of the “required majority” of our directors as defined in Section 57(o) of the 1940 Act.
Cyrus Capital Relationship
The Cyrus Funds, managed by Cyrus Capital, own approximately 28% of our outstanding common stock, and also hold a 38% indirect economic
interest, but no voting interest, in the Adviser. As a result, Cyrus Capital benefits from our performance and our investments. Pursuant to an irrevocable proxy, the Cyrus Funds’ shares of our common stock must be voted in the same percentages
as our other stockholders (excluding Stifel) vote their shares. Cyrus Capital does not have any rights to exercise a controlling influence over our operations or the operations or investment management function of the Adviser. As a result of the
relationship with Cyrus Capital and the Cyrus Funds, we could be presumed to be an affiliate of the Cyrus Funds under the 1940 Act. We believe we may co-invest with the Cyrus Funds upon approval of the “required majority” of our directors
as defined in Section 57(o) of the 1940 Act. In addition, the Cyrus Funds may, through such co-investments, have interests that conflict with ours, including receiving fees from the portfolio company directly as well as through its economic interest
in the Adviser. Cyrus Capital may also provide us with investment opportunities.
Pursuant to a services agreement between the Adviser and
Cyrus Capital (the “Services Agreement”), the Adviser can utilize the expertise of the investment professionals of Cyrus Capital to provide investment services to us from time to time on an as needed basis as part of the Adviser’s
Investment Team and in connection with the Adviser’s obligations to us under the Investment Advisory Agreement. If the Adviser determines it is in our best interests to utilize the expertise of any of the investment professionals of Cyrus
Capital, such investment professionals will also continue to engage in investment advisory activities for the private investment funds managed by Cyrus Capital, including the Cyrus Funds, which could result in a conflict of interest, and may
distract them from their responsibilities to us. The Adviser currently utilizes the investment professionals that perform analyst functions provided under the Services Agreement for less than 10% of the aggregate time dedicated to the business by
the Adviser’s Investment Team. In addition, we may receive other administrative services from the Adviser, pursuant to the Administration Agreement, which, in turn, upon request by the Adviser, may be provided to us on behalf of the Adviser by
Cyrus Capital under the terms of the Services Agreement.
Other Conflicts of Interest
We may also have conflicts of interest arising out of the investment advisory activities of the Adviser. The Adviser may in the future manage
other investment funds, accounts or investment vehicles that invest or may invest in assets eligible for purchase by us. To the extent that we compete with entities managed by the Adviser or any of its affiliates for a particular investment
opportunity, the Adviser will allocate investment opportunities across the entities for which such opportunities are appropriate, consistent with (a) its internal investment allocation policies, (b) the requirements of the Advisers Act,
and (c) certain restrictions under the 1940 Act regarding co-investments with affiliates.
See “Risk Factors—Risks Related
to Our Business—There are significant potential conflicts of interest that could affect our investment returns,” “—Conflict related to obligations the Adviser or its affiliates have to other
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clients” and “—The Adviser’s incentive fee structure may create incentives to it that are not fully aligned with the interests of our stockholders.”
Corporate Information
Our principal
executive offices are currently located at 65 East 55th Street, 15th Floor, New York, NY 10022, and our telephone number is
(212) 257-5199. We maintain a website located at www.cmfn-inc.com. Information on our website is not incorporated into or a part of this prospectus.
We are an “emerging growth company,” within the meaning of the JOBS Act. As an emerging growth company, we may take advantage of
specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. We will remain an emerging growth company until the earlier of (a) the last day of the fiscal year: (i) ending June 30, 2019;
(ii) in which we have total annual gross revenue of at least $1.07 billion; or (iii) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700
million as of the prior June 30th, and (b) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
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THE OFFERING
We may offer, from time to time, up to $500,000,000 of our securities, on terms to be determined at the time of the offering. Our securities
may be offered at prices and on terms to be disclosed in one or more prospectus supplements. In addition, this prospectus relates to 6,000,004 shares of our common stock that may be sold by the selling stockholders identified under “Selling
Stockholders.”
We may offer shares of our common stock at a discount to net asset value per share at prices approximating market
value less selling expenses upon approval of our board of directors, including a majority of our independent directors, in certain circumstances. At a meeting initially convened on November 6, 2018 and reconvened on December 18, 2018, our
stockholders voted to allow us to issue common stock at a price below net asset value per share for the period ending on the earlier of the one year anniversary of the date of the Company’s 2018 Annual Meeting of Stockholders and the date of
the Company’s 2019 Annual Meeting of Stockholders, which we expect to be held in November 2019. Our stockholders did not specify a maximum discount below net asset value at which we are able to issue our common stock, although the number of
shares sold in each offering may not exceed 25% of our outstanding common stock immediately prior to such sale. In addition, we cannot issue shares of our common stock below net asset value unless our board of directors determines that it would be
in our and our stockholders’ best interests to do so. Sales of common stock at prices below net asset value per share dilute the interests of existing stockholders, have the effect of reducing our net asset value per share and may reduce our
market price per share. In addition, continuous sales of common stock below net asset value may have a negative impact on total returns and could have a negative impact on the market price of our shares of common stock. See “Sales of Common
Stock Below Net Asset Value.”
Our securities may be offered directly to one or more purchasers by us or through agents designated
from time to time by us, or to or through underwriters or dealers. The prospectus supplement relating to the offering will disclose the terms of the offering, including the name or names of any agents or underwriters involved in the sale of our
securities by us, the purchase price, and any fee, commission or discount arrangement between us and our agents or underwriters or among our underwriters or the basis upon which such amount may be calculated. See “Plan of Distribution.” We
may not sell any of our securities directly or through agents, underwriters or dealers without delivery of a prospectus supplement describing the method and terms of the offering of our securities.
Set forth below is additional information regarding the offering of our securities:
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Use of Proceeds
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We plan to use the net proceeds of this offering to make new investments in portfolio companies in accordance with our investment objective and strategies as described in this prospectus and for general working capital purposes. We may also use
a portion of the net proceeds to reduce any of our outstanding borrowings. Pending such use, we will invest the net proceeds primarily in high quality, short-term debt securities consistent with our business development company election and our
election to be taxed as a RIC. We will not receive any proceeds from the sale of common stock by any of the selling stockholders. Each supplement to this prospectus relating to an offering will more fully identify the use of the proceeds from such
offering. See “Use of Proceeds.”
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Investment Advisory Agreement
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We pay the Adviser a fee for its services under the Investment Advisory Agreement. This fee consists of two components: a base management fee and an
incentive fee. The base management fee is
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calculated at an annual rate of 1.75% of our gross assets, including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents. The base management
fee is payable quarterly in arrears.
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The incentive fee consists of two parts. The first part, which is calculated and payable quarterly in arrears, equals 20.0% of our “pre-incentive fee net investment income” for the immediately preceding
quarter, subject to an annualized hurdle rate of 8.0% with a “catch up” fee for returns between the 8.0% hurdle and 10.0%. The second part is calculated and payable in arrears as of the end of each calendar year (or, upon termination of
the Investment Advisory Agreement, as of the termination date) and equals 20.0% of our aggregate cumulative realized capital gains from inception through the end of each calendar year, computed net of aggregate cumulative realized capital losses and
aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid capital gain incentive fees. See “Management Agreements—Management Fee and Incentive Fee.”
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Pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees, such as commitment, origination, structuring, diligence, managerial assistance and
consulting fees or other fees that we receive from portfolio companies) accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under our Administration Agreement, and
any interest expense and any distributions paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as
original issue discount (“OID”), debt instruments with PIK interest and zero coupon securities), accrued income that we have not yet received in cash. The portion of such incentive fee that is attributable to deferred interest (such as PIK
interest or OID) will be paid to the Adviser, together with interest thereon from the date of deferral to the date of payment, only if and to the extent we actually receive such interest in cash, and any accrual thereof will be reversed if and to
the extent such interest is reversed in connection with any write-off or similar treatment of the investment giving rise to any deferred interest accrual.
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Our net pre-incentive fee investment income used to calculate this part of the incentive fee is also included in the amount of our gross assets used to calculate the 1.75% base management fee.
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Nasdaq Global Select Market symbol
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“CMFN”
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Trading at a discount
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Shares of closed-end investment companies, including business development companies, frequently trade in the secondary market at a discount to their net
asset values. The risk that our shares may trade at
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a discount to our net asset value is separate and distinct from the risk that our net asset value per share may decline. We cannot predict whether our shares will trade above, at or below net
asset value. See “Risk Factors.”
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Sales of Common Stock Below Net Asset Value
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We are not generally able to issue and sell our common stock at a price below our net asset value per share unless we have prior stockholder approval. In this regard, at a meeting initially convened on November 6, 2018 and reconvened on
December 18, 2018, our stockholders voted to allow us to issue common stock at a price below net asset value per share for the period ending on the earlier of the one year anniversary of the date of our 2018 Annual Meeting of Stockholders and
the date of our 2019 Annual Meeting of Stockholders, which we expect to be held in November 2019. Our stockholders did not specify a maximum discount below net asset value at which we are able to issue our common stock, although the number of shares
sold in each offering may not exceed 25% of our outstanding common stock immediately prior to such sale. In addition, we cannot issue shares of our common stock below net asset value unless our board of directors determines that it would be in our
and our stockholders’ best interests to do so. Sales of common stock at prices below net asset value per share dilute the interests of existing stockholders, have the effect of reducing our net asset value per share and may reduce our market
price per share. In addition, continuous sales of common stock below net asset value may have a negative impact on total returns and could have a negative impact on the market price of our shares of common stock. See “Sales of Common Stock
Below Net Asset Value.”
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Distributions
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We pay quarterly distributions to our stockholders out of assets legally available for distribution. Our quarterly distributions, if any, will be determined by our board of directors.
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Taxation
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We have elected to be treated for U.S. federal income tax purposes as a RIC. As a RIC, we generally will not have to pay corporate-level U.S. federal income taxes on any net ordinary income or capital gains that we distribute to our
stockholders. To maintain our qualification as a RIC and the associated tax benefits, we must meet specified source-of-income and asset diversification requirements and distribute annually at least 90% of our net ordinary income and net short-term
capital gains, if any, in excess of our net long-term capital losses. See “Distributions.”
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Leverage
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We expect to continue to use borrowed funds in order to make additional investments. We expect to use this practice, which is known as
“leverage,” when the terms and conditions are favorable to long-term investing and aligned with our investment strategy and portfolio composition in an effort to increase returns to our stockholders, but this strategy involves significant
risks. See “Risk Factors.” With certain limited exceptions, we are only allowed to
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borrow amounts such that our asset coverage, as defined in the 1940 Act, is at least 200% (150% effective May 2, 2019) immediately after each such borrowing. The amount of leverage that we employ
will depend on the Adviser’s and our board of directors’ assessment of market and other factors at the time of any proposed borrowing.
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We have, through CM SPV, our wholly owned subsidiary, entered into the Term Financing with UBS, which expires on December 5, 2020. The Term Financing is collateralized by a portion of the debt investments in our
portfolio. Borrowings under the Term Financing bear interest (i) at a rate per annum equal to one-month LIBOR plus 2.75% through December 4, 2018, and (ii) at a rate per annum equal to one-month LIBOR plus 2.55% from December 5, 2018 through December 5, 2020. As of April 5, 2019, $102.0 million was outstanding under the Term Financing. We have also entered into the 2017 UBS Revolving
Financing with UBS, which expires December 5, 2019. Borrowings under the 2017 UBS Revolving Financing generally bear interest at a rate per annum equal to one-month LIBOR plus 3.55%. As of April 5,
2019, $4.0 million was outstanding under the 2017 UBS Revolving Financing.
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Dividend reinvestment plan
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We have adopted an “opt out” dividend reinvestment plan for our stockholders. Under this plan, if we declare a cash distribution to our stockholders, the amount of such distribution will be automatically reinvested in additional shares
of our common stock unless a stockholder specifically elects not to participate in our dividend reinvestment plan. If a stockholder opts out, that stockholder will receive cash distributions. Stockholders who receive distributions in the form of
shares of common stock generally will be subject to the same U.S. federal, state and local tax consequences as stockholders who elect to receive their distributions in cash, but will not receive any corresponding cash distributions with which to pay
any applicable taxes. See “Dividend Reinvestment Plan.”
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Administration Agreement
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The Administration Agreement requires us to reimburse the Adviser for our allocable portion (subject to the review of our board of directors) of overhead and other expenses, including furnishing us (through the Services Agreement with Cyrus
Capital) with office facilities and equipment and providing clerical, bookkeeping, record keeping and other administrative services at such facilities, and our allocable portion of the cost of our chief financial officer and chief compliance officer
and his respective staff. To the extent that the Adviser outsources any of its duties under the Administration Agreement, we will pay the fees associated with such functions on a direct basis, without incremental profit to the Adviser. See
“Management Agreements—Administration Agreement.”
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License arrangements
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We have entered into a license agreement with the Adviser under which the Adviser has granted us a non-exclusive, royalty-free license
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to use the name “CM Finance.” For a description of the License Agreement, see “Management Agreements—License Agreement.”
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Custodian and transfer agent
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U.S. Bank National Association serves as our custodian, and American Stock Transfer and Trust Company, LLC serves as our transfer and distribution paying agent and registrar. See “Custodian, Transfer and Dividend Paying Agent and
Registrar.”
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Anti-takeover provisions
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Our charter and bylaws, as well as certain federal and state statutory and regulatory requirements, contain certain provisions that may have the effect of discouraging a third party from making an acquisition proposal for us. These anti-takeover
provisions may inhibit a change in control in circumstances that could give the holders of our common stock the opportunity to realize a premium over the market price for our common stock. See “Description of Our Common Stock.”
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Available information
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We are required to file periodic reports, proxy statements and other information with the SEC. This information is available at the SEC’s public reference room at 100 F. Street, N.E., Washington, D.C. 20549 and on the SEC’s website at
http://www.sec.gov. Information on the operation of the SEC’s public reference room may be obtained by calling the SEC at 1-800-SEC-0330.
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We maintain a website at www.cmfn-inc.com and make all of our annual, quarterly and current reports, proxy statements and other information available, free of charge, on or through our website. Information on our
website is not incorporated into or part of this prospectus or any prospectus supplement and should not be relied upon as such. You may also obtain such information free of charge by contacting us in writing at 65 East 55th Street, 15th Floor, New York, NY 10022.
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Incorporation by reference
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This prospectus is part of a registration statement that we have filed with the SEC. In accordance with the Small Business Credit Availability Act, we are allowed to “incorporate by reference” the information that we file with the SEC,
which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to comprise a part of this prospectus from the date we file that document. Any reports filed
by us with the SEC subsequent to the date of this filing and before the date that any offering of any securities by means of this prospectus and any accompanying prospectus supplement is terminated will automatically update and, where applicable,
supersede any information contained in this prospectus or incorporated by reference in this prospectus. See “Incorporation by Reference.”
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Risk Factors
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An investment in our securities is subject to risks. The following is a summary of the principal risks that you should carefully consider before
investing in our securities. In addition, see “Risk Factors”
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beginning on page 22 of this prospectus to read about factors you should consider before deciding to invest in our securities.
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Capital markets may experience periods of disruption and instability and we cannot predict when these conditions
will occur. Such market conditions could materially and adversely affect debt and equity capital markets in the United States and abroad, which could have a negative impact on our business, financial condition and results of operations.
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We depend upon key personnel of the Adviser for our future success. If the Adviser were to lose any of its key
personnel, our ability to achieve our investment objective could be significantly harmed.
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Our business model depends to a significant extent upon our Adviser’s network of relationships. Any
inability of the Adviser to maintain or develop these relationships, or the failure of these relationships to generate investment opportunities, could adversely affect our business.
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Our relationships with Cyrus Capital and Stifel may create conflicts of interest.
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There are significant potential conflicts of interest that could negatively affect our investment returns.
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The members of the Investment Team may, from time to time, possess material non-public information, limiting our
investment discretion.
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There are conflicts related to other arrangements with the Adviser.
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Our financial condition, results of operations and cash flows will depend on our ability to manage our business
effectively.
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The Adviser’s incentive fee structure may create incentives to it that are not fully aligned with the
interests of our stockholders.
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Our incentive fee may induce the Adviser to make speculative investments.
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The involvement of our interested directors in the valuations process may create conflicts of interest.
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We operate in a highly competitive market for investment opportunities, which could reduce returns and result in
losses.
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We will be subject to corporate-level U.S. federal income tax if we are unable to maintain our qualification as a
RIC under Subchapter M of the Code.
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Regulations governing our operation as a BDC affect our ability to, and the way in which we raise additional
capital. As a BDC, the necessity of raising additional capital may expose us to risks, including the typical risks associated with leverage.
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Our board of directors has approved our ability to incur additional leverage, which may increase our risks
related to our use of leverage.
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Because we finance our investments with borrowed money, the potential for gain or loss on amounts invested in us
is magnified and may increase the risk of investing in us.
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Because we borrow money to make our investments, if market interest rates were to increase, our cost of capital
could increase, which could reduce our net investment income.
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We are exposed to risks associated with changes in interest rates including potential effects on our cost of
capital and net investment income.
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Adverse developments in the credit markets may impair our ability to secure debt financing.
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The failure in cyber security systems, as well as the occurrence of events unanticipated in our disaster recovery
systems and management continuity planning could impair our ability to conduct business effectively.
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Most of our portfolio investments are recorded at fair value as determined in good faith by our board of
directors and, as a result, there may be uncertainty as to the value of our portfolio investments.
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Sales of substantial amounts of our common stock in the public market may have an adverse effect on the market
price of our common stock.
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FEES AND EXPENSES
The following table is intended to assist you in understanding the costs and expenses that an investor in our common stock will bear directly
or indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. Moreover, the information set forth below does not include any transaction costs and expenses that investors will incur in connection
with each offering of our securities pursuant to this prospectus. As a result, investors are urged to read the “Fees and Expenses” table contained in any corresponding prospectus supplement to fully understand the actual transaction costs
and expenses they will incur in connection with each such offering. Except where the context suggests otherwise, whenever this prospectus contains a reference to fees or expenses paid by “us” or that “we” will pay fees or
expenses, common stockholders will indirectly bear such fees or expenses.
|
|
|
|
|
|
|
Stockholder Transaction Expenses:
|
|
|
|
|
|
Sales load (as a percentage of offering price)
|
|
|
—
|
%(1)
|
|
Offering expenses (as a percentage of offering price)
|
|
|
—
|
%(2)
|
|
Dividend reinvestment plan expenses
|
|
|
—
|
%(3)
|
|
|
|
|
|
|
|
Total Stockholder Transaction Expenses (as a percentage of offering price
|
|
|
—
|
%(4)
|
|
Annual Expenses (as percentage of net assets attributable to common stock)
|
|
|
|
|
|
Base management fees
|
|
|
3.62
|
%(5)
|
|
Incentive fees payable under the investment advisory agreement (20.0%)
|
|
|
1.57
|
%(6)
|
|
Interest payments on borrowed funds
|
|
|
6.61
|
%(7)
|
|
Other expenses
|
|
|
2.49
|
%(8)
|
|
|
|
|
|
|
|
Total annual expenses
|
|
|
14.29
|
%
|
|
|
|
|
|
|
|
(1)
|
In the event that our securities are sold to or through underwriters, a corresponding prospectus supplement
will disclose the applicable sales load.
|
|
(2)
|
In the event that we conduct an offering of our securities, a corresponding prospectus supplement will disclose
the estimated offering expenses. Our common stockholders will bear, directly or indirectly, the expenses of any offering of our securities, including debt securities.
|
|
(3)
|
The expenses of the dividend reinvestment plan are included in “Other expenses.” See “Dividend
Reinvestment Plan.”
|
|
(4)
|
Total stockholder transaction expenses may include sales load and will be disclosed in a future prospectus
supplement, if any.
|
|
(5)
|
Reflects the aggregate amount of base management fees that we estimate will be payable during the next twelve
months. Our base management fee, payable quarterly in arrears, is 1.75% of our gross assets, including assets purchased with borrowed amounts or other forms of leverage and excluding cash and cash equivalents and is estimated by assuming the base
management fee remains consistent with the base management fee incurred for the quarter ended December 31, 2018. See “Management Agreements—Investment Advisory Agreement.”
|
|
(6)
|
Reflects the aggregate amount of incentive fees that we estimate will be payable during the next twelve months.
See “Management Agreements—Investment Advisory Agreement.”
|
The incentive fee consists of two components,
ordinary income and capital gains:
The ordinary income component, which is payable quarterly in arrears, equals 20.0% of the excess, if
any, of our “Pre-incentive Fee Net Investment Income” over a 2.0% quarterly (8.0% annualized) hurdle rate, expressed as a rate of return on the value of our net assets attributable to our common stock, and a
“catch-up” provision, measured as of the end of each calendar quarter. Under this provision, in any calendar quarter, the Adviser receives no incentive fee until our net investment income equals the
hurdle rate of 2.0% but then receives, as a “catch-up,” 100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than
2.5% subject to a deferral of non-cash amounts. The effect of the “catch-up” provision is that, subject to the
18
deferral provisions discussed below, if pre-incentive fee net investment income exceeds 2.5% in any calendar quarter, the Adviser will receive 20.0% of our pre-incentive fee net investment income
as if a hurdle rate did not apply. The ordinary income component of the incentive fee will be computed on income that may include interest that is accrued but not yet received in cash. The portion of such incentive fee that is attributable to
deferred interest (sometimes referred to as PIK interest, or OID) will be paid to the Adviser only if and to the extent we actually receive such interest in cash, and any accrual thereof will be reversed if and to the extent such interest is
reversed in connection with any write-off or similar treatment of the investment giving rise to any deferred interest accrual. Any reversal of such amounts would reduce net income for the quarter by the net amount of the reversal (after taking into
account the reversal of incentive fees payable) and would result in a reduction and possibly elimination of the incentive fees for such quarter. Notwithstanding any such incentive fee reduction or elimination, there is no accumulation of amounts on
the hurdle rate from quarter to quarter and accordingly there is no clawback of amounts previously paid if subsequent quarters are below the quarterly hurdle and there is no delay of payment if prior quarters are below the quarterly hurdle.
The capital gains component of the incentive fee equals 20.0% of our “Incentive Fee Capital Gains,” if any, which equals our
aggregate cumulative realized capital gains from inception through the end of each calendar year, computed net of our aggregate cumulative realized capital losses and our aggregate cumulative unrealized capital depreciation, less the aggregate
amount of any previously paid capital gain incentive fees. The second component of the incentive fee is payable, in arrears, at the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date). See
“Management Agreements—Management Fee and Incentive Fee.”
|
(7)
|
We may borrow funds from time to time to make investments to the extent we determine that the economic
situation is conducive to doing so. The table includes all estimated expected borrowing costs in connection with the Financing Facilities. The costs associated with our outstanding borrowings are indirectly borne by our stockholders.
|
|
(8)
|
“Other expenses” represents our estimated amounts for the current fiscal year, including our overhead
expenses, including payments under the administration agreement based on our allocable portion of overhead and other expenses incurred by the Adviser. See “Management Agreements —Administration Agreement.”
|
Example
The following example demonstrates the projected
dollar amount of total cumulative expenses over various periods with respect to a hypothetical investment in us. In calculating the following expense amounts, we have assumed a 4.0% sales load and that our annual operating expenses would remain at
the levels set forth in the table above. In the event that shares to which this prospectus relates are sold to or through underwriters, a corresponding prospectus supplement will restate this example to reflect the applicable sales load.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year
|
|
|
3 Years
|
|
|
5 Years
|
|
|
10 Years
|
|
|
You would pay the following expenses on a $1,000 investment, assuming a 5% annual return
|
|
$
|
166
|
|
|
$
|
386
|
|
|
$
|
569
|
|
|
$
|
905
|
|
While the example assumes, as required by the SEC, a 5% annual return, our performance will vary and may result in a return
greater or less than 5%. Because the income incentive fee under our investment advisory agreement is unlikely to be significant assuming a 5% annual return, the example assumes that the 5% annual return will be generated entirely through the
realization of capital gains on our assets and, as a result, will trigger the payment of a capital gains incentive fee under our investment advisory agreement. The “Pre-Incentive Fee Net Investment Income” under the investment advisory
agreement, which, assuming a 5% annual return, would either not be payable or have an immaterial impact on the expense amounts shown above is not included in the example set forth above. If we achieve sufficient returns on our investments, including
through the realization of
19
capital gains, to trigger sufficient returns on our investments to trigger “Pre-Incentive Fee Net Investment Income” of a material amount, our expenses, and returns to our investors,
would be higher. Further, while the example assumes reinvestment of all distributions at net asset value, participants in our dividend reinvestment plan will receive a number of shares of our common stock, determined by dividing the total dollar
amount of the distribution payable to a participant by (a) 95% of the market price per share of our common stock at the close of trading on the payment date fixed by our board of directors or (b) the average purchase price of all shares of
common stock purchased by the administrator of the dividend reinvestment plan in the event shares are purchased in the open market to satisfy the share requirements of the dividend reinvestment plan, which may be at, above or below net asset value.
This example and the expenses in the table above should not be considered a representation of our future expenses, and actual expenses (including the
cost of debt, if any, and other expenses) may be greater or less than those shown.
20
SELECTED FINANCIAL AND OTHER DATA
The following selected financial data for the year ended June 30, 2018 is derived from our financial statements, which have been audited
by RSM US LLP, our independent registered public accounting firm. The following selected financial data for the years ended June 30, 2017, June 30, 2016, June 30, 2015 and June 30, 2014, is derived from our financial
statements, which have been audited by Ernst and Young, LLP, our former independent registered public accounting firm. The selected financial data at December 31, 2018, and for the six months ended December 31, 2018, have been derived from unaudited
financial data, but, in the opinion of management, reflect all adjustments that are necessary to present fairly the financial condition and operating results for such interim periods. Interim results as of and for the six months ended December 31,
2018 are not necessarily indicative of the results that may be expected for the year ending June 30, 2019. The data should be read in conjunction with our consolidated financial statements and related notes thereto and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of
Operations Data:
|
|
For the six
months ended
December 31,
2018
(unaudited)
|
|
|
For the
year ended
June 30,
2018
|
|
|
For the
year ended
June 30,
2017
|
|
|
For the
year ended
June 30,
2016
|
|
|
For the
year ended
June 30,
2015
|
|
|
For the
year ended
June 30,
2014
|
|
|
Total investment income
|
|
$
|
17,553,814
|
|
|
$
|
40,791,752
|
|
|
$
|
31,012,197
|
|
|
$
|
35,579,922
|
|
|
$
|
36,917,105
|
|
|
$
|
21,134,061
|
|
|
Total expenses, net of fee waiver
|
|
$
|
10,425,406
|
|
|
$
|
21,816,119
|
|
|
$
|
15,313,613
|
|
|
$
|
15,725,966
|
|
|
$
|
16,699,402
|
|
|
$
|
5,135,934
|
|
|
Net investment income
|
|
$
|
7,128,408
|
|
|
$
|
18,975,633
|
|
|
$
|
15,698,584
|
|
|
$
|
19,853,956
|
|
|
$
|
20,217,703
|
|
|
$
|
15,998,127
|
|
|
Net increase (decrease) in net assets resulting from operations
|
|
$
|
(7,954,255
|
)
|
|
$
|
15,625,480
|
|
|
$
|
23,579,465
|
|
|
$
|
(9,344,770
|
)
|
|
$
|
15,433,288
|
|
|
$
|
16,176,034
|
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value(1)
|
|
$
|
11.49
|
|
|
$
|
12.57
|
|
|
$
|
12.41
|
|
|
$
|
11.90
|
|
|
$
|
14.41
|
|
|
$
|
14.65
|
|
|
Net investment income
|
|
$
|
0.52
|
|
|
$
|
1.39
|
|
|
$
|
1.15
|
|
|
$
|
1.45
|
|
|
$
|
1.48
|
|
|
$
|
0.47
|
|
|
Net increase (decrease) in net assets resulting from operations
|
|
$
|
(0.58
|
)
|
|
$
|
1.14
|
|
|
$
|
1.72
|
|
|
$
|
(0.68
|
)
|
|
$
|
1.13
|
|
|
$
|
0.51
|
|
|
Distributions declared
|
|
$
|
0.50
|
|
|
$
|
1.00
|
|
|
$
|
1.20
|
|
|
$
|
1.83
|
|
|
$
|
1.37
|
|
|
$
|
0.52
|
|
|
Total return based on market value
|
|
$
|
(24.58
|
)%
|
|
|
0.01
|
%
|
|
|
27.93
|
%
|
|
|
(21.26
|
%)
|
|
|
4.23
|
%
|
|
|
0.65
|
%
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
At December 31,
2018
|
|
|
At June 30,
2018
|
|
|
At June 30,
2017
|
|
|
At June 30,
2016
|
|
|
At June 30,
2015
|
|
|
At June 30,
2014
|
|
|
Investments at fair value
|
|
$
|
283,335,302
|
|
|
$
|
293,592,013
|
|
|
$
|
254,907,171
|
|
|
$
|
272,114,164
|
|
|
$
|
330,323,856
|
|
|
$
|
273,710,465
|
|
|
Cash and cash equivalents
|
|
$
|
6,197,259
|
|
|
$
|
5,620,441
|
|
|
$
|
10,646,697
|
|
|
$
|
18,433,066
|
|
|
$
|
21,535,492
|
|
|
$
|
24,698,073
|
|
|
Total assets
|
|
$
|
301,984,402
|
|
|
$
|
314,534,581
|
|
|
$
|
296,033,878
|
|
|
$
|
319,961,415
|
|
|
$
|
360,458,841
|
|
|
$
|
308,300,322
|
|
|
Total liabilities
|
|
$
|
145,548,094
|
|
|
$
|
143,011,915
|
|
|
$
|
126,085,766
|
|
|
$
|
157,211,532
|
|
|
$
|
163,507,992
|
|
|
$
|
108,083,501
|
|
|
Total net assets
|
|
$
|
156,436,308
|
|
|
$
|
171,522,666
|
|
|
$
|
169,948,112
|
|
|
$
|
162,749,883
|
|
|
$
|
196,950,849
|
|
|
$
|
200,216,821
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of portfolio companies at period end
|
|
|
29
|
|
|
|
25
|
|
|
|
23
|
|
|
|
22
|
|
|
|
26
|
|
|
|
24
|
|
|
Weighted average yield on debt investments (at cost) at period end
|
|
|
11.08
|
%
|
|
|
11.19
|
%
|
|
|
9.73
|
%
|
|
|
9.80
|
%
|
|
|
10.91
|
%
|
|
|
10.82
|
%
|
|
Weighted average yield on total investments (at cost) at period end
|
|
|
10.83
|
%
|
|
|
11.12
|
%
|
|
|
9.64
|
%
|
|
|
9.70
|
%
|
|
|
10.91
|
%
|
|
|
10.74
|
%
|
|
(1)
|
As of December 31, 2018 and June 30, 2018, 2017, 2016, 2015 and 2014, respectively.
|
21
RISK FACTORS
Investing in our securities involves a number of significant risks. Before you invest in our securities, you should be aware of various
risks, including those described below. You should carefully consider these risk factors, together with all of the other information included in this prospectus and any accompanying prospectus supplement, before you decide whether to make an
investment in our securities. The risks set out below are the principal risks with respect to an investment in our securities generally and with respect to a business development company with investment objectives, investment policies, capital
structures or trading markets similar to ours. However, they may not be not the only risks we face. Additional risks and uncertainties not presently known to us or not presently deemed material by us may also impair our operations and performance.
If any of the following events occur, our business, financial condition, results of operations and cash flows could be materially and adversely affected. In such case, our net asset value and the trading price of our securities could decline, and
you may lose all or part of your investment.
Risks Relating to Our Business and Structure
Capital markets may experience periods of disruption and instability and we cannot predict when these conditions will occur. Such market conditions could
materially and adversely affect debt and equity capital markets in the United States and abroad, which could have a negative impact on our business, financial condition and results of operations.
The U.S. and global capital markets experienced extreme volatility and disruption during the economic downturn that began in mid-2007, and the
U.S. economy was in a recession for several consecutive calendar quarters during the same period. In 2010, a financial crisis emerged in Europe, triggered by high budget deficits and rising direct and contingent sovereign debt, which created
concerns about the ability of certain nations to continue to service their sovereign debt obligations. Risks resulting from such debt crisis and any future debt crisis in Europe or any similar crisis elsewhere could have a detrimental impact on the
global economic recovery, sovereign and non-sovereign debt in certain countries and the financial condition of financial institutions generally. In July and August 2015, Greece reached agreements with its creditors for bailouts that provide aid in
exchange for certain austerity measures. These and similar austerity measures may adversely affect world economic conditions and have an adverse impact on our business and that of our portfolio companies. In the second quarter of 2015, stock prices
in China experienced a significant drop, resulting primarily from continued sell-off of shares trading in Chinese markets. In August 2015, Chinese authorities sharply devalued China’s currency. These market and economic disruptions adversely
affected, and these and other similar market and economic disruptions may in the future affect, the U.S. capital markets, which could adversely affect our business and that of our portfolio companies. These market disruptions materially and
adversely affected, and may in the future affect, the broader financial and credit markets and has reduced the availability of debt and equity capital for the market as a whole and to financial firms, in particular. Additionally, since December
2015, the Federal Reserve continually raised its federal funds target rate. However, if key economic indicators, such as the unemployment rate or inflation, do not progress at a rate consistent with the Federal Reserve’s objectives, the target
range for the federal funds rate may further increase and cause interest rates and borrowing costs to rise, which may negatively impact our ability to access the debt markets on favorable terms and may also increase the costs of our borrowers,
hampering their ability to repay us.
At various times, these disruptions resulted in, and may in the future result, a lack of liquidity
in parts of the debt capital markets, significant write-offs in the financial services sector and the repricing of credit risk. These conditions may reoccur for a prolonged period of time again or materially worsen in the future, including as a
result of further downgrades to the U.S. government’s sovereign credit rating or the perceived credit worthiness of the United States or other large global economies. Unfavorable economic conditions, including future recessions, also could
increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. We may in the future have difficulty accessing debt and equity capital on attractive terms, or at all, and a severe
disruption and instability in the global financial markets or deteriorations
22
in credit and financing conditions may cause us to reduce the volume of loans we originate and/or fund, adversely affect the value of our portfolio investments or otherwise have a material
adverse effect on our business, financial condition, results of operations and cash flows.
Legislative or other actions relating to taxes could
have a negative effect on us.
Legislative or other actions relating to taxes could have a negative effect on the Company. The
rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. On December 20, 2017, the U.S. House of Representatives and the U.S.
Senate each voted to approve H.R. 1 (the “Tax Cuts and Jobs Act”) and, on December 22, 2017, President Trump signed the Tax Cuts and Jobs Act into law. The Tax Cuts and Jobs Act makes many changes to the Code, including, among other
things, significant changes to the taxation of business entities, the deductibility of interest expense, and the tax treatment of capital investment. We cannot predict with certainty how any changes in the tax laws might affect the Fund, investors,
or the Fund’s portfolio investments.
The United Kingdom referendum decision to leave the European Union may create significant risks and
uncertainty for global markets and our investments.
The 2016 decision made in the United Kingdom referendum to leave the European
Union has led to volatility in global financial markets, and in particular in the markets of the United Kingdom and across Europe, and may also lead to weakening in consumer, corporate and financial confidence in the United Kingdom and Europe. The
extent and process by which the United Kingdom will exit the European Union, and the longer term economic, legal, political and social framework to be put in place between the United Kingdom and the European Union are unclear at this stage and are
likely to lead to ongoing political and economic uncertainty and periods of exacerbated volatility in both the United Kingdom and in wider European markets for some time. In particular, the decision made in the United Kingdom referendum may lead to
a call for similar referenda in other European jurisdictions which may cause increased economic volatility and uncertainty in the European and global markets. This volatility and uncertainty may have an adverse effect on the economy generally and on
our ability of and the ability of our portfolio companies to execute our respective strategies and to receive attractive returns.
In
particular, currency volatility may mean that our returns and the returns of our portfolio companies are adversely affected by market movements and may make it more difficult, or more expensive, for us to implement appropriate currency hedging.
Potential decline in the value of the British Pound and/or the euro against other currencies, along with the potential downgrading of the United Kingdom’s sovereign credit rating, may also have an impact on the performance of any of our
portfolio companies located in the United Kingdom or Europe.
We depend upon key personnel of the Adviser for our future success. If the Adviser
were to lose any of its key personnel, our ability to achieve our investment objective could be significantly harmed.
We depend on
the diligence, skill, experience and network of business contacts of the Investment Team of the Adviser, in particular Messrs. Mauer and Jansen, who are also members of the Adviser’s investment committee, our executive officers and members of
our board of directors. We can offer no assurance that Messrs. Mauer and Jansen will continue to provide investment advice to us. The loss of either Mr. Mauer or Mr. Jansen could limit our ability to achieve our investment objective and
operate as we anticipate.
In addition, we are dependent on the other members of the Investment Team. If any of the members of the
Investment Team were to resign, we may not be able to hire investment professionals with similar expertise and ability to provide the same or equivalent services on acceptable terms. If we are unable to do so quickly, our operations are likely to
experience a disruption, and our financial condition, business and results of operations may be adversely affected. Even if we are able to retain comparable professionals the integration of such investment professionals and their lack of familiarity
with our investment objective may result in additional costs and time delays that may adversely affect our business, financial condition, results of operations and cash flows.
23
Our business model depends to a significant extent upon our Adviser’s network of relationships. Any
inability of the Adviser to maintain or develop these relationships, or the failure of these relationships to generate investment opportunities, could adversely affect our business.
We depend upon the Adviser to maintain its relationships with private equity sponsors, placement agents, investment banks, management groups
and other financial institutions, including Stifel and Cyrus Capital, and we expect to rely to a significant extent upon these relationships to provide us with potential investment opportunities. If the Adviser or members of the Investment Team fail
to maintain such relationships, or to develop new relationships with other sources of investment opportunities, we may not be able to grow our investment portfolio. In addition, individuals with whom the Adviser has relationships are not obligated
to provide us with investment opportunities, and we can offer no assurance that these relationships will generate investment opportunities for us in the future.
Our relationship with Cyrus Capital may create conflicts of interest.
The Cyrus Funds, managed by Cyrus Capital, own approximately 28% of our outstanding common stock. The Cyrus Funds also have a 38% indirect
economic interest in the Adviser. Pursuant to the services arrangement with Cyrus Capital, employees of Cyrus Capital, including administrative professionals and investment professionals (the “Cyrus Professionals”), will be made available
to the Adviser upon request of the Adviser on an as needed basis. These Cyrus Professionals also engage in investment advisory activities for the private investment funds managed by Cyrus Capital, including the Cyrus Funds, which could result in
conflicts of interest with respect to, among other things, the allocation of investment opportunities, and may distract them from their responsibilities to us. Upon request of the Adviser, Cyrus Capital also may provide certain financial, accounting
and administrative services to the Adviser pursuant to the Services Agreement upon which the Adviser may rely to satisfy its obligations under the Administration Agreement.
In addition, as a result of the relationship with Cyrus Capital and the Cyrus Funds, we could be presumed to be an affiliate of the Cyrus
Funds under the 1940 Act. We believe we may co-invest with the Cyrus Funds upon approval of the “required majority” of our directors as defined in Section 57(o) of the 1940 Act. However, we can provide no assurance that the SEC or its
staff will not take a contrary position. If the SEC or its staff takes a contrary position, we would be required to obtain an exemptive order from the SEC in order to co-invest with affiliates of Cyrus Capital, including the Cyrus Funds. We can
offer no assurance that we will successfully obtain such an order. If we cannot co-invest with affiliates of Cyrus Capital, our business, financial condition, results of operations and cash flows could be materially adversely affected. In addition,
the Cyrus Funds may, through such co-investments, have interests that conflict with ours, including receiving fees from the portfolio company directly as well as through its economic interest in the Adviser.
Our relationship with Stifel may create conflicts of interest.
Stifel owns approximately 16% of our outstanding common stock. Stifel also has a 20% interest in the Adviser. Three members of the Investment
Team are dual employees of the Adviser and Stifel Nicolaus & Company, Incorporated or its affiliates pursuant to a personnel sharing arrangement with Stifel Nicolaus & Company, Incorporated. Although the members of the Investment Team that
are dual employees dedicate substantially all of their time to the business and activities of the Adviser, they may continue to engage in investment advisory activities for Stifel Nicolaus & Company, Incorporated and its affiliates from time to
time. This arrangement could result in a conflict of interest and may distract these investment professionals from their responsibilities to us. Stifel has a right to nominate an individual for election on our board of directors. Stifel has not
exercised its right to nominate for election a member of our board of directors. We expect that if Stifel exercises its right to nominate an individual for election to our board of directors, such person would also be an employee of Stifel, and
would continue to engage in investment advisory activities for Stifel, which could result in a conflict of interest and may distract such director appointee from his or her responsibilities to us. In addition, Mr. Nitka, Stifel’s designee to
the Adviser’s investment committee, is a managing director and head of the
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Credit Investments Group at Stifel Nicolaus & Company, Incorporated. Should any conflicts arise as a result of Mr. Nitka’s membership on the Adviser’s investment committee and his
role at Stifel Nicolaus & Company, Incorporated, Mr. Nitka will recuse himself from consideration of any potential conflict related to Stifel Nicolaus & Company, Incorporated and its affiliates.
Under the Stifel arrangement and subject to certain restrictions, Stifel will use its commercially reasonable efforts to present to the
Adviser to review and bid on, Stifel Nicolaus & Company, Incorporated-originated leveraged finance and high yield corporate debt opportunities consistent with our investment strategy, subject to the approval of our board of directors, as
necessary under the 1940 Act, and certain other limitations. Stifel may invest in the same portfolio companies that we invest in (regardless of whether our investment arose from a Stifel-originated opportunity), and Stifel may, through such
investments, have interests that conflict with ours, including receiving fees from the portfolio company directly as well as through its interest in the Adviser. We believe that we may co-invest with Stifel and its affiliates upon approval of the
“required majority” of our directors as defined in Section 57(o) of the 1940 Act. However, we can provide no assurance that the SEC or its staff will not take a contrary position. If the SEC or its staff takes a contrary position, we
would be required to obtain an exemptive order from the SEC in order to co-invest with Stifel and its affiliates. We can offer no assurance that we will successfully obtain such an order. If we cannot co-invest with Stifel and its affiliates, our
business, financial condition, results of operations and cash flows could be materially adversely affected.
In addition, Stifel, through
Keefe, Bruyette & Woods, Inc., a subsidiary of Stifel’s parent, Stifel Financial Corp., will be a “principal underwriter,” as defined in the 1940 Act, by virtue of and during the term of, any future offering in which Stifel
may be part of the underwriting syndicate. As a result, our ability to co-invest with Stifel will be limited during the term of any future offering in which Stifel acts as a “principal underwriter.” If we cannot co-invest with affiliates
of Stifel, our business, financial condition, results of operations and cash flows could be materially adversely affected.
There are significant
potential conflicts of interest that could negatively affect our investment returns.
There may be times when the Adviser or the
members of the Investment Team have interests that differ from those of our stockholders, giving rise to conflicts of interest. The members of the Adviser’s investment committee and the Investment Team serve, or may serve, as officers,
directors, members, or principals of entities that operate in the same or a related line of business as we do, such as Stifel, or of investment funds, accounts, or investment vehicles managed by the Adviser or Stifel. Similarly, the Adviser or the
members of the Investment Team may have other clients with similar, different or competing investment objectives. In serving in these multiple capacities, they may have obligations to other clients or investors in those entities, the fulfillment of
which may not be in the best interests of us or our stockholders. In addition, the Adviser and some of its affiliates, including our officers and our non-independent directors, are not prohibited from raising money for, or managing, another
investment entity that makes the same types of investments as those we target. Three members of the Investment Team are dual employees of the Adviser and Stifel Nicolaus & Company, Incorporated or its affiliates pursuant to a personnel sharing
arrangement with Stifel Nicolaus & Company, Incorporated. Although the members of the Investment Team that are dual employees dedicate substantially all of their time to the business and activities of the Adviser, they may continue to engage in
investment advisory activities for Stifel Nicolaus & Company, Incorporated and its affiliates from time to time. This arrangement could result in a conflict of interest and may distract these investment professionals from their responsibilities
to us. As a result, and although the Adviser and its Investment Team are subject to a written conflicts of interest policy, the time and resources the Investment Team could devote to us may be diverted. In addition, we may compete with any such
Stifel-advised investment entity for the same investors and investment opportunities.
The members of the Investment Team may, from time to time,
possess material non-public information, limiting our investment discretion.
Members of the Investment Team may serve as directors
of, or in a similar capacity with, portfolio companies in which we invest. In the event that material nonpublic information is obtained with respect to such
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companies, or we become subject to trading restrictions under the internal trading policies of those companies or as a result of applicable law or regulations, we could be prohibited for a period
of time from purchasing or selling the securities of such companies, and this prohibition may have an adverse effect on us.
There are conflicts
related to other arrangements with the Adviser.
We have entered into a License Agreement with the Adviser under which the Adviser
has agreed to grant us a non-exclusive, royalty-free license to use the name “CM Finance.” See “Management Agreements—License Agreement.” In addition, we have entered into an Administration Agreement with the Adviser
pursuant to which we are required to pay to the Adviser our allocable portion of overhead and other expenses incurred by the Adviser in performing its obligations under such Administration Agreement, such as rent, equipment and our allocable portion
of the cost of our Chief Financial Officer and our Chief Compliance Officer and his respective staff’s compensation and compensation-related expenses. This will create conflicts of interest that our board of directors will monitor. For example,
under the terms of the license agreement, we will be unable to preclude the Adviser from licensing or transferring the ownership of the “CM Finance” name to third parties, some of whom may compete against us. Consequently, we will be
unable to prevent any damage to goodwill that may occur as a result of the activities of the Adviser or others. Furthermore, in the event the license agreement is terminated, we will be required to change our name and cease using “CM
Finance” as part of our name. Any of these events could disrupt our recognition in the market place, damage any goodwill we may have generated and otherwise harm our business.
Our financial condition, results of operations and cash flows will depend on our ability to manage our business effectively.
Our ability to achieve our investment objective will depend on our ability to manage our business and to grow our investments and earnings.
This will depend, in turn, on the Adviser’s ability to identify, invest in and monitor portfolio companies that meet our investment criteria. The achievement of our investment objective on a cost-effective basis will depend upon the
Adviser’s execution of our investment process, its ability to provide competent, attentive and efficient services to us and, to a lesser extent, our access to financing on acceptable terms. The Adviser’s investment professionals may have
substantial responsibilities in connection with the management of other investment funds, accounts and investment vehicles. The personnel of the Adviser may also be called upon to provide managerial assistance to our portfolio companies. These
activities may distract them from identifying new investment opportunities for us or slow our rate of investment. Any failure to manage our business and our future growth effectively could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
The Adviser’s incentive fee structure may create incentives to it that are not fully aligned
with the interests of our stockholders.
In the course of our investing activities, we pay management and incentive fees to the
Adviser. We have entered into an Investment Advisory Agreement with the Adviser that provides that these fees will be based on the value of our gross assets. As a result, investors in our common stock will invest on a “gross” basis and
receive distributions on a “net” basis after expenses, resulting in a lower rate of return than one might achieve through direct investments. Because these fees are based on the value of our gross assets, the Adviser will benefit when we
incur debt or use leverage. This fee structure may encourage the Adviser to cause us to borrow money to finance additional investments. Under certain circumstances, the use of borrowed money may increase the likelihood of default, which would
disfavor our stockholders.
Our board of directors is charged with protecting our interests by monitoring how the Adviser addresses these
and other conflicts of interests associated with its management services and compensation. While our board of directors is not expected to review or approve each investment decision, borrowing or incurrence of leverage, our independent directors
will periodically review the Adviser’s services and fees as well as its portfolio management decisions and
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portfolio performance. In connection with these reviews, our independent directors will consider whether our fees and expenses (including those related to leverage) remain appropriate. As a
result of this arrangement, the Adviser may from time to time have interests that differ from those of our stockholders, giving rise to a conflict.
Our incentive fee may induce the Adviser to make speculative investments.
The Adviser receives an incentive fee based, in part, upon net capital gains realized on our investments. Unlike that portion of the incentive
fee based on income, there is no hurdle rate applicable to the portion of the incentive fee based on net capital gains. Additionally, under the incentive fee structure, the Adviser may benefit when we recognize capital gains and, because the Adviser
will determine when to sell a holding, the Adviser will control the timing of the recognition of such capital gains. As a result, the Adviser may have a tendency to invest more capital in investments likely to result in capital gains, compared to
income-producing securities. Such a practice could result in our investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during economic downturns.
We may be obligated to pay the Adviser incentive compensation even if we incur a loss and may pay more than 20.0% of our net capital gains because we
cannot recover payments made in previous years.
The Adviser is entitled to incentive compensation for each fiscal quarter in an
amount equal to a percentage of the excess of our investment income for that quarter (before deducting incentive compensation) above a threshold return for that quarter. Thus, we may be required to pay the Adviser incentive compensation for a fiscal
quarter even if there is a decline in the value of our portfolio or we incur a net loss for that quarter. If we pay an incentive fee of 20% of our realized capital gains (net of all realized capital losses and unrealized capital depreciation on a
cumulative basis) and thereafter experience additional realized capital losses or unrealized capital depreciation, we will not be able to recover any portion of the incentive fee previously paid.
PIK interest payments we receive will increase our assets under management and, as a result, will increase the amount of base management fees and
incentive fees payable by us to the Adviser.
Certain of our debt investments contain provisions providing for the payment of PIK
interest. Because PIK interest results in an increase in the size of the loan balance of the underlying loan, the receipt by us of PIK interest will have the effect of increasing our assets under management. As a result, because the base management
fee that we pay to the Adviser is based on the value of our gross assets, receipt of PIK interest will result in an increase in the amount of the base management fee payable by us. In addition, any such increase in a loan balance due to the receipt
of PIK interest will cause such loan to accrue interest on the higher loan balance, which will result in an increase in our pre-incentive fee net investment income and, as a result, an increase in incentive fees that are payable to the Adviser.
The involvement of our interested directors in the valuation process may create conflicts of interest.
We expect to make most of our portfolio investments in the form of loans and securities that are not publicly traded and for which there are
limited or no market based price quotations available. As a result, our board of directors will determine the fair value of these loans and securities in good faith as described below in “—Most of our portfolio investments will be recorded
at fair value as determined in good faith by our board of directors and, as a result, there may be uncertainty as to the value of our portfolio investments.” In connection with that determination, investment professionals from the Adviser may
provide our board of directors with valuations based upon the most recent portfolio company financial statements available and projected financial results of each portfolio company. While the valuation for each portfolio investment will be reviewed
by an independent valuation firm quarterly, the ultimate determination of fair value will be made by our board of directors and not by such third-party valuation firm. In addition, Messrs. Mauer and Jansen, each an interested member of our board of
directors, has a direct or indirect pecuniary interest in the Adviser. The participation of the Adviser’s investment professionals in our valuation process, and the pecuniary interest in the Adviser by certain members
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of our board of directors, could result in a conflict of interest as the Adviser’s management fee is based, in part, on the value of our gross assets, and our incentive fees will be based,
in part, on realized gains and realized and unrealized losses.
The Investment Advisory Agreement and the Administration Agreement with the Adviser
were not negotiated on an arm’s length basis and may not be as favorable to us as if they had been negotiated with an unaffiliated third party.
The Investment Advisory Agreement and the Administration Agreement were negotiated between related parties. Consequently, their terms,
including fees payable to the Adviser, may not be as favorable to us as if they had been negotiated with an unaffiliated third party. In addition, we may choose not to enforce, or to enforce less vigorously, our rights and remedies under these
agreements because of our desire to maintain our ongoing relationship with the Adviser and its affiliates. Any such decision, however, would breach our fiduciary obligations to our stockholders.
Our incentive fee arrangements with the Adviser may vary from those of other investment funds, account or investment vehicles that the Adviser may
manage in the future, which may create an incentive for the Adviser to devote time and resources to a higher fee-paying fund.
If
the Adviser is paid a higher performance-based fee from any other fund that it may manage in the future, it may have an incentive to devote more research and development or other activities, and/or recommend the allocation of investment
opportunities, to such higher fee-paying fund. For example, to the extent the Adviser’s incentive compensation is not subject to a hurdle or total return requirement with respect to another fund, it may have an incentive to devote time and
resources to such other fund. As a result, the investment professionals of the Adviser may devote time and resources to a higher fee-paying fund.
The Adviser’s liability is limited under the Investment Advisory Agreement and we have agreed to indemnify the Adviser against certain liabilities,
which may lead the Adviser to act in a riskier manner on our behalf than it would when acting for its own account.
Under the
Investment Advisory Agreement, the Adviser has not assumed any responsibility to us other than to render the services called for under that agreement. It will not be responsible for any action of our board of directors in following or declining to
follow the Adviser’s advice or recommendations. Under the Investment Advisory Agreement, the Adviser, its officers, members and personnel, and any person controlling or controlled by the Adviser will not be liable to us, any subsidiary of ours,
our directors, our stockholders or any subsidiary’s stockholders or partners for acts or omissions performed in accordance with and pursuant to the Investment Advisory Agreement, except those resulting from acts constituting gross negligence,
willful misconduct, bad faith or reckless disregard of the duties that the Adviser owes to us under the Investment Advisory Agreement. In addition, as part of the Investment Advisory Agreement, we have agreed to indemnify the Adviser and each of its
officers, directors, members, managers and employees from and against any claims or liabilities, including reasonable legal fees and other expenses reasonably incurred, arising out of or in connection with our business and operations or any action
taken or omitted on our behalf pursuant to authority granted by the Investment Advisory Agreement, except where attributable to gross negligence, willful misconduct, bad faith or reckless disregard of such person’s duties under the Investment
Advisory Agreement. These protections may lead the Adviser to act in a riskier manner when acting on our behalf than it would when acting for its own account.
We operate in a highly competitive market for investment opportunities, which could reduce returns and result in losses.
A number of entities compete with us to make the types of investments that we make. We compete with public and private funds, other BDCs,
commercial and investment banks, commercial financing companies and, to the extent they provide an alternative form of financing, private equity and hedge funds. Many of our
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competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, we believe some of our competitors may have access to
funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than
us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC or the source-of-income, asset diversification and distribution requirements we must satisfy to maintain our RIC
qualification. The competitive pressures we face may have a material adverse effect on our business, financial condition, results of operations and cash flows. As a result of this competition, we may not be able to take advantage of attractive
investment opportunities from time to time, and we may not be able to identify and make investments that are consistent with our investment objective.
With respect to the investments we make, we do not seek to compete based primarily on the interest rates we offer, and we believe that some of
our competitors may make loans with interest rates that will be lower than the rates we offer. With respect to all investments, we may lose some investment opportunities if we do not match our competitors’ pricing, terms and structure. However,
if we match our competitors’ pricing, terms and structure, we may experience decreased net interest income, lower yields and increased risk of credit loss.
We will be subject to corporate-level U.S. federal income tax if we are unable to maintain our qualification as a RIC under Subchapter M of the Code.
To maintain our qualification as a RIC under Subchapter M of the Code, we must meet certain source-of-income, asset
diversification and distribution requirements. The source-of-income requirement will be satisfied if we obtain at least 90% of our income for each year from dividends, interest, gains from the sale of stock or securities or similar sources. The
distribution requirement for a RIC is satisfied if we distribute at least 90% of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, to our stockholders on an annual basis. Because we incur
debt, we will be subject to certain asset coverage ratio requirements under the 1940 Act and financial covenants under loan and credit agreements that could, under certain circumstances, restrict us from making distributions necessary to maintain
our qualification as a RIC. If we are unable to obtain cash from other sources, we may fail to maintain our qualification as a RIC and, thus, may be subject to corporate-level U.S. federal income tax. To maintain our qualification as a RIC, we must
also meet certain asset diversification requirements at the end of each calendar quarter. Failure to meet these tests may result in our having to dispose of certain investments quickly in order to prevent the loss of our qualification as a RIC.
Because most of our investments are in private or thinly-traded public companies, any such dispositions may be made at disadvantageous prices and may result in substantial losses. No certainty can be provided that we will satisfy the asset
diversification requirements of the other requirements necessary to maintain our qualification as a RIC. If we fail to maintain our qualification as a RIC for any reason and become subject to corporate income tax, the resulting corporate income
taxes could substantially reduce our net assets, the amount of income available for distributions to our stockholders and the amount of funds available for new investments. Such a failure would have a material adverse effect on us and our
stockholders. See “Certain U.S. Federal Income Tax Considerations—Taxation as a RIC.”
We may need to raise additional capital to
grow because we must distribute most of our income.
We may need additional capital to fund new investments and grow our portfolio
of investments. We intend to access the capital markets periodically to issue debt or equity securities or borrow from financial institutions in order to obtain such additional capital. Unfavorable economic conditions could increase our funding
costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. A reduction in the availability of new capital could limit our ability to grow. In addition, we are required to distribute at least 90% of
our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, to our stockholders to maintain our qualification as a RIC. As a result, these earnings will not be available to fund new investments. An
inability on our part to access the capital markets successfully could limit our ability to grow our business and execute our business strategy fully and could decrease our earnings, if any, which would have an adverse effect on the value of our
securities.
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Our distributions to stockholders may be funded, in part, from waivers of investment advisory fees by the
Adviser.
To the extent any distributions by us are funded through waivers of the incentive fee portion of our investment advisory
fees, such distributions will not be based on our investment performance, and can only be sustained if we achieve positive investment performance in future periods and/or the Adviser continues to waive such fees. Any such waivers in no way imply
that the Adviser will waive incentive fees in any future period. There can be no assurance that we will achieve the performance necessary or that the Adviser will waive all or any portion of the incentive fee necessary to be able to pay
distributions at a specific rate or at all.
You may not receive distributions, or our distributions may not grow over time.
We intend to make distributions on a quarterly basis to our stockholders out of assets legally available for distribution. We cannot assure you
that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. Our ability to pay distributions might be adversely affected by the impact of one or more of
the risk factors described in this prospectus. Due to the asset coverage test applicable to us under the 1940 Act as a BDC, we may be limited in our ability to make distributions. All distributions will be made at the discretion of our board of
directors and will depend on our earnings, financial condition, maintenance of RIC status, compliance with applicable BDC, SBA regulations (if applicable) and such other factors as our board of directors may deem relative from time to time. We
cannot assure you that we will make distributions to our stockholders in the future.
We may have difficulty paying our required distributions if we
recognize income before, or without, receiving cash representing such income.
For U.S. federal income tax purposes, we will
include in income certain amounts that we have not yet received in cash, such as the accrual of OID. This may arise if we receive warrants in connection with the making of a loan and in other circumstances, or through contracted PIK interest, which
represents contractual interest added to the loan balance and due at the end of the loan term. Such OID, which could be significant relative to our overall investment activities, and increases in loan balances as a result of contracted PIK
arrangements will be included in income before we receive any corresponding cash payments. We also may be required to include in income certain other amounts that we will not receive in cash.
Since in certain cases we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the
requirement to distribute at least 90% of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, to maintain our qualification as a RIC. In such a case, we may have to sell some of our investments
at times we would not consider advantageous or raise additional debt or equity capital or reduce new investment originations to meet these distribution requirements. If we are not able to obtain such cash from other sources, we may fail to maintain
our qualification as a RIC and thus be subject to corporate-level U.S. federal income tax. See “Certain U.S. Federal Income Tax Considerations—Taxation as a RIC.”
We may in the future choose to pay dividends in our own stock, in which case you may be required to pay tax in excess of the cash you receive.
We may distribute taxable dividends that are payable in part in our stock. Under certain applicable provisions of the Code and the
Treasury regulations, distributions payable in cash or in shares of stock at the election of stockholders are treated as taxable dividends. The Internal Revenue Service has issued a revenue procedure indicating that this rule will apply if the total
amount of cash to be distributed is not less than 20% of the total distribution. Under this revenue procedure, if too many stockholders elect to receive their distributions in cash, each such stockholder would receive a pro rata share of the total
cash to be distributed and would receive the remainder of their distribution in shares of stock. If we decide to make any distributions consistent with this revenue procedure
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that are payable in part in our stock, taxable stockholders receiving such dividends will be required to include the full amount of the dividend (whether received in cash, our stock, or
combination thereof) as ordinary income (or as long-term capital gain to the extent such distribution is properly designated as a capital gain dividend) to the extent of our current and accumulated earnings and profits for U.S. federal income tax
purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such dividends in excess of any cash received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be
less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to
such dividends, including in respect of all or a portion of such dividend that is payable in stock. If a significant number of our stockholders determine to sell shares of our stock in order to pay taxes owed on dividends, it may put downward
pressure on the trading price of our stock.
Regulations governing our operation as a BDC affect our ability to, and the way in which we raise
additional capital. As a BDC, the necessity of raising additional capital may expose us to risks, including the typical risks associated with leverage.
We may issue debt securities or preferred stock and/or borrow money from banks or other financial institutions, which we refer to collectively
as “senior securities,” up to the maximum amount permitted by the 1940 Act. Under the provisions of the 1940 Act, we are permitted as a BDC to issue senior securities in amounts such that our asset coverage ratio, as defined in the 1940
Act, equals at least 200% of our gross assets less all liabilities and indebtedness not represented by senior securities after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy this test. If that
happens, we would not be able to borrow additional funds until we were able to comply with the 200% (or the 150% asset coverage ratio effective as of May 2, 2019) asset coverage ratio under the 1940 Act. Also, any amounts that we use to service our
indebtedness would not be available for distributions to our common stockholders. If we issue senior securities, we will be exposed to typical risks associated with leverage, including an increased risk of loss.
We are not generally able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common
stock, or warrants, options or rights to acquire our common stock, at a price below then-current net asset value per share of our common stock if our board of directors determines that such sale is in our best interests. In this regard, at a meeting
initially convened on November 6, 2018 and reconvened on December 18, 2018, our stockholders voted to allow us to issue common stock at a price below net asset value per share for the period ending on the earlier of the one year
anniversary of the date of our 2018 Annual Meeting of Stockholders and the date of our 2019 Annual Meeting of Stockholders, which we expect to be held in November 2019. Our stockholders did not specify a maximum discount below net asset value at
which we are able to issue our common stock, although the number of shares sold in each offering may not exceed 25% of our outstanding common stock immediately prior to such sale. In addition, we cannot issue shares of our common stock below net
asset value unless our board of directors determines that it would be in our and our stockholders’ best interests to do so. Sales of common stock at prices below net asset value per share dilute the interests of existing stockholders, have the
effect of reducing our net asset value per share and may reduce our market price per share. In addition, continuous sales of common stock below net asset value may have a negative impact on total returns and could have a negative impact on the
market price of our shares of common stock. If we raise additional funds by issuing common stock or senior securities convertible into, or exchangeable for, our common stock, then the percentage ownership of our stockholders at that time will
decrease, and you may experience dilution. In addition, neither Stifel nor the Cyrus Funds are subject to these restrictions and may sell their respective shares of our common stock at a per share price that is below net asset value per share, which
may negatively affect the prevailing market prices for our common stock and our ability to raise additional capital.
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Our board of directors has approved our ability to incur additional leverage, which may increase our risks
related to our use of leverage.
The 1940 Act generally prohibits us from incurring indebtedness unless immediately after such
borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). However, recent legislation has modified the 1940 Act by allowing a BDC to increase the maximum
amount of leverage it may incur from an asset coverage ratio of 200% to an asset coverage ratio of 150%, if certain requirements are met. In other words, prior to the enactment of the legislation, a BDC could borrow $1 for investment purposes for
every $1 of investor equity. Now, for those BDCs that satisfy the legislation’s approval and disclosure requirements, the BDC can borrow $2 for investment purposes for every $1 of investor equity. Under the legislation, we are allowed to
increase our leverage capacity if shareholders representing at least a majority of the votes cast, when quorum is met, approve a proposal to do so. If we receive shareholder approval, we would be allowed to increase our leverage capacity on the
first day after such approval. Alternatively, the legislation allows the “required majority” of our independent directors, as defined in Section 57(o) of the 1940 Act, to approve an increase in our leverage capacity, and such approval
would become effective after one year. In either case, we would be required to make certain disclosures on our website and in SEC filings regarding, among other things, the receipt of approval to increase our leverage, our leverage capacity and
usage, and risks related to leverage.
In accordance with the legislation, on May 2, 2018, our board of directors, including a
“required majority” approved the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, our asset coverage requirements for senior securities will change from 200% to 150%, effective as of May 2,
2019.
Leverage magnifies the potential for loss on investments and on invested equity capital. As we use leverage to partially finance
our investments, you will experience increased risks of investing in our securities. If the value of our assets increases, then leveraging would cause the net asset value attributable to our common stock to increase more sharply than it would have
had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged our business. Similarly, any increase in our income in excess of
interest payable on the borrowed funds would cause our net investment income to increase more than it would without the leverage, while any decrease in our income would cause net investment income to decline more sharply than it would have had we
not borrowed. Such a decline could negatively affect our ability to pay common stock dividends, scheduled debt payments or other payments related to our securities. Leverage is generally considered a speculative investment technique. See “Risk
Factors – Risks Related to Our Business and Structure – Because we finance our investments with borrowed money, the potential for gain or loss on amounts invested in us is magnified and may increase the risk of investing in us.”
Because we finance our investments with borrowed money, the potential for gain or loss on amounts invested in us is magnified and may increase the risk
of investing in us.
The use of leverage magnifies the potential for gain or loss on amounts invested. The use of leverage is
generally considered a speculative investment technique and increases the risks associated with investing in our securities. If we continue to use leverage to partially finance our investments through banks, insurance companies and other lenders,
you will experience increased risks of investment in our common stock. Lenders of these funds have fixed dollar claims on our assets that are superior to the claims of our common stockholders, and we would expect such lenders to seek recovery
against our assets in the event of a default. As of December 31, 2018, substantially all of our assets were pledged as collateral under the Financing Facilities. In addition, under the terms of the Financing Facilities and any borrowing
facility or other debt instrument we may enter into, we are likely to be required to use the net proceeds of any investments that we sell to repay a portion of the amount borrowed under such facility or instrument before applying such net proceeds
to any other uses. If the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged, thereby magnifying losses or eliminating our stake in a leveraged
32
investment. Similarly, any decrease in our revenue or income will cause our net income to decline more sharply than it would have had we not borrowed. Such a decline would also negatively affect
our ability to make distributions with respect to our common stock or preferred stock. Our ability to service any debt will depend largely on our financial performance and will be subject to prevailing economic conditions and competitive pressures.
Moreover, as the base management fee payable to the Adviser will be payable based on the value of our gross assets, including those assets acquired through the use of leverage, the Adviser will have a financial incentive to incur leverage, which may
not be consistent with our stockholders’ interests. In addition, our common stockholders will bear the burden of any increase in our expenses as a result of our use of leverage, including interest expenses and any increase in the base
management fee payable to the Adviser.
As a BDC, we generally are required to meet a coverage ratio of total assets to total borrowings
and other senior securities, which include all of our borrowings and any preferred stock that we may issue in the future, of at least 200% (or 150% effective as of May 2, 2019). If this ratio declines below 200% (or 150% effective as of
May 2, 2019), we will not be able to incur additional debt and could be required to sell a portion of our investments to repay some debt when it is otherwise disadvantageous for us to do so. This could have a material adverse effect on our
operations, and we may not be able to make distributions. The amount of leverage that we employ will depend on the Adviser’s and our board of directors’ assessment of market and other factors at the time of any proposed borrowing. We
cannot assure you that we will be able to obtain credit at all or on terms acceptable to us.
Illustration. The following table
illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns, net of expenses. The calculations in the table below are hypothetical and actual results may be higher or lower than those
appearing below.
Assumed Return on Our Portfolio(1)
(net of expenses)
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|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
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(10.0)%
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(5.0)%
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0.0%
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5.0%
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10.0%
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|
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Corresponding net return to common stockholder
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(23.6)%
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(13.9)%
|
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(4.3)%
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5.4%
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15.0%
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(1)
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Assumes $302.0 million in total assets, $134.0 million in debt outstanding, $156.4 million in
net assets, and an average cost of funds of 5.00%. Actual interest payments may be different.
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In addition, our debt
facilities may impose financial and operating covenants that restrict our business activities, including limitations that hinder our ability to finance additional loans and investments or to make the distributions required to maintain our
qualification as a RIC under the Code.
We may default under the Financing Facilities or any future borrowing facility we enter into or be unable to
amend, repay or refinance any such facility on commercially reasonable terms, or at all, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
In the event we default under the Financing Facilities or any other future borrowing facility, our business could be adversely affected as we
may be forced to sell a portion of our investments quickly and prematurely at prices that may be disadvantageous to us in order to meet our outstanding payment obligations and/or support working capital requirements under the Financing Facilities or
such future borrowing facility, any of which would have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, following any such default, the agent for the lenders under the Financing
Facilities or such future borrowing facility could assume control of the disposition of any or all of our assets, including the selection of such assets to be disposed and the timing of such disposition, which would have a material adverse effect on
our business, financial condition, results of operations and cash flows.
33
Provisions in the Financing Facilities or any other future borrowing facility may limit our discretion in
operating our business.
The Financing Facilities are, and any future borrowing facility may be, backed by all or a portion of our
loans and securities on which the lenders will or, in the case of a future facility, may have a security interest. We may pledge up to 100% of our assets and may grant a security interest in all of our assets under the terms of any debt instrument
we enter into with lenders. We expect that any security interests we grant will be set forth in a pledge and security agreement and evidenced by the filing of financing statements by the agent for the lenders. In addition, we expect that the
custodian for our securities serving as collateral for such loan would include in its electronic systems notices indicating the existence of such security interests and, following notice of occurrence of an event of default, if any, and during its
continuance, will only accept transfer instructions with respect to any such securities from the lender or its designee. If we were to default under the terms of any debt instrument, the agent for the applicable lenders would be able to assume
control of the timing of disposition of any or all of our assets securing such debt, which would have a material adverse effect on our business, financial condition, results of operations and cash flows.
In addition, any security interests as well as negative covenants under the Financing Facilities or any other borrowing facility may limit our
ability to create liens on assets to secure additional debt and may make it difficult for us to restructure or refinance indebtedness at or prior to maturity or obtain additional debt or equity financing. In addition, if our borrowing base under the
Financing Facilities or any other borrowing facility were to decrease, we would be required to secure additional assets in an amount equal to any borrowing base deficiency. In the event that all of our assets are secured at the time of such a
borrowing base deficiency, we could be required to repay advances under the Financing Facilities or any other borrowing facility or make deposits to a collection account, either of which could have a material adverse impact on our ability to fund
future investments and to make stockholder distributions.
In addition, under the Financing Facilities or any future borrowing facility we
will be subject to limitations as to how borrowed funds may be used, which may include restrictions on geographic and industry concentrations, loan size, payment frequency and status, average life, collateral interests and investment ratings, as
well as regulatory restrictions on leverage, which may affect the amount of funding that may be obtained. There may also be certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on
delinquencies and charge-offs, a violation of which could limit further advances and, in some cases, result in an event of default. An event of default under the Financing Facilities or any other borrowing facility could result in an accelerated
maturity date for all amounts outstanding thereunder, which could have a material adverse effect on our business and financial condition. This could reduce our revenues and, by delaying any cash payment allowed to us under the Financing Facilities
or any other borrowing facility until the lenders have been paid in full, reduce our liquidity and cash flow and impair our ability to grow our business and maintain our qualification as a RIC.
Because we borrow money to make our investments, if market interest rates were to increase, our cost of capital could increase, which could reduce our
net investment income.
Because we borrow money to make investments, our net investment income will depend, in part, upon the
difference between the rate at which we borrow funds and the rate at which we invest those funds. As a result, we can offer no assurance that a significant change in market interest rates would not have a material adverse effect on our net
investment income in the event we use debt to finance our investments. In periods of rising interest rates, our cost of funds would increase, which could reduce our net investment income. We may use interest rate risk management techniques in an
effort to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. There is no limit on our ability to enter derivative transactions.
34
In addition, a rise in the general level of interest rates typically leads to higher interest
rates applicable to our debt investments. Accordingly, an increase in interest rates may result in an increase of the amount of our pre-incentive fee net investment income and, as a result, an increase in incentive fees payable to the Adviser.
We are exposed to risks associated with changes in interest rates including potential effects on our cost of capital and net investment income.
General interest rate fluctuations and changes in credit spreads on floating rate loans may have a substantial negative impact on
our investments and investment opportunities and, accordingly, may have a material adverse effect on our rate of return on invested capital. In addition, an increase in interest rates would make it more expensive to use debt to finance our
investments. Decreases in credit spreads on debt that pays a floating rate of return would have an impact on the income generation of our floating rate assets. Trading prices for debt that pays a fixed rate of return tend to fall as interest rates
rise. Trading prices tend to fluctuate more for fixed rate securities that have longer maturities. Although we have no policy governing the maturities of our investments, under current market conditions we expect that we will invest in a portfolio
of debt generally having maturities of up to 6 years. This means that we will be subject to greater risk (other things being equal) than an entity investing solely in shorter-term securities.
Adverse developments in the credit markets may impair our ability to secure debt financing.
During the economic downturn in the United States that began in mid-2007, many commercial banks and other financial institutions stopped
lending or significantly curtailed their lending activity. In addition, in an effort to stem losses and reduce their exposure to segments of the economy deemed to be high risk, some financial institutions limited routine refinancing and loan
modification transactions and even reviewed the terms of existing facilities to identify bases for accelerating the maturity of existing lending facilities. As a result, it may be difficult for us to obtain desired financing to finance the growth of
our investments on acceptable economic terms, or at all.
If we are unable to consummate credit facilities on commercially reasonable
terms, our liquidity may be reduced significantly. If we are unable to repay amounts outstanding under any facility we may enter into and are declared in default or are unable to renew or refinance any such facility, it would limit our ability to
initiate significant originations or to operate our business in the normal course. These situations may arise due to circumstances that we may be unable to control, such as inaccessibility of the credit markets, a severe decline in the value of the
U.S. dollar, a further economic downturn or an operational problem that affects third parties or us, and could materially damage our business. Moreover, we are unable to predict when economic and market conditions may become more favorable. Even if
such conditions improve broadly and significantly over the long term, adverse conditions in particular sectors of the financial markets could adversely impact our business.
Our ability to enter into transactions involving derivatives and financial commitment transactions may be limited.
The SEC has proposed a new rule under the 1940 Act that would govern the use of derivatives (defined to include any swap, security-based swap,
futures contract, forward contract, option or any similar instrument) as well as financial commitment transactions (defined to include reverse repurchase agreements, short sale borrowings and any firm or standby commitment agreement or similar
agreement) by BDCs. Under the proposed rule, a BDC would be required to comply with one of two alternative portfolio limitations and manage the risks associated with derivatives transactions and financial commitment transactions by segregating
certain assets. Furthermore, a BDC that engages in more than a limited amount of derivatives transactions or that uses complex derivatives would be required to establish a formalized derivatives risk management program. If the SEC adopts this rule
in the form proposed, our ability to enter into transactions involving such instruments may be hindered, which could have an adverse effect on our business, financial condition and results of operations.
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Terrorist attacks, acts of war or natural disasters may affect any market for our common stock, impact the
businesses in which we invest and harm our business, operating results and financial condition.
Terrorist acts, acts of war or
natural disasters may disrupt our operations, as well as the operations of the businesses in which we invest. Such acts have created, and continue to create, economic and political uncertainties and have contributed to global economic instability.
Future terrorist activities, military or security operations, or natural disasters could further weaken the domestic/global economies and create additional uncertainties, which may negatively impact the businesses in which we invest directly or
indirectly and, in turn, could have a material adverse impact on our business, operating results and financial condition. Losses from terrorist attacks and natural disasters are generally uninsurable.
The failure in cyber security systems, as well as the occurrence of events unanticipated in our disaster recovery systems and management continuity
planning could impair our ability to conduct business effectively.
The occurrence of a disaster such as a cyber-attack, a natural
catastrophe, an industrial accident, events unanticipated in our disaster recovery systems, or a support failure from external providers, could have an adverse effect on our ability to conduct business and on our results of operations and financial
condition, particularly if those events affect our computer-based data processing, transmission, storage, and retrieval systems or destroy data. If a significant number of our managers were unavailable in the event of a disaster, our ability to
effectively conduct our business could be severely compromised.
We depend heavily upon computer systems to perform necessary business
functions. Despite our implementation of a variety of security measures, our computer systems could be subject to cyber-attacks and unauthorized access, such as physical and electronic break-ins or unauthorized tampering. Like other companies, we
may experience threats to our data and systems, including malware and computer virus attacks, unauthorized access, system failures and disruptions. If one or more of these events occurs, it could potentially jeopardize the confidential, proprietary
and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations, which could result in damage to our reputation, financial losses,
litigation, increased costs, regulatory penalties and/or customer dissatisfaction or loss.
Third parties with which we do business may
also be sources of cybersecurity or other technological risks. We outsource certain functions and these relationships allow for the storage and processing of our information, as well as customer, counterparty, employee and borrower information.
While we engage in actions to reduce our exposure resulting from outsourcing, ongoing threats may result in unauthorized access, loss, exposure or destruction of data, or other cybersecurity incidents, with increased costs and other consequences,
including those described above.
The effect of global climate change may impact the operations of our portfolio companies.
There may be evidence of global climate change. Climate change creates physical and financial risk and some of our portfolio companies may be
adversely affected by climate change. For example, the needs of customers of energy companies vary with weather conditions, primarily temperature and humidity. To the extent weather conditions are affected by climate change, energy use could
increase or decrease depending on the duration and magnitude of any changes. Increases in the cost of energy could adversely affect the cost of operations of our portfolio companies if the use of energy products or services is material to their
business. A decrease in energy use due to weather changes may affect some of our portfolio companies’ financial condition, through decreased revenues. Extreme weather conditions in general require more system backup, adding to costs, and can
contribute to increased system stresses, including service interruptions.
If we do not invest a sufficient portion of our assets in qualifying
assets, we could fail to maintain our qualification as a BDC or be precluded from investing according to our current business strategy.
As a BDC, we may not acquire any assets other than “qualifying assets” unless, at the time of and after giving effect to such
acquisition, at least 70% of our total assets are qualifying assets.
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We believe that most of the investments that we may acquire in the future will constitute
qualifying assets. However, we may be precluded from investing in what we believe to be attractive investments if such investments are not qualifying assets for purposes of the 1940 Act. If we do not invest a sufficient portion of our assets in
qualifying assets, we could violate the 1940 Act provisions applicable to BDCs. As a result of such violation, specific rules under the 1940 Act could prevent us, for example, from making follow-on investments in existing portfolio companies (which
could result in the dilution of our position) or could require us to dispose of investments at inappropriate times in order to come into compliance with the 1940 Act. If we need to dispose of such investments quickly, it could be difficult to
dispose of such investments on favorable terms. We may not be able to find a buyer for such investments and, even if we do find a buyer, we may have to sell the investments at a substantial loss. Any such outcomes would have a material adverse
effect on our business, financial condition, results of operations and cash flows.
If we do not maintain our status as a BDC, we would be
subject to regulation as a registered closed-end investment company under the 1940 Act. As a registered closed-end investment company, we would be subject to substantially more regulatory restrictions under the 1940 Act, which would significantly
decrease our operating flexibility.
Most of our portfolio investments are recorded at fair value as determined in good faith by our board of
directors and, as a result, there may be uncertainty as to the value of our portfolio investments.
Most of our portfolio
investments will take the form of securities that are not publicly traded. The fair value of loans, securities and other investments that are not publicly traded may not be readily determinable, and we will value these investments at fair value as
determined in good faith by our board of directors, including to reflect significant events affecting the value of our investments. Most, if not all, of our investments (other than cash and cash equivalents) will be classified as Level 3 under the
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 820: Fair Value Measurements and Disclosures (“ASC 820”). This means that our portfolio valuations will be based on unobservable inputs
and our own assumptions about how market participants would price the asset or liability in question. Inputs into the determination of fair value of our portfolio investments require significant management judgment or estimation. Even if observable
market data are available, such information may be the result of consensus pricing information or broker quotes, which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of
consensus pricing and/or quotes accompanied by disclaimers materially reduces the reliability of such information. We have retained the services of independent service providers to review the valuation of these loans and securities. The types of
factors that the board of directors may take into account in determining the fair value of our investments generally include, as appropriate, comparison to publicly traded securities including such factors as yield, maturity and measures of credit
quality, the enterprise value of a portfolio company, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does
business and other relevant factors. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our
determinations of fair value may differ materially from the values that would have been used if a ready market for these loans and securities existed. Our net asset value could be adversely affected if our determinations regarding the fair value of
our investments were materially higher than the values that we ultimately realize upon the disposal of such loans and securities.
We
adjust quarterly the valuation of our portfolio to reflect our board of directors’ determination of the fair value of each investment in our portfolio. Any changes in fair value are recorded in our statement of operations as net change in
unrealized appreciation or depreciation.
We may experience fluctuations in our quarterly operating results.
We could experience fluctuations in our quarterly operating results due to a number of factors, including the interest rate payable on the
loans and debt securities we acquire, the default rate on such loans and securities, the
37
level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic
conditions. In light of these factors, results for any period should not be relied upon as being indicative of performance in future periods.
We
are an “emerging growth company” under the JOBS Act, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
We currently are an “emerging growth company,” as defined in the JOBS Act, until the earlier of (a) the last day of the fiscal
year (i) ending June 30, 2019, (ii) in which we have total annual gross revenue of at least $1.07 billion, or (iii) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held
by non-affiliates exceeds $700 million as of the prior June 30th, and (b) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year
period.
We are taking advantage of some of the reduced regulatory and disclosure requirements permitted by the JOBS Act and, as a result,
some investors may consider our common stock less attractive, which could reduce the market value of our common stock. For example, while we expect to remain an emerging growth company through June 30, 2019, we are taking advantage of the
exemption from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting and
the extended transition period available to emerging growth companies to comply with “new or revised accounting standards” until those standards are applicable to private companies. As a result, our financial statements may not be
comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies. This may increase the risk that material weaknesses or other
deficiencies in our internal control over financial reporting go undetected.
Efforts to comply with Section 404 of the Sarbanes-Oxley Act will
involve significant expenditures, and non-compliance with Section 404 of the Sarbanes-Oxley Act may adversely affect us and the market price of our common stock.
Under current SEC rules, we are required to report on our internal control over financial reporting pursuant to Section 404(a) of the
Sarbanes-Oxley Act, and related rules and regulations of the SEC. Because we will no longer qualify as an emerging growth company beginning with our fiscal year ending June 30, 2019, our independent registered public accounting firm must audit
this report, pursuant to Section 404(b) of the Sarbanes-Oxley Act, beginning with the fiscal year ending June 30, 2019. We are required to review on an annual basis our internal control over financial reporting, and on a quarterly and
annual basis to evaluate and disclose changes in our internal control over financial reporting.
As a result, we expect to incur
additional expenses in the near term that may negatively impact our financial performance and our ability to make distributions. This process also will result in a diversion of management’s time and attention. We cannot be certain as to the
timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations, and we may not be able to ensure that the process is effective or that our internal control over financial reporting is or will be
effective in a timely manner. In the event that we are unable to maintain or achieve compliance with Section 404 of the Sarbanes-Oxley Act and related rules, we and the market price of our common stock may be adversely affected.
Our status as an “emerging growth company” under the JOBS Act may make it more difficult to raise capital as and when we need it.
Because of the exemptions from various reporting requirements provided to us as an “emerging growth company” and because we will have
an extended transition period for complying with new or revised financial accounting standards, we may be less attractive to investors and it may be difficult for us to raise additional
38
capital as and when we need it. Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting is not as transparent as other
companies in our industry. If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.
New or amended laws or regulations governing our operations may adversely affect our business.
We and our portfolio companies will be subject to regulation by laws at the U.S. federal, state and local levels. These laws and regulations,
as well as their interpretation, may change from time to time, and new laws, regulations and interpretations may also come into effect. Any such new or changed laws or regulations could have a material adverse effect on our business.
Additionally, changes to the laws and regulations governing our operations related to permitted investments may cause us to alter our
investment strategy in order to avail ourselves of new or different opportunities. Such changes could result in material differences to the strategies and plans set forth in this prospectus and our filings with the SEC, and may shift our investment
focus from the areas of expertise of the Adviser to other types of investments in which the Adviser may have little or no expertise or experience. Any such changes, if they occur, could have a material adverse effect on our results of operations and
the value of your investment.
Our board of directors may change our investment objective, operating policies and strategies without prior notice or
stockholder approval.
Our board of directors has the authority, except as otherwise provided in the 1940 Act, to modify or waive
our investment objective or certain of our operating policies and strategies without prior notice and without stockholder approval. However, absent stockholder approval, we may not change the nature of our business so as to cease to be, or withdraw
our election as, a BDC. We cannot predict the effect any changes to our current operating policies and strategies would have on our business, operating results and the market price of our common stock. Nevertheless, any such changes could adversely
affect our business and impair our ability to make distributions to our stockholders.
The Adviser can resign as the Adviser or administrator upon
60 days’ notice and we may not be able to find a suitable replacement within that time, or at all, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations.
The Adviser has the right under the Investment Advisory Agreement to resign as the Adviser at any time upon not less than 60 days’ written
notice, whether we have found a replacement or not. Similarly, the Adviser has the right under the Administration Agreement to resign at any time upon not less than 60 days’ written notice, whether we have found a replacement or not. If the
Adviser were to resign, we may not be able to find a new investment adviser or administrator or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 60 days, or at all. If
we are unable to do so quickly, our operations are likely to experience a disruption, our financial condition, business and results of operations as well as our ability to pay distributions to our stockholders are likely to be adversely affected and
the market price of our shares may decline. In addition, the coordination of our internal management and investment or administrative activities, as applicable, is likely to suffer if we are unable to identify and reach an agreement with a single
institution or group of executives having the expertise possessed by the Adviser. Even if we are able to retain comparable management, whether internal or external, the integration of such management and their lack of familiarity with our investment
objective may result in additional costs and time delays that may adversely affect our business, financial condition, results of operations and cash flows.
39
We are highly dependent on information systems, and systems failures could significantly disrupt our
business, which may, in turn, negatively affect the market price of our common stock and our ability to make distributions to our stockholders.
Our business is highly dependent on the communications and information systems of the Adviser, which are provided to us on behalf of the
Adviser by Cyrus Capital pursuant to the Services Agreement directly or through third party service providers. Any failure or interruption of such systems, including as a result of the termination of the Services Agreement or an agreement with any
such third party service provider, could cause delays or other problems in our activities. This, in turn, could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to
make distributions to our stockholders.
The current state of the economy and financial markets of the United States, China and other several
countries in the European Union increases the likelihood of adverse effects on our financial position and results of operations.
Due to federal budget deficit concerns, S&P downgraded the federal government’s credit rating from AAA to AA+ for the first time in
history on August 5, 2011. Further, Moody’s and Fitch had warned that they may downgrade the federal government’s credit rating. Further downgrades or warnings by S&P or other rating agencies, and the United States
government’s credit and deficit concerns in general, could cause interest rates and borrowing costs to rise, which may negatively impact both the perception of credit risk associated with our debt portfolio and our ability to access the debt
markets on favorable terms. In addition, a decreased U.S. government credit rating could create broader financial turmoil and uncertainty, which may weigh heavily on our financial performance and the value of our common stock.
In 2010, a financial crisis emerged in Europe, triggered by high budget deficits and rising direct and contingent sovereign debt in Greece,
Ireland, Italy, Portugal and Spain, which created concerns about the ability of these nations to continue to service their sovereign debt obligations. While the financial stability of many of such countries has improved significantly, risks
resulting from any future debt crisis in Europe or any similar crisis could have a detrimental impact on the global economic recovery, sovereign and non-sovereign debt in these countries and the financial condition of European financial
institutions. In July and August 2015, Greece reached agreements with its international creditors for bailouts that provide aid in exchange for austerity terms that had previously been rejected by Greek voters. Market and economic disruptions have
affected, and may in the future affect, consumer confidence levels and spending, personal bankruptcy rates, levels of incurrence and default on consumer debt and home prices, among other factors. We cannot assure you that market disruptions in
Europe, including the increased cost of funding for certain governments and financial institutions, will not impact the global economy, and we cannot assure you that assistance packages will be available, or if available, be sufficient to stabilize
countries and markets in Europe or elsewhere affected by a financial crisis. To the extent uncertainty regarding any economic recovery in Europe negatively impacts consumer confidence and consumer credit factors, our business, financial condition
and results of operations could be significantly and adversely affected.
In the second quarter of 2015, stock prices in China experienced
a significant drop, resulting primarily from continued selloff of shares trading in Chinese markets. In addition, in August 2015, Chinese authorities sharply devalued China’s currency. Since then, the Chinese capital markets have continued to
experience periods of instability. In June 2016, British voters passed a referendum to exit the European Union leading to heightened volatility in global markets and foreign currencies. These market and economic disruptions have affected, and may in
the future affect, the U.S. capital markets, which could adversely affect our business, financial condition or results of operations.
In
October 2014, the Federal Reserve announced that it was concluding its bond-buying program, or quantitative easing, which was designed to stimulate the economy and expand the Federal Reserve’s holdings of long-term securities, suggesting that
key economic indicators, such as the unemployment rate, had showed signs
40
of improvement since the inception of the program. It is unclear what effect, if any, the conclusion of the Federal Reserve’s bond-buying program will have on the value of our investments.
Additionally, the Federal Reserve has gradually raised the federal funds rate since December 2015, and has announced its intention to continue to raise the federal funds rate over time. These developments, along with the United States
government’s credit and deficit concerns, the European sovereign debt crisis and the economic slowdown in China, could cause interest rates and borrowing costs to rise, which may negatively impact our ability to access the debt markets on
favorable terms.
Our board of directors is authorized to reclassify any unissued shares of common stock into one or more classes of preferred
stock, which could convey special rights and privileges to its owners.
Under Maryland General Corporation Law and our charter, our
board of directors is authorized to classify and reclassify any authorized but unissued shares of stock into one or more classes of stock, including preferred stock. Prior to issuance of shares of each class or series, the board of directors will be
required by Maryland law and our charter to set the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to stockholder distributions, qualifications and terms or conditions of redemption for each class or
series. Thus, the board of directors could authorize the issuance of shares of preferred stock with terms and conditions that could have the effect of delaying, deferring or preventing a transaction or a change in control that might involve a
premium price for holders of our common stock or that otherwise might be in their best interest. The cost of any such reclassification would be borne by our common stockholders. The issuance of preferred shares convertible into shares of common
stock may also reduce the net income and net asset value per share of our common stock upon conversion, provided, that we will only be permitted to issue such convertible preferred stock to the extent we comply with the requirements of
Section 61 of the 1940 Act, including obtaining common stockholder approval. These effects, among others, could have an adverse effect on your investment in our common stock. Certain matters under the 1940 Act require the separate vote of the
holders of any issued and outstanding preferred stock. For example, the 1940 Act provides that holders of preferred stock are entitled to vote separately from holders of common stock to elect two preferred stock directors. We currently have no plans
to issue preferred stock.
Provisions of the Maryland General Corporation Law and of our charter and bylaws could deter takeover attempts and have
an adverse impact on the price of our common stock.
Our board of directors is divided into three classes of directors serving
staggered terms. A classified board may render a change in control of us or removal of our incumbent management more difficult. The Maryland General Corporation Law and our charter and bylaws contain additional provisions that may discourage, delay
or make more difficult a change in control of CM Finance Inc or the removal of our directors. We are subject to the Maryland Business Combination Act, subject to any applicable requirements of the 1940 Act. Our board of directors has adopted a
resolution exempting from the Business Combination Act any business combination between us and any other person, subject to prior approval of such business combination by our board of directors, including approval by a majority of our independent
directors. If the resolution exempting business combinations is repealed or our board of directors does not approve a business combination, the Business Combination Act may discourage third parties from trying to acquire control of us and increase
the difficulty of consummating such an offer. Our bylaws exempt from the Maryland Control Share Acquisition Act acquisitions of our stock by any person. If we amend our bylaws to repeal the exemption from the Control Share Acquisition Act, the
Control Share Acquisition Act also may make it more difficult for a third party to obtain control of us and increase the difficulty of consummating such a transaction.
We have also adopted measures that may make it difficult for a third party to obtain control of us, including provisions of our charter
classifying our board of directors in three classes serving staggered three-year terms, and authorizing our board of directors to classify or reclassify shares of our stock in one or more classes or series, to cause the issuance of additional shares
of our stock, to amend our charter without stockholder approval and to increase or decrease the number of shares of stock that we have authority to issue. These provisions, as well as
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other provisions of our charter and bylaws, may delay, defer or prevent a transaction or a change in control that might otherwise be in the best interests of our stockholders. See
“Description of Our Common Stock—Certain Provisions of the Maryland General Corporation Law and Our Charter and Bylaws.”
Risks Relating
to our Investments
Economic recessions or downturns could adversely affect our portfolio companies, leading to defaults on our investments,
which would harm our operating results.
Many of the portfolio companies in which we expect to make investments, including those
currently included in our portfolio, are likely to be susceptible to economic slowdowns or recessions and may be unable to repay our loans during such periods. In such event, the number of our non-performing assets is likely to increase and the
value of our portfolio is likely to decrease during such periods. Adverse economic conditions may decrease the value of collateral securing some of our loans and debt securities and the value of our equity investments. Economic slowdowns or
recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by
lenders not to extend credit to us. These events could prevent us from increasing our investments and harm our operating results.
A
portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of its loans and foreclosure on its assets, which could trigger cross-defaults under
other agreements and jeopardize our portfolio company’s ability to meet its obligations under the loans and debt securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with
a defaulting portfolio company.
We may hold the loans and debt securities of leveraged companies that may, due to the significant operating
volatility typical of such companies, enter into bankruptcy proceedings, and we could lose all or part of our investment, which would harm our operating results.
Investment in leveraged companies involves a number of significant risks. Leveraged companies in which we invest may have limited financial
resources and may be unable to meet their obligations under their loans and debt securities that we hold. Such developments may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of our realizing any
guarantees that we may have obtained in connection with our investment. Smaller leveraged companies also may have less predictable operating results and may require substantial additional capital to support their operations, finance their expansion
or maintain their competitive position.
Leveraged companies may also experience bankruptcy or similar financial distress. The bankruptcy
process has a number of significant inherent risks. Many events in a bankruptcy proceeding are the product of contested matters and adversarial proceedings and are beyond the control of the creditors. A bankruptcy filing by a portfolio company may
adversely and permanently affect that company. If the proceeding is converted to a liquidation, the value of the portfolio company may not equal the liquidation value that was believed to exist at the time of the investment. The duration of a
bankruptcy proceeding is also difficult to predict, and a creditor’s return on investment can be adversely affected by delays until the plan of reorganization or liquidation ultimately becomes effective. The administrative costs in connection
with a bankruptcy proceeding are frequently high and would be paid out of the debtor’s estate prior to any return to creditors. Because the standards for classification of claims under bankruptcy law are vague, our influence with respect to the
class of securities or other obligations we own may be lost by increases in the number and amount of claims in the same class or by different classification and treatment. In the early stages of the bankruptcy process, it is often difficult to
estimate the extent of, or even to identify, any contingent claims that might be made. In addition, certain claims that have priority by law (for example, claims for taxes) may be substantial.
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A portfolio company’s failure to satisfy financial or operating covenants imposed by us or
other lenders could lead to defaults and, potentially, termination of its loans and foreclosure on its assets. This could trigger cross-defaults under other agreements and jeopardize such portfolio company’s ability to meet its obligations
under the loans or debt or equity securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of certain financial covenants, with a defaulting
portfolio company.
Credit risk is the potential loss we may incur from a failure of a company to make payments according to the terms of
a contract. We are subject to credit risk because of our strategy of investing in the debt of leveraged companies and our involvement in derivative instruments. Our exposure to credit risk on our investments is limited to the fair value of the
investments. Our derivative contracts are executed pursuant to an International Swaps and Derivatives Association master agreement that we currently have in place with UBS with respect to the Term Financing. Any material exposure due to
counter-party risk under the Term Financing or the Financing Facilities, generally, could have a material adverse effect on our operating results.
There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability
claims.
If one of our portfolio companies were to go bankrupt, even though we may have structured our interest as senior debt,
depending on the facts and circumstances, including the extent to which we may have actually provided managerial assistance to that portfolio company, a bankruptcy court might re-characterize our debt holding and subordinate all or a portion of our
claim to that of other creditors. In addition, lenders can be subject to lender liability claims for actions taken by them where they become too involved in the borrower’s business or exercise control over the borrower. It is possible that we
could become subject to a lender’s liability claim, including as a result of actions taken if we actually render significant managerial assistance.
Our investments in private and middle-market portfolio companies are risky, and we could lose all or part of our investment.
Investment in private and middle-market companies involves a number of significant risks. Generally, little public information exists about
these companies, and we will rely on the ability of the Adviser’s investment professionals to obtain adequate information to evaluate the potential returns and risks from investing in these companies. If we are unable to uncover all material
information about these companies, we may not make a fully informed investment decision, and we may lose money on our investments. Middle-market companies may have limited financial resources and may be unable to meet their obligations under their
loans and debt securities that we hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of our realizing any guarantees we may have obtained in connection with our investment. In addition,
such companies typically have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as general
economic downturns. Additionally, middle-market companies are more likely to depend on the management talents and efforts of a small group of persons. Therefore, the death, disability, resignation or termination of one or more of these persons could
have a material adverse impact on one or more of the portfolio companies we invest in and, in turn, on us. Middle-market companies also may be parties to litigation and may be engaged in rapidly changing businesses with products subject to a
substantial risk of obsolescence. In addition, our executive officers, directors and investment adviser may, in the ordinary course of business, be named as defendants in litigation arising from our investments in portfolio companies.
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Our investments may include PIK interest.
To the extent that we invest in loans with a PIK interest component and the accretion of PIK interest constitutes a portion of our income, we
will be exposed to risks associated with the requirement to include such non-cash income in taxable and accounting income prior to receipt of cash, including the following:
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loans with a PIK interest component may have higher interest rates that reflect the payment deferral and
increased credit risk associated with these instruments, and PIK instruments generally represent a significantly higher credit risk than coupon loans;
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loans with a PIK interest component may have unreliable valuations because their continuing accruals require
continuing judgments about the collectability of the deferred payments and the value of any associated collateral;
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the deferral of PIK interest increases the loan-to-value ratio, which is a fundamental measure of loan risk; and
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even if the accounting conditions for PIK interest accrual are met, the borrower could still default when the
borrower’s actual payment is due at the maturity of the loan.
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We may expose ourselves to risks if we engage in hedging
transactions.
If we engage in hedging transactions, we may expose ourselves to risks associated with such transactions. We may
utilize instruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and
market interest rates. Hedging against a decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. However, such
hedging can establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfolio positions. Such hedging transactions may also limit the opportunity for gain if the values of the
underlying portfolio positions should increase. Moreover, it may not be possible to hedge against an exchange rate or interest rate fluctuation that is so generally anticipated that we are not able to enter into a hedging transaction at an
acceptable price.
The success of our hedging transactions will depend on our ability to correctly predict movements in currencies and
interest rates. Therefore, while we may enter into such transactions to seek to reduce currency exchange rate and interest rate risks, unanticipated changes in currency exchange rates or interest rates may result in poorer overall investment
performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged may
vary. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge
and expose us to risk of loss. In addition, it may not be possible to hedge fully or perfectly against currency fluctuations affecting the value of securities denominated in non-U.S. currencies because the value of those securities is likely to
fluctuate as a result of factors not related to currency fluctuations.
The lack of liquidity in our investments may adversely affect our business.
All of our assets may be invested in illiquid loans and securities, and a substantial portion of our investments in leveraged
companies will be subject to legal and other restrictions on resale or will otherwise be less liquid than more broadly traded public securities. The illiquidity of these investments may make it difficult for us to sell such investments if the need
arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our investments. Also, as noted above, we may be limited or
prohibited in our ability to sell or otherwise exit certain positions in our initial portfolio as such a transaction could be considered a joint transaction prohibited by the 1940 Act.
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Price declines and illiquidity in the corporate debt markets may adversely affect the fair value of our
portfolio investments, reducing our net asset value through increased net unrealized depreciation.
As a BDC, we are required to
carry our investments at market value or, if no market value is ascertainable, at fair value as determined in good faith by our board of directors. As part of the valuation process, we may take into account the following types of factors, if
relevant, in determining the fair value of our investments:
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available current market data, including relevant and applicable market trading and transaction comparables;
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applicable market yields and multiples;
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call protection provisions;
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the nature and realizable value of any collateral;
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the portfolio company’s ability to make payments, its earnings and discounted cash flows and the markets in
which it does business;
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comparisons of financial ratios of peer companies that are public;
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comparable merger and acquisition transactions; and
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principal market and enterprise values.
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When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we use the pricing indicated by the
external event to corroborate our valuation. We record decreases in the market values or fair values of our investments as unrealized depreciation. Declines in prices and liquidity in the corporate debt markets may result in significant net
unrealized depreciation in our portfolio. The effect of all of these factors on our portfolio may reduce our net asset value by increasing net unrealized depreciation in our portfolio. Depending on market conditions, we could incur substantial
realized losses and may suffer additional unrealized losses in future periods, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are a non-diversified investment company within the meaning of the 1940 Act, and therefore we are not limited with respect to the proportion of our
assets that may be invested in securities of a single issuer.
We are classified as a non-diversified investment company within the
meaning of the 1940 Act, which means that we are not limited by the 1940 Act with respect to the proportion of our assets that we may invest in securities of a single issuer. Beyond the asset diversification requirements associated with our
qualification as a RIC under the Code, we do not have fixed guidelines for diversification. To the extent that we assume large positions in the securities of a small number of issuers or our investments are concentrated in relatively few industries,
our net asset value may fluctuate to a greater extent than that of a diversified investment company as a result of changes in the financial condition or the market’s assessment of the issuer. We may also be more susceptible to any single
economic or regulatory occurrence than a diversified investment company.
Our portfolio may be concentrated in a limited number of industries, which
may subject us to a risk of significant loss if there is a downturn in a particular industry in which a number of our investments are concentrated.
Our portfolio may be concentrated in a limited number of industries. A downturn in any particular industry in which we are invested could
significantly impact the aggregate returns we realize.
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As of December 31, 2018, our investments in the energy equipment and services industry together
with oil, gas and consumable fuels represented approximately 19.05% of the fair value of our portfolio, our investments in the professional services industry represented approximately 15.01% of the fair value of our portfolio, and our investments in
the media industry represented approximately 12.77% of the fair value of our portfolio. If an industry in which we have significant investments suffers from adverse business or economic conditions, as these industries have to varying degrees, a
material portion of our investment portfolio could be affected adversely, which, in turn, could adversely affect our financial position and results of operations.
Our investments in the energy equipment and services and oil, gas and consumable fuels industries face considerable uncertainties including substantial
regulatory challenges.
Our investments in portfolio companies that operate in the energy equipment and services and oil, gas and
consumable fuels industries represent approximately 19.05% of our total portfolio as of December 31, 2018. The revenues, income (or losses) and valuations of companies in these industries are highly dependent upon the valuations of oil and gas
companies, which can fluctuate suddenly and dramatically due to any one or more of the following factors:
Commodity Pricing Risk.
In general, commodity prices directly affect oil and gas companies, especially for those who own the underlying commodity. In addition, the volatility of commodity prices can affect other oil and gas companies due to the impact of prices on the
volume of commodities produced, transported, processed, stored or distributed and on the cost of fuel for power generation companies. The volatility of commodity prices can also affect oil and gas companies’ ability to access the capital
markets in light of market perception that their performance may be directly tied to commodity prices. Historically, energy commodity prices have been cyclical and exhibited significant volatility as evident in the recent and sudden decline in oil
prices during the second half of 2014.
Regulatory Risk. Changes in the regulatory environment could adversely affect the
profitability of oil and gas companies. Federal, state and local governments heavily regulate the businesses of oil and gas companies in diverse matters, such as the way in which assets are constructed, maintained and operated and the prices oil and
gas companies may charge for their products and services. Such regulation can change over time in scope and intensity.
Production
Risk. The volume of crude oil, natural gas or other energy commodities available for producing, transporting, processing, storing, distributing or generating power may materially impact the profitability of energy companies. A significant
decrease in the production of natural gas, crude oil, coal or other energy commodities, due to the decline of production from existing facilities, import supply disruption, depressed commodity prices, political events, OPEC actions or otherwise,
could reduce revenue and operating income or increase operating costs of energy companies and, therefore, their ability to pay debt or dividends.
Demand Risk. A sustained decline in demand for crude oil, natural gas and refined petroleum products could materially affect revenues
and cash flows of energy companies. Factors that could lead to a decrease in market demand include a recession or other adverse economic conditions, increases in the market price of the underlying commodity, higher taxes or other regulatory actions
that increase costs, or shifts in consumer demand for such products.
Depletion and Exploration Risk. Oil and gas companies’
commodities naturally deplete over time. Depletion could have a material adverse impact on such company’s ability to maintain its revenue. Further, estimates of reserves may not be accurate and, even if accurate, reserves may not be produced
profitably. In addition, exploration of energy resources, especially of oil and natural gas, is inherently risky and requires large amounts of capital.
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Weather Risk. Unseasonable extreme weather patterns could result in significant volatility
in demand for energy and power or may directly affect the operations of individual companies. This weather-related risk may create fluctuations in earnings of energy companies.
Operational Risk. Oil and gas companies are subject to various operational risks, such as failed drilling or well development,
unscheduled outages, underestimated cost projections, unanticipated operation and maintenance expenses, failure to obtain the necessary permits to operate and failure of third-party contractors to perform their contractual obligations.
Competition Risk. The oil and gas companies in which we may invest will face substantial competition in acquiring properties, enhancing
and developing their assets, marketing their commodities, securing trained personnel and operating their properties. Many of their competitors may have financial and other resources that substantially exceed their resources.
Valuation Risk. The valuation of our holdings in oil and gas portfolio companies is subject to uncertainties inherent in estimating
quantities of reserves of oil, natural gas and coal and in projecting future rates of production and the timing of development expenditures, which are dependent upon many factors beyond our control. The estimates rely on various assumptions,
including, but not limited to, commodity prices, operating expenses, capital expenditures and the availability of funds, and are therefore inherently imprecise indications of future net cash flows. Actual future production, cash flows, taxes,
operating expenses, development expenditures and quantities of recoverable reserves may vary substantially from those assumed in the estimates. Any significant variance in these assumptions could materially affect the value of our investments in oil
and gas companies.
Climate Change. There may be evidence of global climate change. Climate change creates physical and financial
risk and some of our portfolio companies may be adversely affected by climate change. For example, the needs of customers of oil and gas companies vary with weather conditions, primarily temperature and humidity. To the extent climate changes affect
weather conditions, energy use could increase or decrease depending on the duration and magnitude of any changes. Increased oil and gas use due to weather changes may require additional investments by our portfolio companies in more pipelines and
other infrastructure to serve increased demand. A decrease in oil and gas use due to weather changes may affect our portfolio companies’ financial condition through decreased revenues. Extreme weather conditions in general require more system
backup, adding to costs, and can contribute to increased system stresses, including service interruptions. Potential lawsuits against or taxes or other regulatory costs imposed on greenhouse gas emitters could also affect oil and gas companies,
based on links drawn between greenhouse gas emissions and climate change.
Our investments in the professional services industry face considerable
uncertainties including significant regulatory challenges.
Our investments in portfolio companies that operate in the professional
services industry represent approximately 15.01% of our total portfolio as of December 31, 2018. Our investments in portfolio companies in the professional services sector include those that provide services related to data and information,
building, cleaning and maintenance services, and energy efficiency services. Portfolio companies in the professional services sector are subject to many risks, including the negative impact of regulation, changing technology, a competitive
marketplace and difficulty in obtaining financing. Portfolio companies in the professional services industry must respond quickly to technological changes and understand the impact of these changes on customers’ preferences. Adverse economic,
business, or regulatory developments affecting the professional services sector could have a negative impact on the value of our investments in portfolio companies operating in this industry, and therefore could negatively impact our business and
results of operations.
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An investment in media companies may be risky relative to an investment in companies operating in other
industries.
Our investments in portfolio companies that operate in the media industry represent approximately 12.77% of our total
portfolio as of December 31, 2018. There are unique risks in investing in companies in the media industry and a downturn in the industry could significantly impact the aggregate returns we realize.
Media companies typically have limited operating histories, narrower product lines and smaller market shares than larger businesses, which tend
to render them more vulnerable to competitors’ actions and market conditions, as well as general economic downturns. In addition, media companies generally have less predictable operating results, may from time to time be parties to litigation,
may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position.
In recent years, a number of internet companies have filed for bankruptcy or liquidated, and many large companies whose purchases affect the
demand for products and services in the media industry have experienced financial difficulties, which may result in decreased demand for such products and services in the future. Our investments in the media industry may be risky and we could lose
all or part of our investments.
Our failure to make follow-on investments in our portfolio companies could impair the value of our portfolio.
Following an initial investment in a portfolio company, we may make additional investments in that portfolio company as
“follow-on” investments, including exercising warrants, options or convertible securities that were acquired in the original or subsequent financing; in seeking to:
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increase or maintain in whole or in part our position as a creditor or our equity ownership percentage in a
portfolio company;
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preserve or enhance the value of our investment.
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We have discretion to make follow-on investments, subject to the availability of capital resources. Failure on our part to make follow-on
investments may, in some circumstances, jeopardize the continued viability of a portfolio company and our initial investment, or may result in a missed opportunity for us to increase our participation in a successful operation. Even if we have
sufficient capital to make a desired follow-on investment, we may elect not to make a follow-on investment because we may not want to increase our level of risk, because we prefer other opportunities or because we are inhibited by compliance with
BDC requirements of the 1940 Act or the desire to maintain our qualification as a RIC.
Because we generally do not hold controlling equity
interests in our portfolio companies, we may not be able to exercise control over our portfolio companies or to prevent decisions by management of our portfolio companies that could decrease the value of our investments.
We do not hold controlling equity positions in any of the portfolio companies included in our portfolio and, although we may do so in the
future, we do not currently intend to hold controlling equity positions in our portfolio companies. As a result, we will be subject to the risk that a portfolio company may make business decisions with which we disagree, and that the management
and/or stockholders of a portfolio company may take risks or otherwise act in ways that are adverse to our interests. Due to the lack of liquidity of the debt and equity investments that we expect to hold in our portfolio companies, we may not be
able to dispose of our investments in the event we disagree with the actions of a portfolio company and may therefore suffer a decrease in the value of our investments.
Prepayments of our debt investments by our portfolio companies could adversely impact our results of operations and ability to make stockholder
distributions and result in a decline in the market price of our shares.
We are subject to the risk that the debt investments we
make in portfolio companies may be repaid prior to maturity. We expect that our investments will generally allow for repayment at any time subject to certain
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penalties. When this occurs, we intend to generally reinvest these proceeds in temporary investments, pending their future investment in accordance with our investment strategy. These temporary
investments will typically have substantially lower yields than the debt being prepaid, and we could experience significant delays in reinvesting these amounts. Any future investment may also be at lower yields than the debt that was repaid. As a
result, our results of operations could be materially adversely affected if one or more of our portfolio companies elects to prepay amounts owed to us. Additionally, prepayments could negatively impact our ability to make, or the amount of,
stockholder distributions with respect to our common stock, which could result in a decline in the market price of our shares.
Our portfolio
companies may incur debt that ranks equally with, or senior to, our investments in such companies.
We intend to invest a portion
of our capital in second lien and subordinated loans issued by our portfolio companies. The portfolio companies usually have, or may be permitted to incur, other debt that ranks equally with, or senior to, the loans in which we invest. By their
terms, such debt instruments may provide that the holders are entitled to receive payment of interest or principal on or before the dates on which we are entitled to receive payments in respect of the loans in which we invest. Also, in the event of
insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we
receive any distribution in respect of our investment. After repaying senior creditors, a portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of debt ranking equally with loans in which we
invest, we would have to share any distributions on an equal and ratable basis with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.
Additionally, certain loans that we may make to portfolio companies may be secured on a second priority basis by the same collateral securing
senior secured debt of such companies. The first priority liens on the collateral will secure the portfolio company’s obligations under any outstanding senior debt and may secure certain other future debt that may be permitted to be incurred by
the portfolio company under the agreements governing the loans. The holders of obligations secured by first priority liens on the collateral will generally control the liquidation of, and be entitled to receive proceeds from, any realization of the
collateral to repay their obligations in full before us. In addition, the value of the collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that
the proceeds, if any, from sales of all of the collateral would be sufficient to satisfy the loan obligations secured by the second priority liens after payment in full of all obligations secured by the first priority liens on the collateral. If
such proceeds were not sufficient to repay amounts outstanding under the loan obligations secured by the second priority liens, then we, to the extent not repaid from the proceeds of the sale of the collateral, will only have an unsecured claim
against the portfolio company’s remaining assets, if any.
We may also make unsecured loans to portfolio companies, meaning that such
loans will not benefit from any interest in collateral of such companies. Liens on such portfolio companies’ collateral, if any, will secure the portfolio company’s obligations under its outstanding secured debt and may secure certain
future debt that is permitted to be incurred by the portfolio company under its secured loan agreements. The holders of obligations secured by such liens will generally control the liquidation of, and be entitled to receive proceeds from, any
realization of such collateral to repay their obligations in full before us. In addition, the value of such collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can
be no assurance that the proceeds, if any, from sales of such collateral would be sufficient to satisfy our unsecured loan obligations after payment in full of all secured loan obligations. If such proceeds were not sufficient to repay the
outstanding secured loan obligations, then our unsecured claims would rank equally with the unpaid portion of such secured creditors’ claims against the portfolio company’s remaining assets, if any.
The rights we may have with respect to the collateral securing the loans we make to our portfolio companies with senior debt outstanding may
also be limited pursuant to the terms of one or more intercreditor agreements
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that we enter into with the holders of such senior debt. Under a typical intercreditor agreement, at any time that obligations that have the benefit of the first priority liens are outstanding,
any of the following actions that may be taken in respect of the collateral will be at the direction of the holders of the obligations secured by the first priority liens:
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the ability to cause the commencement of enforcement proceedings against the collateral;
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the ability to control the conduct of such proceedings;
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the approval of amendments to collateral documents;
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releases of liens on the collateral; and
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waivers of past defaults under collateral documents.
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We may not have the ability to control or direct such actions, even if our rights are adversely affected.
The disposition of our investments may result in contingent liabilities.
We currently expect that substantially all of our investments will involve loans and private securities. In connection with the disposition of
such an investment, we may be required to make representations about the business and financial affairs of the portfolio company typical of those made in connection with the sale of a business. We may also be required to indemnify the purchasers of
such investment to the extent that any such representations turn out to be inaccurate or with respect to potential liabilities. These arrangements may result in contingent liabilities that ultimately result in funding obligations that we must
satisfy through our return of distributions previously made to us.
The interest rates of our term loans to our portfolio companies that extend
beyond 2021 might be subject to change based on recent regulatory changes.
LIBOR, the London interbank offered rate, is the basic
rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. We typically use LIBOR as a reference rate in term loans we extend to portfolio
companies such that the interest due to us pursuant to a term loan extended to a partner company is calculated using LIBOR. Some of our term loan agreements with partner companies contain a stated minimum value for LIBOR.
On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced the desire to phase out LIBOR
by the end of 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S.-dollar LIBOR with the Secured Overnight
Financing Rate (“SOFR”) a new index calculated by short-term repurchase agreements, backed by Treasury securities. Although there have been a few issuances utilizing SOFR or the Sterling Over Night Index Average, an alternative reference
rate that is based on transactions, it is unknown whether these alternative reference rates will attain market acceptance as replacements for LIBOR.
If LIBOR ceases to exist, 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. There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. As such, the potential effect of any such event on our cost of
capital and net investment income cannot yet be determined.
We may not realize gains from our equity investments.
When we invest in loans and debt securities, we may acquire warrants or other equity securities of portfolio companies as well. We may also
invest in equity securities directly. To the extent we hold equity investments, we
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will attempt to dispose of them and realize gains upon our disposition of them. However, the equity interests we receive may not appreciate in value and, may decline in value. As a result, we may
not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience.
Risks Relating to Our Common Stock
Shares of
closed-end investment companies, including BDCs, may trade at a discount to their net asset value.
Shares of closed-end investment
companies, including BDCs, may trade at a discount from net asset value. This characteristic of closed-end investment companies and BDCs is separate and distinct from the risk that our net asset value per share may decline. We cannot predict whether
our common stock will trade at, above or below net asset value. In this regard, at a meeting initially convened on November 6, 2018 and reconvened on December 18, 2018, our stockholders voted to allow us to issue common stock at a price
below net asset value per share for the period ending on the earlier of the one year anniversary of the date of our 2018 Annual Meeting of Stockholders and the date of our 2019 Annual Meeting of Stockholders, which we expect to be held in November
2019. Our stockholders did not specify a maximum discount below net asset value at which we are able to issue our common stock, although the number of shares sold in each offering may not exceed 25% of our outstanding common stock immediately prior
to such sale. In addition, we cannot issue shares of our common stock below net asset value unless our board of directors determines that it would be in our and our stockholders’ best interests to do so. Sales of common stock at prices below
net asset value per share dilute the interests of existing stockholders, have the effect of reducing our net asset value per share and may reduce our market price per share. In addition, continuous sales of common stock below net asset value may
have a negative impact on total returns and could have a negative impact on the market price of our shares of common stock. See “—Existing stockholders may incur dilution if, in the future, we sell shares of our common stock in one or more
offerings at prices below the then current net asset value per share of our common stock” for a discussion of a proposal approved by our stockholders that permits us to issue shares of our common stock below net asset value.
Investing in our common stock may involve an above average degree of risk.
The investments we make in accordance with our investment objective may result in a higher amount of risk, and higher volatility or loss of
principal, than alternative investment options. Our investments in portfolio companies may be speculative and, therefore, an investment in our common stock may not be suitable for someone with lower risk tolerance.
The market price of our common stock may fluctuate significantly.
The market price and liquidity of the market for shares of our common stock may be significantly affected by numerous factors, some of which
are beyond our control and may not be directly related to our operating performance. These factors include:
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significant volatility in the market price and trading volume of securities of BDCs or other companies in our
sector, which is not necessarily related to the operating performance of these companies;
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changes in regulatory policies or tax guidelines, particularly with respect to RICs or BDCs;
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loss of our qualification as a RIC or BDC;
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changes in earnings or variations in operating results;
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changes in the value of our portfolio of investments;
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increases in the interest rates we pay;
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changes in accounting guidelines governing valuation of our investments;
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any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities
analysts;
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departure of the Adviser’s key personnel;
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change in the Adviser’s relationship with Cyrus Capital under the Services Agreement;
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change in the Adviser’s relationship with Stifel under the Stifel arrangement;
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sales of our shares by the Cyrus Funds;
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sales of our shares by Stifel;
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operating performance of companies comparable to us; and
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general economic trends and other external factors.
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In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often
been brought against that company. Due to the potential volatility of our stock price, we may become the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention
and resources from our business.
Sales of substantial amounts of our common stock in the public market may have an adverse effect on the market
price of our common stock.
Stifel owns approximately 16% of our total outstanding common stock, and the Cyrus Funds own, in the
aggregate, approximately 28% of our total outstanding common stock. The shares issued by us to Stifel and the Cyrus Funds in connection with the CM Finance Merger are generally freely tradable in the public market, subject to the volume limitations,
applicable holding periods and other provisions of Rule 144 under the Securities Act. Sales of substantial amounts of our common stock, the availability of such common stock for sale or the registration of such common stock for sale and the ability
of our stockholders, including Stifel and the Cyrus Funds to sell their respective shares at a price per share that is below our then current net asset value per share could adversely affect the prevailing market prices for our common stock. If this
occurs and continues, it could impair our ability to raise additional capital through the sale of securities should we desire to do so and negatively impact the market of our common stock.
Risks Relating to an Offering of Our Securities
We
may be unable to invest a significant portion of the net proceeds raised from our offerings on acceptable terms, which would harm our financial condition and operating results.
We anticipate that substantially all of the net proceeds raised in our offerings will be utilized within six months of any such offering’s
completion, however, delays in investing the net proceeds raised in our offerings may cause our performance to be worse than that of other fully invested BDCs or other lenders or investors pursuing comparable investment strategies. We cannot assure
you that we will be able to identify any investments that meet our investment objective or that any investment that we make will produce a positive return. We may be unable to invest the net proceeds from any offering on acceptable terms within the
time period that we anticipate or at all, which could harm our financial condition and operating results. We anticipate that, depending on market conditions, it may take a substantial period of time to invest substantially all of the net proceeds of
any offering in securities meeting our investment objective. During such a period, we will continue to invest the net proceeds of any offering primarily in cash, cash equivalents, U.S. government securities, repurchase agreements and high-quality
debt instruments maturing in one year or less from the time of investment, which may produce returns that are significantly lower than the returns which we expect to achieve when our portfolio is fully invested in securities meeting our investment
objective, and given our expense ratio and the prevailing interest rate climate, there is a possible risk of losing money on the offering proceeds of certain securities, such as debt securities during this interval. As a result, any distributions
that we pay during such period may be substantially lower than the distributions that we may be able to pay when our portfolio is fully invested in securities meeting our investment objective. In addition, until such time as the net proceeds of any
offering are invested in securities meeting our investment objective, the market price for our securities may
52
decline. Thus, the return on your investment may be lower than when, if ever, our portfolio is fully invested in securities meeting our investment objective.
We may not be able to pay distributions to our stockholders, our distributions may not grow over time, and a portion of distributions paid to our
stockholders may be a return of capital, which is a distribution of the stockholders’ invested capital.
We intend to make
distributions on a quarterly basis to our stockholders out of assets legally available for distribution. We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year
increases in cash distributions. Our ability to pay distributions might be adversely affected by the impact of one or more of the risk factors described in this prospectus. Due to the asset coverage test applicable to us under the 1940 Act as a BDC,
we may be limited in our ability to make distributions.
When we make distributions, we will be required to determine the extent to which
such distributions are paid out of current or accumulated earnings and profits. Distributions in excess of current and accumulated earnings and profits will be treated as a non-taxable return of capital. To the extent there is a return of capital,
investors will be required to reduce their basis in our stock for U.S. federal income tax purposes, which may result in higher tax liability when the shares are sold, even if they have not increased in value or have lost value. In addition, any
return of capital will be net of any sales load and offering expenses associated with sales of shares of our common stock. In the future, our distributions may include a return of capital. See “Certain U.S. Federal Income Tax
Considerations.”
To the extent, any distributions by us are funded through waivers of the incentive fee portion of our investment
advisory fees such distributions will not be based on our investment performance, and can only be sustained if we achieve positive investment performance in future periods and/or the Adviser continues to waive such fees. Any such waivers in no way
imply that the Adviser will waive incentive fees in any future period. There can be no assurance that we will achieve the performance necessary or that the Adviser will waive all or any portion of the incentive fee necessary to be able to pay
distributions at a specific rate or at all.
We may allocate the net proceeds from an offering in ways with which you may not agree.
We will have significant flexibility in investing the net proceeds of an offering and may use the net proceeds from an offering in ways with
which you may not agree or for purposes other than those contemplated at the time of the offering. In addition, we can provide you with no assurance that by increasing the size of our available equity capital our expense ratio or debt ratio will be
lowered.
Stockholders may experience dilution in their ownership percentage if they do not participate in our dividend reinvestment plan.
All distributions declared in cash payable to stockholders that are participants in our dividend reinvestment plan are generally
automatically reinvested in shares of our common stock. As a result, stockholders that do not participate in the dividend reinvestment plan may experience dilution over time. Stockholders who receive distributions in shares of common stock may
experience accretion to the net asset value of their shares if our shares are trading at a premium and dilution if our shares are trading at a discount. The level of accretion or discount would depend on various factors, including the proportion of
our stockholders who participate in the plan, the level of premium or discount at which our shares are trading and the amount of the distribution payable to a stockholder.
Existing stockholders may incur dilution if, in the future, we sell shares of our common stock in one or more offerings at prices below the then current
net asset value per share of our common stock.
The 1940 Act prohibits us from selling shares of our common stock at a price below
the current net asset value per share of such stock, with certain exceptions. One such exception is prior stockholder approval of
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issuances below net asset value provided that our board of directors makes certain determinations. In this regard, at a meeting initially convened on November 6, 2018 and reconvened on
December 18, 2018, our stockholders voted to allow us to issue common stock at a price below net asset value per share for the period ending on the earlier of the one year anniversary of the date of our 2018 Annual Meeting of Stockholders and
the date of our 2019 Annual Meeting of Stockholders, which we expect to be held in November 2019. Our stockholders did not specify a maximum discount below net asset value at which we are able to issue our common stock, although the number of shares
sold in each offering may not exceed 25% of our outstanding common stock immediately prior to such sale. In addition, we cannot issue shares of our common stock below net asset value unless our board of directors determines that it would be in our
and our stockholders’ best interests to do so. Continued access to this exception will require approval of similar proposals at future stockholder meetings. Any decision to sell shares of our common stock below the then current net asset value
per share of our common stock would be subject to the determination by our board of directors that such issuance is in our and our stockholders’ best interests.
If we were to sell shares of our common stock below net asset value per share, such sales would result in an immediate dilution to the net
asset value per share. This dilution would occur as a result of the sale of shares at a price below the then current net asset value per share of our common stock and a proportionately greater decrease in a stockholder’s interest in our
earnings and assets and voting interest in us than the increase in our assets resulting from such issuance.
Because the number of shares
of common stock that could be so issued and the timing of any issuance is not currently known, the actual dilutive effect cannot be predicted; however, the example below illustrates the effect of dilution to existing stockholders resulting from the
sale of common stock at prices below the net asset value of such shares. Please see “Sales of Common Stock Below Net Asset Value” for a more complete discussion of the potentially dilutive impacts of an offering at a price less than net
asset value per share.
Illustration: Example of Dilutive Effect of the Issuance of Shares Below Net Asset Value. The example
assumes that Company XYZ has 13,500,000 common shares outstanding, $300,000,000 in total assets and $100,000,000 in total liabilities. The current net asset value and net asset value per share are thus $200,000,000 and $14.81. The table illustrates
the dilutive effect on nonparticipating Stockholder A of (1) an offering of 1,350,000 shares (10% of the outstanding shares) at $13.33 per share after offering expenses and commissions (a 10% discount from net asset value).
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Prior to Sale
Below NAV
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Following Sale
Below NAV
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Percentage
Change
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Reduction to NAV
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Total Shares Outstanding
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13,500,000
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14,850,000
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10.00
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%
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NAV per share
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$
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14.81
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$
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14.68
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(0.91
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)%
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Dilution to Existing Stockholder
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Shares Held by Stockholder A
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135,000
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135,000
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(1)
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0.00
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%
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Percentage Held by Stockholder A
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1.00
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%
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0.91
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%
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(9.09
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)%
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Total Interest of Stockholder A in NAV
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$
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2,000,000
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$
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1,981,818
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(0.91
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)%
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(1)
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Assumes that Stockholder A does not purchase additional shares in the sale of shares below NAV.
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Our shares might trade at premiums that are unsustainable or at discounts from net asset value.
Shares of BDCs like us may, during some periods, trade at prices higher than their net asset value per share and, during other periods, as
frequently occurs with closed-end investment companies, trade at prices lower than their net asset value per share. The perceived value of our investment portfolio may be affected by a number of factors including perceived prospects for individual
companies we invest in, market conditions for common stock generally, for initial public offerings and other exit events for venture capital backed companies, and the mix of companies in our investment portfolio over time. Negative or unforeseen
developments affecting the perceived value of companies in our investment portfolio could result in a decline in the trading price of our common stock relative to our net asset value per share.
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The possibility that our shares will trade at a discount from net asset value or at premiums that
are unsustainable are risks separate and distinct from the risk that our net asset value per share will decrease. The risk of purchasing shares of a BDC that might trade at a discount or unsustainable premium is more pronounced for investors who
wish to sell their shares in a relatively short period of time because, for those investors, realization of a gain or loss on their investments is likely to be more dependent upon changes in premium or discount levels than upon increases or
decreases in net asset value per share.
If we issue preferred stock and/or debt securities, the net asset value and market value of our common
stock may become more volatile.
We cannot assure you that the issuance of preferred stock and/or debt securities would result in a
higher yield or return to the holders of our common stock. The issuance of preferred stock and/or debt securities would likely cause the net asset value and market value of our common stock to become more volatile. If the distribution rate on the
preferred stock, or the interest rate on the debt securities, were to approach the net rate of return on our investment portfolio, the benefit of leverage to the holders of our common stock would be reduced. If the distribution rate on the preferred
stock, or the interest rate on the debt securities, were to exceed the net rate of return on our portfolio, the use of leverage would result in a lower rate of return to the holders of common stock than if we had not issued the preferred stock
and/or debt securities. Any decline in the net asset value of our investment would be borne entirely by the holders of our common stock. Therefore, if the market value of our portfolio were to decline, the leverage would result in a greater decrease
in net asset value to the holders of our common stock than if we were not leveraged through the issuance of preferred stock and/or debt securities. This decline in net asset value would also tend to cause a greater decline in the market price for
our common stock.
There is also a risk that, in the event of a sharp decline in the value of our net assets, we would be in danger of
failing to maintain required asset coverage ratios which may be required by the preferred stock and/or debt securities or of a downgrade in the ratings of the preferred stock and/or debt securities or our current investment income might not be
sufficient to meet the distribution requirements on the preferred stock or the interest payments on the debt securities. In order to counteract such an event, we might need to liquidate investments in order to fund redemption of some or all of the
preferred stock and/or debt securities. In addition, we would pay (and the holders of our common stock would bear) all costs and expenses relating to the issuance and ongoing maintenance of the preferred stock and/or debt securities. Holders of
preferred stock and/or debt securities may have different interests than holders of common stock and may at times have disproportionate influence over our affairs.
The trading market or market value of our debt securities or any convertible debt securities, if issued to the public, may be volatile.
Our debt securities or any convertible debt securities, if issued to the public, may or may not have an established trading market. We cannot assure investors
that a trading market for our debt securities or any convertible debt securities, if issued to the public, would develop or be maintained if developed. In addition to our creditworthiness, many factors may materially adversely affect the trading
market for, and market value of, our publicly issued debt securities or any convertible debt securities. These factors include, but are not limited to, the following:
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the time remaining to the maturity of these debt securities;
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the outstanding principal amount of debt securities with terms identical to these debt securities;
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the general economic environment;
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the supply of debt securities trading in the secondary market, if any;
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the redemption, repayment or convertible features, if any, of these debt securities;
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the level, direction and volatility of market interest rates generally; and
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market rates of interest higher or lower than rates borne by the debt securities.
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There also may be a limited number of buyers for our debt securities. This too may materially
adversely affect the market value of the debt securities or the trading market for the debt securities. Our debt securities may include convertible features that cause them to more closely bear risks associated with an investment in our common
stock.
Terms relating to redemption may materially adversely affect the return on any debt securities.
If we issue any debt securities or any convertible debt securities that are redeemable at our option, we may choose to redeem the debt
securities at times when prevailing interest rates are lower than the interest rate paid on the debt securities. In addition, if the debt securities are subject to mandatory redemption, we may be required to redeem the debt securities at times when
prevailing interest rates are lower than the interest rate paid on the debt securities. In this circumstance, a holder of our debt securities may not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate
as high as the debt securities being redeemed.
The issuance of subscription rights, warrants or convertible debt that are exchangeable for our
common stock, will cause your interest in us to be diluted as a result of any such rights, warrants or convertible debt offering.
Stockholders who do not fully exercise rights, warrants or convertible debt issued to them in any offering of subscription rights, warrants or
convertible debt to purchase our common stock should expect that they will, at the completion of the offering, own a smaller proportional interest in us than would otherwise be the case if they fully exercised their rights, warrants or convertible
debt. We cannot state precisely the amount of any such dilution in share ownership because we do not know what proportion of the common stock would be purchased as a result of any such offering.
In addition, if the subscription price, warrant price or convertible debt price is less than our net asset value per share of common stock at
the time of such offering, then our stockholders would experience an immediate dilution of the aggregate net asset value of their shares as a result of the offering. The amount of any such decrease in net asset value is not predictable because it is
not known at this time what the subscription price, warrant price, convertible debt price or net asset value per share will be on the expiration date of such offering or what proportion of our common stock will be purchased as a result of any such
offering. The risk of dilution is greater if there are multiple rights offerings. However, our board of directors will make a good faith determination that any offering of subscription rights, warrants or convertible debt would result in a net
benefit to existing stockholders.
Future offerings of debt securities, which would be senior to our common stock upon liquidation, or equity
securities, which could dilute our existing stockholders and may be senior to our common stock for the purposes of distributions, may harm the value of our common stock.
In the future, we may attempt to increase our capital resources by making offerings of debt or equity securities, including commercial paper,
medium-term notes, senior or subordinated notes and classes of preferred stock or common stock, subject to the restrictions of the 1940 Act. Upon a liquidation of our company, holders of our debt securities and shares of preferred stock and lenders
with respect to other borrowings would receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings by us may dilute the holdings of our existing stockholders or reduce the value of our common
stock, or both. Any preferred stock we may issue would have a preference on distributions that could limit our ability to make distributions to the holders of our common stock. Because our decision to issue securities in any future offering will
depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future offerings reducing the market price of our
common stock and diluting their stock holdings in us. In addition, proceeds from a sale of common stock will likely be used to increase our total assets or to pay down our borrowings, among other uses. This would increase our asset coverage ratio
and permit us to incur additional leverage under rules pertaining to business development companies by increasing our borrowings or issuing senior securities such as preferred stock or additional debt securities.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this prospectus and the accompanying prospectus supplement, if any, constitute forward-looking statements, which
relate to future events or our future performance or financial condition. The forward-looking statements contained in this prospectus and the accompanying prospectus supplement, if any, involve risks and uncertainties, including statements as to:
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our future operating results;
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our business prospects and the prospects of our portfolio companies;
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the effect of investments that we expect to make;
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our contractual arrangements and relationships with third parties;
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our contractual arrangements and relationships with Stifel and Cyrus Capital;
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actual and potential conflicts of interest with the Adviser;
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the dependence of our future success on the general economy and its effect on the industries in which we invest;
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the ability of our portfolio companies to achieve their objectives;
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the use of borrowed money to finance a portion of our investments;
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the adequacy of our financing sources and working capital;
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the timing of cash flows, if any, from the operations of our portfolio companies;
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the ability of the Adviser to locate suitable investments for us and to monitor and administer our investments;
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the ability of the Adviser to attract and retain highly talented professionals;
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our ability to qualify and maintain our qualification as a RIC and as a business development company; and
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the effect of 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.
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Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words “may,”
“might,” “will,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “anticipate,” “predict,”
“potential,” “plan” or similar words.
We have based the forward-looking statements included in this prospectus and
the accompanying prospectus supplement, if any, on information available to us on the date of this prospectus and the accompanying prospectus supplement, if any, and we assume no obligation to update any such forward-looking statements. Actual
results could differ materially from those anticipated in our forward-looking statements, and future results could differ materially from historical performance. We undertake no obligation to revise or update any forward-looking statements, whether
as a result of new information, future events or otherwise, unless required by law or SEC rule or regulation. You are advised to consult any additional disclosures that we may make directly to you, including in the form of a prospectus supplement or
post-effective amendment to the registration statement to which this prospectus relates, or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on
Form 8-K.
You should understand that, under Sections 27A(b)(2)(B) of the Securities Act and Section 21E(b)(2)B of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 do not apply to statements made in connection with any offering of securities pursuant to
this prospectus and the accompanying prospectus supplement, if any.
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USE OF PROCEEDS
Unless otherwise specified in any prospectus supplement accompanying this prospectus, we intend to use the net proceeds of this offering, to
make new investments in portfolio companies in accordance with our investment objective and strategies as described in this prospectus, to reduce a portion of our outstanding borrowings under the Financing Facilities or the Notes and for general
working capital purposes.
As of December 31, 2018, indebtedness under the Term Financing was $102.0 million and we pay interest on the
face amount of the Term Financing monthly at a rate of LIBOR plus 2.75% per annum through December 4, 2018. For the period from December 5, 2018 through December 5, 2020, we will pay interest on the face amount of the Term Financing monthly at
a rate of LIBOR plus 2.55% per annum. As of December 31, 2018, there were no borrowings outstanding under the 2017 UBS Revolving Financing, which generally bears interest at a rate per annum equal to one-month LIBOR plus 3.55%. As of December 31,
2018, the outstanding principal balance of the Notes was approximately $34.5 million. The Notes will mature on July 1, 2023 and bear interest at a rate of 6.125%.
We anticipate that substantially all of the net proceeds of any offering of securities will be utilized in the manner described above within
six months of the completion of such offering. Pending such use, we will invest the net proceeds primarily in high quality, short-term debt securities consistent with our business development company election and our election to be taxed as a RIC.
We will not receive any proceeds from any sale of common stock by any of the selling stockholders.
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PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
Our common stock is traded on the NASDAQ Global Select Market under the symbol “CMFN.” In connection with our initial public
offering, our shares of common stock began trading on February 6, 2014, and before that date, there was no established trading market for our common stock.
The following table sets forth, for each fiscal quarter during the last two most recently completed fiscal years and the current fiscal year
to date, the range of high and low closing prices of our common stock as reported on the NASDAQ Global Select Market, and the sales price as a percentage of our net asset value, or NAV.
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Fiscal Year Ended
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NAV
Per Share(1)
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Closing Sales
Price(2)
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Premium or
Discount of
High Sales
to NAV(3)
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Premium or
Discount of
Low Sales
to NAV(3)
|
|
|
|
High
|
|
|
Low
|
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third quarter (through April 5, 2019)
|
|
$
|
|
*
|
|
$
|
8.15
|
|
|
$
|
6.21
|
|
|
|
*
|
%
|
|
|
*
|
%
|
|
Second quarter
|
|
|
11.49
|
|
|
|
8.77
|
|
|
|
5.90
|
|
|
|
(23.67
|
)%
|
|
|
(48.65
|
)%
|
|
First quarter
|
|
|
12.41
|
|
|
|
9.40
|
|
|
|
8.60
|
|
|
|
(24.25
|
)%
|
|
|
(30.70
|
)%
|
|
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth quarter
|
|
|
12.57
|
|
|
|
9.88
|
|
|
|
7.90
|
|
|
|
(21.40
|
)%
|
|
|
(37.15
|
)%
|
|
Third quarter
|
|
|
12.55
|
|
|
|
8.70
|
|
|
|
7.75
|
|
|
|
(30.68
|
)%
|
|
|
(38.25
|
)%
|
|
Second quarter
|
|
|
12.50
|
|
|
|
9.65
|
|
|
|
7.70
|
|
|
|
(22.80
|
)%
|
|
|
(38.40
|
)%
|
|
First quarter
|
|
|
12.39
|
|
|
|
10.30
|
|
|
|
9.25
|
|
|
|
(16.87
|
)%
|
|
|
(25.34
|
)%
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth quarter
|
|
|
12.41
|
|
|
|
10.70
|
|
|
|
10.00
|
|
|
|
(13.78
|
)%
|
|
|
(19.42
|
)%
|
|
Third quarter
|
|
|
12.32
|
|
|
|
10.40
|
|
|
|
9.35
|
|
|
|
(15.58
|
)%
|
|
|
(24.11
|
)%
|
|
Second quarter
|
|
|
12.13
|
|
|
|
10.05
|
|
|
|
8.95
|
|
|
|
(17.15
|
)%
|
|
|
(26.22
|
)%
|
|
First quarter
|
|
|
11.86
|
|
|
|
10.14
|
|
|
|
8.98
|
|
|
|
(14.50
|
)%
|
|
|
(24.28
|
)%
|
|
(1)
|
NAV is determined as of the last date in the relevant quarter and therefore may not reflect the NAV per share
on the date of the high and low sales prices. The NAVs shown are based on outstanding shares at the end of each period.
|
|
(2)
|
Closing sales price is determined as the high or low closing sales price noted within the respective quarter,
not adjusted for dividends.
|
|
(3)
|
Calculated as of the respective high or low sales price divided by the quarter end NAV.
|
On April 5, 2019, the last reported sales price of our common stock was $7.35 per share. As of April 5, 2019, we had 28 stockholders of
record, which did not include stockholders for whom shares are held in nominee or street name.
Shares of business development companies
may trade at a market price that is less than the value of the net assets attributable to those shares. The possibility that our shares of common stock will trade at a discount from net asset value or at premiums that are unsustainable over the long
term are separate and distinct from the risk that our net asset value will decrease. Since they began trading on February 6, 2014, in connection with our initial public offering, our shares of common stock have traded at times at a discount to
the net assets attributable to those shares.
To the extent that we have income available, we intend to make quarterly distributions to
our stockholders. Our quarterly stockholder distributions, if any, will be determined by our board of directors. Any stockholder distribution to our stockholders will be declared out of assets legally available for distribution.
We have elected to be treated as a RIC under the Code. To maintain RIC tax treatment, we must distribute at least 90% of our net ordinary
income and net short-term capital gains in excess of our net long-term capital losses, if any, to our stockholders. In order to avoid certain U.S. federal excise taxes imposed on RICs, we must
59
also distribute during each calendar year an amount at least equal to the sum of: (a) 98% of our net ordinary income for such calendar year; (b) 98.2% of our capital gain net income for
the one-year period ending on October 31 of the calendar year; and (c) any net ordinary income and capital gain net income for preceding years that were not distributed during such years and on which we previously paid no U.S. federal
income tax. We currently intend to make sufficient distributions each calendar year to avoid incurring excise tax, but we may in the future defer distributions and incur excise tax.
We currently intend to distribute net capital gains (i.e., net long-term capital gains in excess of net short-term capital losses), if
any, at least annually out of the assets legally available for such distributions. However, we may decide in the future to retain such capital gains for investment and elect to treat such gains as deemed distributions to you. If this happens, you
will be treated for U.S. federal income tax purposes as if you had received an actual distribution of the capital gains that we retain and reinvested the net after tax proceeds in us. In this situation, you would be eligible to claim a tax credit
(or in certain circumstances a tax refund) equal to your allocable share of the tax we paid on the capital gains deemed distributed to you. See “Certain U.S. Federal Income Tax Considerations.” We cannot assure you that we will achieve
results that will permit us to pay any cash distributions, and if we issue senior securities, we may be prohibited from making distributions if doing so would cause us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if
such distributions are limited by the terms of any of our borrowings.
We have adopted an “opt out” dividend reinvestment plan
for our common stockholders. Unless you elect to receive your distributions in cash, we intend to make such distributions in additional shares of our common stock under our dividend reinvestment plan. Although distributions paid in the form of
additional shares of our common stock will generally be subject to U.S. federal, state and local taxes in the same manner as cash distributions, investors participating in our dividend reinvestment plan will not receive any corresponding cash
distributions with which to pay any such applicable taxes. If you hold shares of our common stock in the name of a broker or financial intermediary, you should contact such broker or financial intermediary regarding your election to receive
distributions in cash in lieu of shares of our common stock. Any distributions reinvested through the issuance of shares through our dividend reinvestment plan will increase our gross assets on which the base management fee and the incentive fee are
determined and paid to our Adviser. See “Dividend Reinvestment Plan.”
The following table summarizes our quarterly cash
distributions, including dividends and returns of capital, if any, per share that have been declared by our board of directors during the three most recently completed fiscal years and the current fiscal year to date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
Date Declared
|
|
|
Record Date
|
|
|
Payment Date
|
|
|
Amount
Per Share
|
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
February 5, 2019
|
|
|
|
March 15, 2019
|
|
|
|
April 4, 2019
|
|
|
$
|
0.2500
|
|
|
Second Quarter
|
|
|
November 6, 2018
|
|
|
|
December 14, 2018
|
|
|
|
January 3, 2019
|
|
|
$
|
0.2500
|
|
|
First Quarter
|
|
|
August 23, 2018
|
|
|
|
September 18, 2018
|
|
|
|
October 5, 2018
|
|
|
$
|
0.2500
|
|
|
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
|
May 2, 2018
|
|
|
|
June 15, 2018
|
|
|
|
July 5, 2018
|
|
|
$
|
0.2500
|
|
|
Third Quarter
|
|
|
February 6, 2018
|
|
|
|
March 16, 2018
|
|
|
|
April 5, 2018
|
|
|
$
|
0.2500
|
|
|
Second Quarter
|
|
|
November 7, 2017
|
|
|
|
December 15, 2017
|
|
|
|
January 4, 2018
|
|
|
$
|
0.2500
|
|
|
First Quarter
|
|
|
August 24, 2017
|
|
|
|
September 8, 2017
|
|
|
|
October 5, 2017
|
|
|
$
|
0.2500
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
|
May 2, 2017
|
|
|
|
June 16, 2017
|
|
|
|
July 6, 2017
|
|
|
$
|
0.2500
|
|
|
Third Quarter
|
|
|
November 3, 2016
|
|
|
|
March 17, 2017
|
|
|
|
April 6, 2017
|
|
|
$
|
0.2500
|
|
|
Second Quarter
|
|
|
November 3, 2016
|
|
|
|
December 16, 2016
|
|
|
|
January 5, 2017
|
|
|
$
|
0.3516
|
|
|
First Quarter
|
|
|
August 25, 2016
|
|
|
|
September 16, 2016
|
|
|
|
October 6, 2016
|
|
|
$
|
0.3516
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
Date Declared
|
|
|
Record Date
|
|
|
Payment Date
|
|
|
Amount
Per Share
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
|
April 28, 2016
|
|
|
|
June 17, 2016
|
|
|
|
July 7, 2016
|
|
|
$
|
0.3516
|
|
|
Third Quarter
|
|
|
February 2, 2016
|
|
|
|
March 18, 2016
|
|
|
|
April 7, 2016
|
|
|
$
|
0.3516
|
|
|
Second Quarter
|
|
|
November 3, 2015
|
|
|
|
December 18, 2015
|
|
|
|
January 5, 2016
|
|
|
$
|
0.3469
|
|
|
First Quarter
|
|
|
June 10, 2015
|
|
|
|
September 18, 2015
|
|
|
|
October 2, 2015
|
|
|
$
|
0.3469
|
|
|
|
|
|
June 10, 2015
|
|
|
|
September 1, 2015
|
|
|
|
September 15, 2015
|
|
|
$
|
0.4300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4.7802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CM Finance Inc (“CMFN,” the “Company”, “us”, “we” or “our”),
a Maryland corporation formed in May 2013, is a closed-end, externally managed, non-diversified management investment company that has elected to be regulated as a
business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, for U.S. federal income tax purposes, we have elected to be treated and intend to continue to qualify as a
regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code (the “Code”).
Our primary
investment objective is to maximize total return to stockholders in the form of current income and capital appreciation by investing directly in debt and related equity of privately held middle market companies to help these companies fund
acquisitions, growth or refinancing. We invest primarily in middle-market companies in the form of unitranche loans, standalone first and second lien and mezzanine loans. We may also invest in unsecured debt, bonds and in the equity of portfolio
companies through warrants and other instruments.
On February 5, 2014, we priced our initial public offering, selling 7,666,666
shares of our common stock, par value $0.001, including the underwriters’ over-allotment, at a price of $15.00 per share with net proceeds of approximately $111.5 million.
CM Finance LLC, a Maryland limited liability company, commenced operations in March 2012. Immediately prior to our initial public offering,
the merger was consummated, whereby CM Finance LLC merged with and into us (the “Merger”). In connection with the Merger, we issued 6,000,000 shares of common stock and $39.8 million in debt to the
pre-existing CM Finance LLC investors, consisting of certain funds (the “Cyrus Funds”) managed by Cyrus Capital. CM Finance Inc had no assets or operations prior to completion of the Merger and, as a
result, the books and records of CM Finance LLC became our books and records, as the surviving entity. Immediately after the Merger, we issued 2,181,818 shares of our common stock to Stifel in exchange for $32.7 million in cash. We used all of
the proceeds of the sale of shares to Stifel, to repurchase 2,181,818 shares of common stock from the Cyrus Funds. Immediately after the completion of the initial public offering, we had 13,666,666 shares outstanding. We also used a portion of the
net proceeds of the initial public offering to repay 100% of the debt issued to the Cyrus Funds in connection with the Merger.
Upon our
election to be regulated as a BDC on February 5, 2014, we entered into the investment advisory agreement (the “Advisory Agreement”) and the administration agreement (the “Administration Agreement”) with the Adviser as our
investment adviser and administrator, respectively.
From time to time, we may form taxable subsidiaries (the “Taxable
Subsidiaries”), which are taxed as corporations for federal income tax purposes. At December 31, 2018, we had one Taxable Subsidiary: Zinc Borrower Blocker, LLC. The Taxable Subsidiaries allow the Company to hold equity securities of
portfolio companies organized as pass-through entities while continuing to satisfy the requirements applicable to a RIC under the Code.
We are generally permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common
stock if our asset coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. However, recent legislation has modified the 1940 Act by allowing a BDC to increase the maximum amount of leverage it may incur
from an asset coverage ratio of 200% to an asset coverage ratio of 150%, if certain requirements are met. On May 2, 2018, our board of directors, including a “required majority” (as such term is defined in Section 57(o) of the
1940 Act) of the board, approved the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act, as amended by the Small Business Credit Availability Act. As a result, our asset coverage requirements for senior
securities will be changed from 200% to 150%, effective as of May 2, 2019.
62
Critical accounting policies
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. Management considers the following critical
accounting policies important to understanding the financial statements. In addition to the discussion below, our critical accounting policies are further described in the notes to our consolidated financial statements.
Valuation of portfolio investments
We value our portfolio investments at fair value based upon the principles and methods of valuation set forth in policies adopted by our board
of directors. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. Market participants are buyers and sellers in the principal (or most
advantageous) market for the asset that (a) are independent of us, (b) are knowledgeable, having a reasonable understanding about the asset based on all available information (including information that might be obtained through due
diligence efforts that are usual and customary), (c) are able to transact for the asset, and (d) are willing to transact for the asset or liability (that is, they are motivated but not forced or otherwise compelled to do so).
Investments for which market quotations are readily available are valued at such market quotations unless the quotations are deemed not to
represent fair value. We generally obtain market quotations from recognized exchanges, market quotation systems, independent pricing services or one or more broker dealers or market makers.
Debt and equity securities for which market quotations are not readily available or for which market quotations are deemed not to represent
fair value are valued at fair value as determined in good faith by our board of directors. Because a readily available market value for many of the investments in our portfolio is often not available, we value many of our portfolio investments at
fair value as determined in good faith by our board of directors using a consistently applied valuation process in accordance with a documented valuation policy that has been reviewed and approved by our board of directors. Due to the inherent
uncertainty and subjectivity of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available
market value existed for such investments and may differ materially from the values that we may ultimately realize. In addition, changes in the market environment and other events may have differing impacts on the market quotations used to value
some of our investments than on the fair values of our investments for which market quotations are not readily available. Market quotations may also be deemed not to represent fair value in certain circumstances where we believe that facts and
circumstances applicable to an issuer, a seller or purchaser, or the market for a particular security causes current market quotations not to reflect the fair value of the security. Examples of these events could include cases where a security
trades infrequently, causing a quoted purchase or sale price to become stale, where there is a “forced” sale by a distressed seller, where market quotations vary substantially among market makers, or where there is a wide bid-ask spread or significant increase in the bid ask spread.
Those investments for which market
quotations are not readily available or for which market quotations are deemed not to represent fair value are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other
relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a
single present amount (discounted). The measurement is based on the value indicated by current market expectations about
63
those future amounts. In following these approaches, the types of factors that we may take into account in determining the fair value of our investments include, as relevant and among other
factors: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and
realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are
public, merger and acquisition comparables, our principal market (as the reporting entity) and enterprise values.
With respect to
investments for which market quotations are not readily available, our board of directors undertakes a multi-step valuation process each quarter, as described below:
|
|
•
|
|
our quarterly valuation process begins with each portfolio company or investment being initially valued by the
members of the Adviser’s investment team responsible for the portfolio investment;
|
|
|
•
|
|
preliminary valuation conclusions are then documented and discussed by our senior management and the Adviser;
|
|
|
•
|
|
on a periodic basis, at least once annually, the valuation for each portfolio investment is reviewed by an
independent valuation firm engaged by our board of directors;
|
|
|
•
|
|
the valuation committee of our board of directors then reviews these preliminary valuations and makes a
recommendation to our board of directors regarding the fair value of each investment; and
|
|
|
•
|
|
the board of directors then reviews and discusses these preliminary valuations and determines the fair value of
each investment in our portfolio in good faith, based on the input of the Adviser, the independent valuation firm and the valuation committee.
|
When valuing all of our investments, we strive to maximize the use of observable inputs and minimize the use of unobservable inputs. Inputs
refer broadly to the assumptions that market participants would use in pricing an asset, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would
use in pricing an asset or liability developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the assumptions market participants would use in pricing an asset or
liability developed based on the best information available under the circumstances.
Our investments are categorized based on the types
of inputs used in their valuation. The level in the U.S. GAAP valuation hierarchy in which an investment falls is based on the lowest level input that is significant to the valuation of the investment in its entirety. Investments are classified by
U.S. GAAP into the three broad levels as follows:
|
|
|
|
|
Level 1 –
|
|
valuation is based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
|
|
|
|
|
Level 2 –
|
|
valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as (a) quoted prices for similar assets or liabilities in
active markets; (b) quoted prices for identical or similar assets or liabilities in markets that are not active, that is, markets in which there are few transactions for the asset or liability, the prices are not current, or price quotations
vary substantially either over time or among market makers, or in which little information is released publicly; (c) inputs other than quoted prices that are observable for the asset or liability; or (d) inputs that are derived principally
from or corroborated by observable market data by correlation or other means.
|
64
|
|
|
|
|
Level 3 –
|
|
valuation is based on unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is
little, if any, market activity for the asset or liability at the measurement date. However, the fair value measurement objective remains the same, that is, an exit price from the perspective of a market participant that holds the asset or owes the
liability. Therefore, unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Unobservable inputs are developed
based on the best information available under the circumstances, which might include the Company’s own data. The Company’s own data used to develop unobservable inputs is adjusted if information is reasonably available without undue cost
and effort that indicates that market participants would use different assumptions.
|
As of December 31, 2018, the Company held all Level 3 investments, with the exception of one
Level 1 investment, determined based on valuations by our board of directors. As of June 30, 2018, all of our investments were classified as Level 3 investments determined based on valuations by our board of directors.
Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our financial statements express the
uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on the consolidated financial statements.
Revenue recognition
Our revenue
recognition policies are as follows:
Net realized gains (losses) on investments: Gains or losses on the sale of investments are
calculated using the specific identification method.
Interest Income: Interest income, adjusted for amortization of premium and
accretion of discount, is recorded on an accrual basis. Origination, closing, commitment, and amendment fees, purchase and original issue discounts associated with loans to portfolio companies are accreted into interest income over the respective
terms of the applicable loans. Accretion of discounts or premiums is calculated by the effective interest or straight-line method, as applicable, as of the purchase date and adjusted only for material amendments or prepayments. Upon the prepayment
of a loan or debt security, any prepayment penalties and unamortized fees and discounts are recorded as interest income and are non-recurring in nature.
Structuring fees and similar fees are recognized as income as earned, usually when received. Structuring fees, excess deal deposits, net
profits interests and overriding royalty interests are included in other fee income.
We may hold debt investments in its portfolio that
contain a payment-in-kind (“PIK”) interest provision. The PIK interest, which represents contractually deferred interest added to the investment balance that
is generally due at maturity, is recorded on the accrual basis to the extent such amounts are expected to be collected.
Non-accrual: Loans are placed on non-accrual status when principal or interest payments are past due 90 days or more or when there is reasonable doubt that
principal or interest will be collected. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual
loans may be recognized as income or applied to principal depending upon management’s judgment about ultimate collectability of principal. Non-accrual loans are restored to accrual status when past due
principal and interest is paid and, in management’s judgment, are likely to remain current. PIK interest is not accrued if we do not expect the issuer to be able to pay all principal and interest when due. As of December 31, 2018, we had
one investment on non-accrual status, and as of June 30, 2018, we had no investments on non-accrual status.
65
Financing Facilities
We have, through CM SPV Ltd. (“SPV”), our wholly owned subsidiary, entered into a $102.0 million term secured financing facility
(the “Term Financing”), due December 5, 2020 with UBS AG, London Branch (together with its affiliates “UBS”). The Term Financing is collateralized by a portion of the debt investments in our portfolio. Borrowings under the
Term Financing bear interest (i) at a rate per annum equal to one-month London Interbank Offered Rate (“LIBOR”) plus 2.75% through December 4, 2018, and (ii) at a rate per annum equal
to one-month LIBOR plus 2.55% from December 5, 2018 through December 5, 2020 (the “Term Financing Rate”). We also incur an annual fee of approximately 1% of the outstanding borrowings under
the Term Financing. As of December 31, 2018 and June 30, 2018, there were $102.0 million and $102.0 million borrowings outstanding under the Term Financing, respectively.
On November 20, 2017, we entered into a $50 million revolving financing facility (the “2017 UBS Revolving Financing”) with
UBS. Borrowings under the 2017 UBS Revolving Financing will generally bear interest at a rate per annum equal to one-month LIBOR plus 3.55% (the “Revolver Financing Rate”). We pay a fee on any
undrawn amounts of 2.50% per annum; provided that if 50% or less of the 2017 UBS Revolving Financing is drawn, the fee will be 2.75% per annum. Any amounts borrowed under the 2017 UBS Revolving Financing will mature, and all accrued and
unpaid interest will be due and payable, on December 5, 2019. As of December 31, 2018, there were no borrowings outstanding under the 2017 UBS Revolving Financing. As of June 30, 2018, there were $17.8 million in borrowings
outstanding under the 2017 UBS Revolving Financing.
On November 9, 2016, we entered into a $50 million senior secured revolving
credit facility (the “Citi Revolving Financing”) with Citibank, N.A. (“Citibank”), which was secured by collateral consisting primarily of commercial loans and corporate bonds. Borrowings under the Citi Revolving Financing
generally bore interest at a rate per annum equal to LIBOR plus 4.85% and the default interest rate was equal to the interest rate then in effect plus 2.00%. On December 8, 2017, we repaid in full all indebtedness, liabilities and other
obligations under, and terminated, the Citi Revolving Financing. In accordance with the termination of the Citi Revolving Financing, all liens on the collateral securing the Citi Revolving Financing were released. As of December 31, 2018 and
June 30, 2018, there were no borrowing outstanding under the Citi Revolving Financing. We refer to the Term Financing, the 2017 UBS Revolving Financing and the Citi Revolving Financing together as the “Financing Facilities.”
Notes due 2023
On July 2, 2018, we
closed the public offering of $30 million in aggregate principal amount of 6.125% notes due 2023 (the “Notes”). On July 12, 2018, the underwriters exercised their over-allotment option to purchase an additional $4.5 million
in aggregate principal amount of the Notes. The total net proceeds to us from the Notes, including the exercise of the underwriters’ over-allotment option, after deducting underwriting discounts and commissions of approximately
$1.0 million and estimated offering expenses of approximately $230,000, were approximately $33.2 million.
The Notes will mature
on July 1, 2023 and bear interest at a rate of 6.125%. The Notes are direct unsecured obligations and rank pari passu, which means equal in right of payment, with all outstanding and future unsecured indebtedness issued by us. Because the Notes
are not secured by any of our assets, they are effectively subordinated to all of our existing and future secured unsubordinated indebtedness (or any indebtedness that is initially unsecured as to which we subsequently grant a security interest), to
the extent of the value of the assets securing such indebtedness. The Notes are structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries and financing vehicles, including, without limitation,
borrowings under the Term Financing and the 2017 UBS Revolving Financing. The Notes are obligations exclusively of CM Finance Inc and not of any of our subsidiaries. None of our subsidiaries is a guarantor of the Notes and the Notes will not be
required to be guaranteed by any subsidiary we may acquire or create in the future.
66
The Notes may be redeemed in whole or in part at any time or from time to time at our option on
or after July 1, 2020. Interest on the Notes is payable quarterly on January 1, April 1, July 1 and October 1 of each year. The Notes are listed on the NASDAQ Global Select Market under the trading symbol “CMFNL.”
We may from time to time repurchase Notes in accordance with the 1940 Act and the rules promulgated thereunder. As of December 31, 2018, the outstanding principal balance of the Notes was approximately $34.5 million.
The indenture under which the Notes are issued (the “Indenture”) contains certain covenants, including covenants (i) requiring
our compliance with the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a) of the 1940 Act, whether or not we continue to be subject to such provisions of the 1940 Act; (ii) requiring our
compliance, under certain circumstances, with the requirements set forth in Section 18(a)(1)(B) as modified by Section 61(a) of the 1940 Act, whether or not we continue to be subject to such provisions of the 1940 Act, prohibiting the
declaration of any cash dividend or distribution upon any class of our capital stock (except to the extent necessary for us to maintain its treatment as a RIC under Subchapter M of the Code), or purchasing any such capital stock, if our asset
coverage, as defined in the 1940 Act, is below 200% (or 150% beginning on May 2, 2019) at the time of the declaration of the dividend or distribution or the purchase and after deducting the amount of such dividend, distribution, or purchase;
and (iii) requiring us to provide financial information to the holders of the Notes and the Trustee if we cease to be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These
covenants are subject to limitations and exceptions that are described in the Indenture.
Investments
Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount we have
available to invest as well as the amount of debt and equity capital available to middle-market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we
make.
As a BDC, we are required to comply with certain regulatory requirements. For instance, as a BDC, we may not acquire any assets
other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in
“eligible portfolio companies.” Under the relevant SEC rules, the term “eligible portfolio company” includes all private companies, companies whose securities are not listed on a national securities exchange, and certain public
companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million. In each case, the company must be organized in the United States. As of December 31, 2018 and
June 30, 2018, approximately 10.1% and 19.6% of our total assets were non-qualifying assets, respectively.
To qualify as a RIC, we must, among other things, meet certain
source-of-income and asset diversification requirements. As a RIC, we generally will not have to pay corporate-level taxes on any income we distribute to our
stockholders.
Revenues
We generate
revenues primarily in the form of interest on the debt we hold. We also generate revenue from royalty income, dividends on our equity interests and capital gains on the sale of warrants and other debt or equity interests that we acquire. Our
investments in fixed income instruments generally have an expected maturity of three to five years, although we have no lower or upper constraint on maturity. Interest on our debt investments is generally payable quarterly or semi-annually. Payments
of principal of our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt investments and preferred stock investments may defer payments of cash
interest or dividends or PIK interest. Any outstanding principal amount of our debt investments and any accrued but unpaid interest will generally become due at the maturity date. In addition, we may generate revenue in the form of prepayment fees,
commitment, origination, structuring or due diligence fees, fees for providing significant managerial assistance, consulting fees and other investment related income.
67
Expenses
Our primary operating expenses include the payment of a base management fee and, depending on our operating results, incentive fees, expenses
reimbursable by us under the Advisory Agreement, administration fees, and our allocable portion of overhead expenses under the Administration Agreement. The base management fee and incentive compensation remunerates the Adviser for work in
identifying, evaluating, negotiating, closing and monitoring our investments. We bear all other out-of-pocket costs and expenses of our operations and transactions,
including, without limitation, those relating to:
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•
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our organization and our offering;
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•
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valuing our assets and calculating our net asset value per share (including the cost and expenses of any
independent valuation firm(s));
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•
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fees and expenses payable to third parties, including agents, consultants or other advisors, in monitoring
financial and legal affairs for us and in monitoring our investments and performing due diligence on our prospective portfolio companies or otherwise relating to, or associated with, evaluating and making investments;
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•
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valuing our assets and calculating our net asset value per share (including the cost and expenses of any
independent valuation firm(s));
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•
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interest payable on debt, if any, incurred to finance our investments and expenses related to unsuccessful
portfolio acquisition efforts;
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•
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offerings of our common stock and other securities;
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•
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administration fees and expenses, if any, payable under the Administration Agreement (including our allocable
portion of the Adviser’s overhead in performing its obligations under the Administration Agreement, including rent, equipment and the allocable portion of the cost of our chief compliance officer, chief financial officer and his staffs’
compensation and compensation-related expenses);
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•
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transfer agent and custody fees and expenses;
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•
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federal and state registration fees;
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•
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costs of registration and listing our shares on any securities exchange;
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•
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federal, state and local taxes;
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•
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independent directors’ fees and expenses;
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•
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costs of preparing and filing reports or other documents required by the SEC or other regulators;
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•
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costs of any reports, proxy statements or other notices to stockholders including printing costs;
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•
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costs associated with individual or group stockholders;
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•
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costs and fees associated with any fidelity bond, directors and officers/errors and omissions liability
insurance, and any other insurance premiums;
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•
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direct costs and expenses of administration and operation, including printing, mailing, long distance telephone,
copying, secretarial and other staff, independent auditors and outside legal costs; and
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•
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all other non-investment advisory expenses incurred by us or the Adviser
in connection with administering our business.
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68
Portfolio and investment activity
Portfolio composition
We invest
primarily in middle-market companies in the form of unitranche loans and standalone first and second lien loans. We may also invest in unsecured debt, bonds and in the equity of portfolio companies through warrants and other instruments.
At December 31, 2018, our investment portfolio of $283.3 million (at fair value) consisted of debt and equity investments in 29
portfolio companies, of which 63.7% were first lien investments, 31.7% were second lien investments, 4.1% were unitranche first lien debt investments, 0.5% were in equities, warrants and other positions, and 0.0% were unsecured debt investments. At
December 31, 2018, our average and largest portfolio company investment at fair value was $9.8 and $24 million, respectively.
At June 30, 2018, our investment portfolio of $293.6 million (at fair value) consisted of investments in 25 portfolio companies, of
which 52.1% were first lien investments, 43.3% were second lien investments, 4.2% were unitranche first lien debt investments, 0.2% were in unsecured debt investments, and 0.2% were in equity and warrants, and other positions. At June 30, 2018,
our average and largest portfolio company investment at fair value was $11.7 million and $24.9 million, respectively.
At
December 31, 2018, the weighted average total yield of debt and income producing securities at amortized cost (which includes income and amortization of fees and discounts) was 11.08% and the weighted average total yield on investments at amortized
cost (which includes interest income and amortization of fees and discounts) was 10.83%. At June 30, 2018, the weighted average total yield of debt and income producing securities at amortized cost (which includes income and amortization of fees and
discounts) was 11.19% and the weighted average total yield on investments at amortized cost (which includes interest income and amortization of fees and discounts) was 11.12%.
We use GICS codes to identify the industry groupings. At December 31, 2018 and June 30, 2018, respectively, the industry composition
of our portfolio in accordance with the GICS codes at fair value was as follows:
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Percentage of
Total Portfolio
at December 31,
2018
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Percentage of
Total Portfolio
at June 30,
2018
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Professional Services
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15.01
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%
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13.98
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%
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Media
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12.77
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10.88
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Energy Equipment & Services
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10.57
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|
10.97
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Oil, Gas & Consumable Fuels
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8.48
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|
8.24
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Diversified Telecommunication Services
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|
7.74
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8.49
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Construction and Engineering
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|
7.73
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|
—
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Hotels, Restaurants & Leisure
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4.31
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|
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11.36
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Commercial Services & Supplies
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4.24
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10.76
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Internet Software & Services
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3.86
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—
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IT Services
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3.86
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9.54
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Distributors
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3.49
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4.25
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Construction Materials
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3.48
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|
—
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Auto Components
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|
3.20
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—
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Technology Hardware, Storage and Peripherals
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|
3.11
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|
—
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Health Care Equipment & Supplies
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|
2.63
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|
2.55
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Containers & Packaging
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|
2.47
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|
—
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69
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Percentage of
Total Portfolio
at December 31,
2018
|
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Percentage of
Total Portfolio
at June 30,
2018
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|
Chemicals
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|
1.96
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%
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|
2.73
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%
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Retail
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|
0.73
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|
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|
—
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Wireless Telecommunication Services
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0.36
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|
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0.16
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Health Care Providers & Services
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—
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3.85
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Electronic Equipment
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—
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|
2.24
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100.00
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%
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|
100.00
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%
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|
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|
During the three months ended December 31, 2018, we added 14 new investments totaling approximately
$50.1 million. Four of these investments were in new portfolio companies. Of the new investments, 100.0% consisted of first lien investments.
At December 31, 2018, 94.8% of our debt investments bore interest based on floating rates based on indices such as LIBOR (in certain
cases, subject to interest rate floors), and 5.2% bore interest at fixed rates. At June 30, 2018, 95.8% of our debt investments bore interest based on floating rates based on indices such as LIBOR (in certain cases, subject to interest rate
floors), and 4.2% bore interest at fixed rates.
Our investment portfolio may contain loans that are in the form of lines of credit or
revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of December 31, 2018, we had three investments with aggregate unfunded
commitments of $10.0 million, and as of June 30, 2018, we had three investments with aggregate unfunded commitments of $2.8 million.
Asset Quality
In addition to
various risk management and monitoring tools, we use the Adviser’s investment rating system to characterize and monitor the credit profile and expected level of returns on each investment in our portfolio. This investment rating system uses a
five-level numeric rating scale. The following is a description of the conditions associated with each investment rating:
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Investment Rating 1
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Investments that are performing above expectations, and whose risks remain favorable compared to the expected risk at the time of the original investment.
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Investment Rating 2
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Investments that are performing within expectations and whose risks remain neutral compared to the expected risk at the time of the original investment. All new loans will initially be rated 2.
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Investment Rating 3
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Investments that are performing below expectations and that require closer monitoring, but where no loss of return or principal is expected. Portfolio companies with a rating of 3 may be out of compliance with their
financial covenants.
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Investment Rating 4
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Investments that are performing substantially below expectations and whose risks have increased substantially since the original investment. These investments are often in workout. Investments with a rating of 4 will be those for
which some loss of return but no loss of principal is expected.
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Investment Rating 5
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Investments that are performing substantially below expectations and whose risks have increased substantially since the original investment. These investments are almost always in workout. Investments with a rating of 5 will be
those for which some loss of return and principal is expected.
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70
If the Adviser determines that an investment is underperforming, or circumstances suggest that
the risk associated with a particular investment has significantly increased, the Adviser will increase its monitoring intensity and prepare regular updates for the investment committee, summarizing current operating results and material impending
events and suggesting recommended actions. While the investment rating system identifies the relative risk for each investment, the rating alone does not dictate the scope and/or frequency of any monitoring that will be performed. The frequency of
the Adviser’s monitoring of an investment will be determined by a number of factors, including, but not limited to, the trends in the financial performance of the portfolio company, the investment structure and the type of collateral securing
the investment.
The following table shows the investment rankings of the investments in our portfolio:
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As of December 31, 2018
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As of June 30, 2018
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Fair Value
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|
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% of
Portfolio
|
|
|
Number of
Investments(1)
|
|
|
Fair Value
|
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|
% of
Portfolio
|
|
|
Number of
Investments
|
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|
1
|
|
$
|
11,933,992
|
|
|
|
4.2
|
%
|
|
|
3
|
|
|
$
|
6,458,750
|
|
|
|
2.2
|
%
|
|
|
1
|
|
|
2
|
|
|
249,958,456
|
|
|
|
88.2
|
|
|
|
29
|
|
|
|
267,055,281
|
|
|
|
91.0
|
|
|
|
29
|
|
|
3
|
|
|
21,442,735
|
|
|
|
7.6
|
|
|
|
2
|
|
|
|
8,765,286
|
|
|
|
3.0
|
|
|
|
1
|
|
|
4
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,580,954
|
|
|
|
3.6
|
|
|
|
2
|
|
|
5
|
|
|
119
|
|
|
|
—
|
|
|
|
4
|
|
|
|
731,742
|
|
|
|
0.2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
283,335,302
|
|
|
|
100.00
|
%
|
|
|
38
|
|
|
$
|
293,592,013
|
|
|
|
100.00
|
%
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of Operations
Comparison of the three months ended December 31, 2018 and December 31, 2017
Investment income
Investment income,
attributable primarily to interest and fees on our debt investments, for the three months ended December 31, 2018 increased to $9.3 million from $8.4 million for the three months ended December 31, 2017, primarily due to the
utilization of cash to purchase additional investments in portfolio companies.
Expenses
Total expenses for the three months ended December 31, 2018 increased to $5.6 million, compared to $4.8 million for the three
months ended December 31, 2017, primarily due to an increase in interest expenses related to an increase in the LIBOR rate and interest payments on the Notes.
Net investment income
Net investment
income was $3.7 million for the three months ended December 31, 2018 and $3.7 million for the three months ended December 31, 2017, primarily due to an increase in investment income resulting from the utilization of cash to
purchase additional investments in portfolio companies offset by an increase in interest expense related to an increase in the LIBOR rate and interest payments on the Notes.
Net realized gain or loss
Net realized
gains on investments totaled $0.1 million for the three months ended December 31, 2018, primarily due to a sale of Intermedia Holding, Inc. There were no realized gains or losses for the three months ended December 31, 2017.
71
Net change in unrealized (depreciation) appreciation on investments
We recorded a net change in unrealized (depreciation) of ($13.2 million) for the three months ended December 31, 2018, primarily due to a
decrease in valuations of Trident USA Health Services, LLC and Premiere Global Services, Inc., and by accretion of certain investments.
During the three months ended December 31, 2017, we recorded a net change in unrealized appreciation of $1.2 million, primarily due
to an increase in valuations of certain investments offset by accretion on certain investments.
Comparison of the twelve months ended June 30,
2018 and June 30, 2017
Investment income
Investment income, attributable primarily to dividends, interest and fees on our debt investments, for the twelve months ended June 30,
2018 increased to $40.8 million from $31.0 million for the twelve months ended June 30, 2017, primarily due to dividends received from our wholly-owned subsidiaries of Bird Electric Blocker, LLC and U.S. Well Services Blocker, LLC.
Expenses
Total expenses (including
waiver, if applicable) for the twelve months ended June 30, 2018 increased to $21.8 million from $15.3 million for the twelve months ended June 30, 2017, due primarily to an increase in our income-based incentive fee and our tax
provision related to the dividend received from our wholly-owned subsidiaries.
Net investment income
Net investment income increased to $19.0 million for the twelve months ended June 30, 2018 from $15.7 million for the twelve
months ended June 30, 2017, due to an increase in investment income primarily due to the dividend received from our wholly-owned subsidiaries offset by our income-based incentive and our tax provision related to the dividend received from our
wholly-owned subsidiaries.
Net realized gain or loss
The net realized loss on investments totaled $9.9 million for the twelve months ended June 30, 2018, primarily due to the
restructuring of Bird Electric, LLC and the sale of Dayton Superior Corporation during the period.
The net realized loss on investments
totaled $11.8 million for the twelve months ended June 30, 2017, primarily due to the restructuring of U.S. Well Services, LLC and AAR Intermediate Holdings LLC during the period.
Net change in unrealized (depreciation) appreciation on investments
We recorded a net change in unrealized appreciation of $6.5 million for the twelve months ended June 30, 2018, primarily due to an
increase in fair value of our investments in Caelus Energy Alaska 03, LLC, AP NMT Acquisition BV and the restructuring of Bird Electric, LLC offset by the restructuring of Trident USA Health Services, LLC during the period.
We recorded a net change in unrealized appreciation of $19.7 million for the twelve months ended June 30, 2017, primarily due to an
increase in fair value of our investments in Caelus Energy Alaska 03, LLC and PR Wireless, Inc., the realization of North American Lifting Holdings, Inc. and the restructuring of U.S. Well Services, LLC and AAR Intermediate Holdings LLC during the
period.
72
Comparison of the twelve months ended June 30, 2017 and June 30, 2016
Investment income
Investment income,
attributable primarily to interest and fees on our debt investments, for the twelve months ended June 30, 2017 decreased to $31.0 million from $35.6 million for the twelve months ended June 30, 2016, primarily due to the
repayment of portfolio companies with higher yields and a higher percentage of uninvested cash during the quarter ended June 30, 2017.
Expenses
Total expenses (including waiver, if applicable) for the twelve months ended June 30, 2017 decreased to $15.3 million from
$15.7 million for the twelve months ended June 30, 2016, due primarily to an increase in our income-based incentive fee waiver.
Net
investment income
Net investment income decreased to $15.7 million for the twelve months ended June 30, 2017 from
$19.9 million for the twelve months ended June 30, 2016, primarily due to a decrease in investment income primarily due to one investment being on non-accrual and the repayment of portfolio companies
with higher yields replaced by lower yielding portfolio companies.
Net realized gain or loss
The net realized loss on investments totaled $11.8 million for the twelve months ended June 30, 2017, primarily due to the
restructuring of U.S. Well Services, LLC and AAR Intermediate Holdings LLC during the period.
The net realized gain on investments
totaled $0.3 million for the twelve months ended June 30, 2016, primarily due to on sales activity during the period.
Net change in
unrealized (depreciation) appreciation on investments
We recorded a net change in unrealized appreciation of $19.7 million for
the twelve months ended June 30, 2017, primarily due to an increase in fair value of our investments in Caelus Energy Alaska 03, LLC and PR Wireless, Inc., the realization of North American Lifting Holdings, Inc. and the restructuring of U.S.
Well Services, LLC and AAR Intermediate Holdings LLC during the period.
We recorded a net change in unrealized depreciation of
$29.5 million for the twelve months ended June 30, 2016, primarily due to decline in fair value of our investments in Bird Electric Enterprises, LLC, AAR Intermediate Holdings, LLC, and YRC Worldwide, Inc.
Liquidity and capital resources
Cash flows
For the three months ended December 31, 2018, our unrestricted cash balance increased by $3.3 million. During that
period, cash increased by $20.6 million from operating activities, primarily due to payments for the purchase of investments in portfolio companies of $47.4 million, offset by sales of investments of $83.5 million in portfolio
companies and an increase in receivables from investments sold of $1.5 million. During the same period, cash from financing activities decreased by $17.2 million, consisting primarily of $3.4 million of distributions paid to our
stockholders, and payments of $19.1 million from borrowings offset by repayment of $7.3 million under the Financing Facilities.
73
Capital Resources
As of December 31, 2018, we had $6.2 million of cash as well as $6.0 million in restricted cash and $50.0 million of
capacity under the 2017 UBS Revolving Financing. We intend to generate additional cash primarily from future offerings of securities, future borrowings under the 2017 UBS Revolving Financing as well as cash flows from operations, including income
earned from investments in our portfolio companies and, to a lesser extent, from the temporary investment of cash in U.S. government securities and other high-quality debt investments that mature in one year or less. Our primary liquidity needs
include interest and principal repayments on our Financing Facilities, interest payments on the Notes, our unfunded loan commitments (if any), investments in portfolio companies, dividend distributions to our stockholders and operating expenses.
As discussed below in further detail, we have elected to be treated as a RIC under the Code. To maintain our RIC status, we generally
must distribute substantially all of our net taxable income to stockholders in the form of dividends. Our net taxable income does not necessarily equal our net income as calculated in accordance with U.S. GAAP.
Regulated Investment Company Status and Distributions
We have elected to be treated as a RIC under Subchapter M of the Code. If we continue to qualify as a RIC, we will not be taxed on our
investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are distributed, or deemed to be distributed, 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 until realized. Dividends declared and paid by us in a year may differ from taxable income for that year as such dividends may include the
distribution of current year taxable income or the distribution of prior year taxable income carried forward into and distributed in the current year. Distributions also may include returns of capital.
To continue to qualify for RIC tax treatment, we must, among other things, distribute to our stockholders, with respect to each taxable year,
at least 90% of our investment company net 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). We will also be subject to a federal excise tax,
based on distributive requirements of our taxable income on a calendar year basis.
We intend to distribute to our stockholders between
90% and 100% of our annual taxable income (which includes our taxable interest and fee income). However, the covenants contained in the Financing Facility may prohibit us from making distributions to our stockholders, and, as a result, could hinder
our ability to satisfy the distribution requirement. In addition, we may retain for investment some or all of our net taxable 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 taxable year fall below the total amount of our dividends for that fiscal year, a portion of those dividend distributions may be deemed a return of capital to our
stockholders.
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 BDC under the 1940 Act and due to provisions in Financing
Facilities. We cannot assure stockholders that they will receive any distributions or distributions at a particular level.
74
In accordance with certain applicable Treasury regulations and private letter rulings issued by
the Internal Revenue Service, 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 a
limitation that the aggregate amount of cash to be distributed to all stockholders must be at least 20% of the aggregate declared distribution. If too many stockholders elect to receive cash, each stockholder electing to receive cash must receive a
pro rata amount of cash (with the balance of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive less than 20% of his or her entire distribution in cash. 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 have no current intention of paying dividends in shares of our stock in
accordance with these Treasury regulations or private letter rulings.
Investment Advisory Agreement
Pursuant to the Advisory Agreement, we have agreed to pay to the Adviser a base management fee of 1.75% of gross assets, including assets
purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents and “fair value of derivatives associated with our financing,” and an incentive fee consisting of two parts.
The first part of the incentive fee, which is calculated and payable quarterly in arrears, equals 20.0% of the
“pre-incentive fee net investment income” (as defined in the Advisory Agreement) for the immediately preceding quarter, subject to a hurdle rate of 2.0% per quarter (8.0% annualized), and is
subject to a “catch-up” feature. The incentive fee is subject to a total return requirement, which provides that no incentive fee in respect of the Company’s
pre-incentive fee net investment income will be payable except to the extent 20.0% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding quarters exceeds
the cumulative incentive fees accrued and/or paid for the 11 preceding quarters. The net pre-incentive fee investment income used to calculate this part of the incentive fee is also included in the amount of
our gross assets used to calculate the 1.75% base management fee.
The second part of the incentive fee is calculated and payable in
arrears as of the end of each calendar year and equals 20.0% of the aggregate cumulative realized capital gains from inception through the end of each calendar year, computed net of aggregate cumulative realized capital losses and aggregate
cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid capital gain incentive fees.
The Adviser agreed to permanently waive all or portions of the incentive fee for the calendar year ended December 31, 2016 to the extent
required to support an annualized dividend yield of 9.375% per annum. The Adviser has not contractually agreed to voluntarily waive any fees under the Advisory Agreement for the calendar year ended December 31, 2017 or thereafter.
For the three months ended December 31, 2018 and December 31, 2017, $1,405,297 and $1,161,353, respectively in base management fees
were earned by the Adviser, of which $1,405,297 and $1,161,353 was payable at December 31, 2018 and December 31, 2017, respectively.
For the three months ended December 31, 2018, we incurred incentive fees of $753,721 related to
pre-incentive fee net investment income. As of December 31, 2018, $1,566,513 of previous incentive fees are currently payable to the Adviser, which consisted of $693,771 of
pre-incentive fees incurred by us that were generated from deferred interest (i.e., PIK and certain discount accretion) and are not payable until such amounts are received in cash. For the three months ended
December 31, 2017, we incurred incentive fees of $921,782 related to pre-incentive fee net investment income. As of December 31, 2017, $1,162,320 of previous incentive fees were currently payable to
the Adviser, which consisted of $414,939 of pre-incentive fees incurred by us that were generated from deferred interest (i.e., PIK and certain discount accretion) and are not payable until such amounts are
received in cash.
75
The capital gains incentive fee consists of fees related to both realized gains, realized capital
losses and unrealized capital depreciation. As of December 31, 2018, there were no capital gains incentive fee accrued, earned or payable to the Adviser under the Advisory Agreement. As of December 31, 2017, there were no capital gains
incentive fee accrued, earned or payable to the Adviser under the Advisory Agreement.
With respect to the incentive fee expense accrual
relating to the unrealized capital gains incentive fee, U.S. GAAP requires that the capital gains incentive fee accrual consider the cumulative aggregate unrealized appreciation in the calculation, as a capital gains incentive fee would be payable
if such unrealized appreciation were realized, even though such unrealized appreciation is not permitted to be considered in calculating the fee actually payable under the Advisory Agreement.
The Advisory Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason
of the reckless disregard of its duties and obligations under the Advisory Agreement, the Adviser and its officers, managers, partners, agents, employees, controlling persons and members, and any other person or entity affiliated with it, are
entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of the Adviser’s services under the Advisory
Agreement or otherwise as the Adviser.
Prior to our election to be regulated as a BDC on February 5, 2014, no management or
incentive fees were due and payable.
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 of December 31, 2018, our off-balance sheet arrangements consisted of $10.0 million in unfunded commitments to three of our portfolio
companies. As of June 30, 2018, our off-balance arrangements consisted of $2.8 million in unfunded commitments to four of our portfolio companies.
Recent Developments
We have evaluated
the need for disclosures and/or adjustments resulting from subsequent events through the date the consolidated financial statements were issued.
Subsequent to the six months ended December 31, 2018 through February 5, 2019, we invested $23.4 million in new and existing
portfolio companies and received repayment or sales proceeds of $29.0 million.
On February 5, 2019, our board of directors
declared a distribution for the quarter ended March 31, 2019 of $0.25 per share payable on April 4, 2019 to stockholders of record as of March 15, 2019.
Quantitative and Qualitative Disclosure about Market Risk
We are subject to financial market risks, including changes in interest rates. At December 31, 2018, 94.4% of our debt investments bore
interest based on floating rates, such as LIBOR, the Euro Interbank Offered Rate, the Federal Funds Rate or the Prime Rate. The interest rates on such investments generally reset by reference to the current market index after one to three months.
Floating rate investments subject to a floor generally reset by reference to the current market index after one to three months only if the index exceeds the floor.
Generally, we believe higher yielding assets such as those in our investment portfolio do not necessarily follow a linear interest rate
relationship and are less sensitive in price to interest rate changes than many other
76
debt investments. Our investments in fixed rate assets are generally exposed to changes in value due to interest rate fluctuations, and our floating rate assets are generally exposed to cash flow
variability from fluctuation in rates. Consequently, our net interest income (interest income less interest expense) is exposed to risks related to interest rate fluctuations. Based on our current portfolio with certain interest rate floors and our
financing at December 31, 2018, a 1.00% increase in interest rates would decrease our net interest income by approximately 8.1% and a 2.00% increase in interest rates would increase our net interest income by approximately 16.2%. Variable-rate
instruments subject to a floor generally reset periodically to the applicable floor and, in the case of investments in our portfolio, quarterly to a floor based on LIBOR, only if the floor exceeds the index. Under these loans, we do not benefit from
increases in interest rates until such rates exceed the floor and thereafter benefit from market rates above any such floor.
Although
management believes that this analysis is indicative of our existing sensitivity to interest rate changes, it does not adjust for changes in the credit markets, the size, credit quality or composition of the assets in our portfolio and other
business developments, including borrowing, that could affect the net increase in net assets resulting from operations or net income. It also does not adjust for the effect of the time lag between a change in the relevant interest rate index and the
rate adjustment under the applicable loan. Accordingly, we can offer no assurances that actual results would not differ materially from the statement above.
77
SENIOR SECURITIES
Information about our senior securities is shown in the following table as of December 31, 2018, and for the fiscal years ended June 30,
2018, 2017, 2016, 2015, 2014 and 2013, respectively. The report of RSM US LLP, our independent registered public accounting firm, on the senior securities table as of fiscal year ended June 30, 2018, is attached as an exhibit to the registration
statement of which this prospectus is a part. The report of Ernst & Young LLP, our former independent registered public accounting firm, on the senior securities table as of fiscal year ended June 30, 2017, is attached as an exhibit to the
registration statement of which this prospectus is a part.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class and Year
|
|
|
Total Amount
Outstanding
Exclusive of
Treasury
Securities(1)
|
|
|
|
Asset
Coverage per
Unit(2)
|
|
|
|
Involuntary
Liquidating
Preference
per Unit(3)
|
|
|
|
Average Market
Value per
Unit(4)
|
|
|
UBS Financing Facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
$
|
102,000,000
|
(5)
|
|
$
|
2,863
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal Year ended June 30 2018
|
|
$
|
119,823,000
|
(5)
|
|
$
|
2,431
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal Year ended June 30, 2017
|
|
$
|
102,000,000
|
|
|
$
|
2,666
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal Year ended June 30, 2016
|
|
$
|
132,478,329
|
(6)
|
|
$
|
2,229
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal Year ended June 30, 2015
|
|
$
|
150,847,459
|
(6)
|
|
$
|
2,306
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal Year ended June 30, 2014
|
|
$
|
85,591,314
|
(6)
|
|
$
|
3,339
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal Year ended June 30, 2013
|
|
$
|
76,500,000
|
|
|
$
|
1,860
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Citi Revolving Financing(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
$
|
—
|
|
|
|
N/A
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal Year ended June 30, 2018
|
|
$
|
—
|
|
|
|
N/A
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal Year ended June 30, 2017
|
|
$
|
—
|
|
|
|
N/A
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Notes due 2023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
$
|
34,500,000
|
|
|
$
|
8,446
|
|
|
|
—
|
|
|
|
$1,002
|
|
|
(1)
|
Total amount of senior securities outstanding at the end of the period presented.
|
|
(2)
|
Asset coverage per unit is the ratio of the carrying value of our total assets, less all liabilities and
indebtedness not represented by senior securities, in relation to the aggregate amount of senior securities representing indebtedness. Asset coverage per unit is expressed in terms of dollar amounts per $1,000 of indebtedness.
|
|
(3)
|
The amount to which such class of senior security would be entitled upon the involuntary liquidation of the
issuer in preference to any security junior to it. The “—” indicates information which the SEC expressly does not require to be disclosed for certain types of senior securities.
|
|
(4)
|
Not applicable, except for the Notes due 2023, which are publicly traded. The Average Market Value Per Unit is
calculated by taking the daily average closing price during the period and dividing it by twenty-five dollars per share and multiplying the result by one thousand to determine a unit price per thousand consistent with Asset Coverage Per Unit.
|
|
(5)
|
Includes senior securities outstanding under the 2017 UBS Revolving Financing and the Term Financing.
|
|
(6)
|
Includes senior securities under the 2013 UBS Revolving Financing and the Term Financing. In connection with
the expiration of the 2013 UBS Revolving Financing in accordance with its terms on December 5, 2016, we repaid in full all indebtedness, liabilities and other obligations thereunder.
|
|
(7)
|
On December 8, 2017, we repaid in full all indebtedness, liabilities and other obligations under, and
terminated, the Citi Revolving Financing.
|
78
THE COMPANY
We are a specialty finance company that invests primarily in the debt of U.S. middle-market companies, which we generally define as those
companies that have an enterprise value, that represents the aggregate of debt value and equity value of the entity of less than $750 million. We are externally managed by the Adviser. The Adviser is led by Michael C. Mauer and Christopher E.
Jansen, who together have over 50 years of experience in the leveraged debt markets. Our primary investment objective is to maximize total return to stockholders in the form of current income and capital appreciation by investing in debt and related
equity investments of privately held middle-market companies.
We seek to invest primarily in middle-market companies that have annual
revenues of at least $50 million and EBITDA of at least $15 million. We focus on companies with leading market positions, significant asset or franchise values, strong free cash flow and experienced senior management teams, with emphasis on
companies with high-quality sponsors. Our investments typically range in size from $5 million to $25 million. We expect that our portfolio companies will use our capital for organic growth, acquisitions, market or product expansion, refinancings,
and/or recapitalizations. We invest, and intend to continue to invest, in unitranche loans and standalone second and first lien loans, with an emphasis on floating rate debt. Unitranche loans are loans structured as first lien loans with certain
characteristics of mezzanine loan risk in one security. We also selectively invest in unsecured debt, bonds and in the equity of portfolio companies through warrants and other instruments, in most cases taking such upside participation interests as
part of a broader investment relationship.
We strive to maintain a strong focus on credit quality, investment discipline and investment
selectivity. We believe that investing in the debt of private middle-market companies generally provides a more attractive relative value proposition than investing in broadly syndicated debt due to the conservative capital structures and superior
default and loss characteristics typically associated with middle-market companies. We believe that, because private middle-market companies have limited access to capital providers, debt investments in these companies typically carry above-market
interest rates and include more favorable protections, resulting in attractive risk-adjusted returns across credit cycles while better preserving capital. The companies in which we invest typically are highly leveraged, and, in most cases, our
investments in such companies are not rated by national rating agencies. If such investments were rated, we believe that they would likely receive a rating below investment grade (i.e., below BBB or Baa), which are often referred to as
“junk.”
We have, through CM SPV, our wholly owned subsidiary, entered into the Term Financing with UBS, which expires on
December 5, 2020. The Term Financing is collateralized by a portion of the debt investments in our portfolio. Borrowings under the Term Financing bear interest (i) at a rate per annum equal to one-month LIBOR plus 2.75% through December 4, 2018, and
(ii) at a rate per annum equal to one-month LIBOR plus 2.55% from December 5, 2018 through December 5, 2020. We have also entered into the 2017 UBS Revolving Financing with UBS, which expires December 5, 2019. Borrowings under the 2017 UBS Revolving
Financing generally bear interest at a rate per annum equal to one-month LIBOR plus 3.55%.
As of December 31, 2018, our portfolio
consisted of debt and equity investments in 29 portfolio companies with a fair value of $283.3 million. As of December 31, 2018, our portfolio consisted of 63.7% first lien investments, 31.7% second lien investments, 4.1% unitranche first lien
debt investments, and 0.5% equity, and warrant and other positions. At December 31, 2018, the weighted average total yield of debt and income producing securities at amortized cost (which includes income and amortization of fees and discounts) was
11.08% and the weighted average total yield on investments at amortized cost (which includes interest income and amortization of fees and discounts) was 10.83%. The weighted average total yield was computed using an internal rate of return
calculation of our debt investments based on contractual cash flows, including interest and amortization payments, and, for floating rate investments, the spot London Interbank Offered Rate (“LIBOR”), as of December 31, 2018 of all of our
debt investments. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. The weighted average total yield of our debt investments is not the same as a return on investment for our stockholders
but, rather, relates to a portion of our investment portfolio and is calculated before payment of all of our fees and expenses, including any sales load paid in connection with an offering of our securities. There can be no assurance that the
weighted average total yield will remain at its current level.
79
The industry composition of our portfolio at fair value at December 31, 2018 and June 30, 2018,
respectively, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
Total Portfolio
at December 31,
2018
|
|
|
Percentage of
Total Portfolio
at June 30,
2018
|
|
|
Professional Services
|
|
|
15.01
|
%
|
|
|
13.98
|
%
|
|
Media
|
|
|
12.77
|
|
|
|
10.88
|
|
|
Energy Equipment & Services
|
|
|
10.57
|
|
|
|
10.97
|
|
|
Oil, Gas & Consumable Fuels
|
|
|
8.48
|
|
|
|
8.24
|
|
|
Diversified Telecommunication Services
|
|
|
7.74
|
|
|
|
8.49
|
|
|
Construction and Engineering
|
|
|
7.73
|
|
|
|
—
|
|
|
Hotels, Restaurants & Leisure
|
|
|
4.31
|
|
|
|
11.36
|
|
|
Commercial Services & Supplies
|
|
|
4.24
|
|
|
|
10.76
|
|
|
Internet Software & Services
|
|
|
3.86
|
|
|
|
—
|
|
|
IT Services
|
|
|
3.86
|
|
|
|
9.54
|
|
|
Distributors
|
|
|
3.49
|
|
|
|
4.25
|
|
|
Construction Materials
|
|
|
3.48
|
|
|
|
—
|
|
|
Auto Components
|
|
|
3.20
|
|
|
|
—
|
|
|
Technology Hardware, Storage and Peripherals
|
|
|
3.11
|
|
|
|
—
|
|
|
Health Care Equipment & Supplies
|
|
|
2.63
|
|
|
|
2.55
|
|
|
Containers & Packaging
|
|
|
2.47
|
|
|
|
—
|
|
|
Chemicals
|
|
|
1.96
|
|
|
|
2.73
|
|
|
Retail
|
|
|
0.73
|
|
|
|
—
|
|
|
Wireless Telecommunication Services
|
|
|
0.36
|
|
|
|
0.16
|
|
|
Health Care Providers & Services
|
|
|
—
|
|
|
|
3.85
|
|
|
Electronic Equipment
|
|
|
—
|
|
|
|
2.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
CM Investment Partners LLC
CM Investment Partners, our external investment adviser, was formed in July 2013 and is a registered investment adviser under the Advisers Act.
The Adviser is responsible for sourcing investment opportunities, conducting industry research, performing diligence on potential investments, structuring our investments and monitoring our portfolio companies on an ongoing basis. The Adviser is led
by its Co-Chief Investment Officers, Michael C. Mauer and Christopher E. Jansen. Mr. Mauer also serves as the Chairman of our board of directors and our Chief Executive Officer, and Mr. Jansen also serves as our President and Secretary and as a
member of our board of directors. Mr. Mauer was formerly Global Co-Head of Leveraged Finance and Global Co-Head of Fixed Income Currency and Commodity Distribution at Citigroup Inc. and a senior member of
its credit committee responsible for all underwriting and principal commitments of leveraged finance capital worldwide. Mr. Jansen was a founding Managing Partner and Senior Portfolio Manager for Stanfield Capital Partners and had a leading
role in planning its strategic direction. At Stanfield, Mr. Jansen was responsible for the management of 15 different portfolios aggregating in excess of $7 billion in assets consisting of large corporate loans, middle-market loans, second
lien loans, high yield bonds and structured finance securities.
The Adviser’s investment team, led by Messrs. Mauer and Jansen, is
supported by three additional investment professionals, who, together with Messrs. Mauer and Jansen, we refer to as the “Investment Team.” The members of the Investment Team have over 100 combined years of structuring customized debt
solutions for middle-market companies, which we believe will enable us to generate favorable returns across credit cycles with an emphasis on preserving capital. Messrs. Mauer and Jansen have developed an investment process for reviewing lending
opportunities, structuring transactions and monitoring investments throughout multiple credit
80
cycles. The members of the Investment Team have extensive networks for sourcing investment opportunities through direct corporate relationships and relationships with private equity firms,
investment banks, restructuring advisors, law firms, boutique advisory firms and distressed/specialty lenders. The members of the Investment Team also have extensive experience across various industries, including aviation, cable, defense,
healthcare, media, mining, oil and gas, power, retail, telecommunications, trucking and asset-backed special situations. As a result, we believe we will be able to achieve appropriate risk-adjusted returns by investing in companies that have
restructured but do not have sufficient track records to receive traditional lending terms from a commercial bank or the broadly syndicated leveraged finance market. We believe the members of the Investment Team share a common investment philosophy
built on a framework of rigorous business assessment, extensive due diligence and disciplined risk valuation methodology.
Every initial
investment requires approval by a majority of the Adviser’s investment committee and such majority must include both Messrs. Mauer and Jansen. The Adviser’s investment committee consists of Messrs. Mauer, Jansen, Muns and Nitka. Every
follow-on investment decision in an existing portfolio company and every investment disposition require approval by at least a majority of the Adviser’s investment committee.
We have entered into the Investment Advisory Agreement with the Adviser, pursuant to which we pay the Adviser a management fee equal to 1.75%
of our gross assets, payable in arrears on a quarterly basis. In addition, pursuant to the Investment Advisory Agreement, we pay the Adviser an Incentive Fee equal to 20.0% of pre-incentive fee net investment income, subject to an annualized hurdle
rate of 8.0% with a “catch up” fee for returns between the 8.0% hurdle and 10.0% as well as 20.0% of net capital gains.
Under
the Administration Agreement, the Adviser provides us with our chief financial officer, accounting and back-office professionals, equipment and clerical, bookkeeping, recordkeeping and other administrative services.
Market Opportunity
We believe that the
current investment environment presents a compelling case for investing in secured debt (including unitranche debt and standalone second and first lien loans) and unsecured debt (including mezzanine/structured equity) of middle-market companies. The
following factors represent the key drivers of our focus on this attractive market segment:
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•
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Reduced Availability of Capital for Middle-Market Companies. We believe there are fewer providers of
financing and less capital available for middle-market companies compared to prior to the economic downturn that began in mid-2007. We believe that, as a result of that downturn:
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•
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many financing providers have chosen to focus on large, liquid corporate loans and syndicated capital markets
transactions rather than lending to middle-market businesses;
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•
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regulatory changes, including the introduction of international capital and liquidity requirements for banks
under the 2012 Basel III Accords, or Basel III, have decreased their capacity to hold non-investment grade leveraged loans, causing banks to curtail lending to middle-market companies;
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•
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hedge funds and collateralized loan obligation managers are less likely to pursue investment opportunities in our
target market as a result of reduced availability of funding for new investments; and
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•
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consolidation of regional banks into money center banks has reduced their focus on middle-market lending.
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As a result, we believe that less competition facilitates higher quality deal flow and allows for greater selectivity
throughout the investment process.
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•
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Robust Demand for Debt Capital. According to Pitchbook, a market research firm, private equity firms had
approximately $874 billion of uncalled capital as of December 31, 2017. They have expanded their focus to include middle-market opportunities due to the lack of opportunities in large capital buyout
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81
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transactions. We expect the large amount of uninvested capital and the expanded focus on middle-market opportunities to drive buyout activity over the next several years, which should, in turn,
continue to create lending opportunities for us.
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•
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Attractive Deal Pricing and Structures. We believe that, in general, middle-market debt investments are
priced more attractively to lenders than larger, more liquid, public debt financings, due to the more limited universe of lenders as well as the highly negotiated nature of these financings. Middle-market transactions tend to offer stronger covenant
packages, higher interest rates, lower leverage levels and better call protection compared to larger financings. In addition, middle-market loans typically offer other investor protections such as default penalties, lien protection, change of
control provisions and information rights for lenders.
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•
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Specialized Lending Requirements. We believe that several factors render many U.S. financial institutions
ill-suited to lend to U.S. middle-market companies. For example, based on the Investment Team’s experience, lending to private U.S. middle-market companies is generally more labor-intensive than lending to larger companies due to the smaller
size of each investment and the fragmented nature of information for such companies. Lending to smaller capitalization companies requires due diligence and underwriting practices consistent with the demands and economic limitations of the
middle-market and may also require more extensive ongoing monitoring by the lender. As a result, middle-market companies historically have been served by a limited segment of the lending community.
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Competitive Strengths
We believe that
the Adviser’s disciplined approach to origination, portfolio construction and risk management should allow us to achieve favorable risk-adjusted returns while preserving our capital. We believe that the following competitive strengths provide
positive returns for our investors:
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•
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Large and Experienced Team with Substantial Resources. The Adviser and its Investment Team is led by
Messrs. Mauer and Jansen, each with over 20 years of experience investing in, providing corporate finance services to, restructuring and consulting with middle-market companies. Messrs. Mauer and Jansen are supported by three additional investment
professionals, who collectively have over 100 combined years of structuring strategic capital for business expansion, refinancings, capital restructuring, post-reorganization financing and servicing the general corporate needs of middle-market
companies. We believe that the Investment Team and its resources provide a significant advantage and contribute to the strength of our business and enhance the quantity and quality of investment opportunities available to us.
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•
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Capitalize on the Investment Team’s Extensive Relationships with Middle-Market Companies, Private Equity
Sponsors and Intermediaries. The members of the Investment Team have extensive networks for sourcing investment opportunities through corporate relationships and relationships with private equity firms, investment banks, restructuring advisors,
law firms, boutique advisory firms and distressed/specialty lenders. We believe that the strength of these relationships in conjunction with the Investment Team’s ability to structure financing solutions for companies that incorporate credit
protections at attractive returns for us provide us with a competitive advantage in identifying investment opportunities in our target market. In addition, pursuant to the terms of our relationship with Stifel and subject to certain restrictions,
Stifel must use its commercially reasonable efforts to present to the Adviser to review and bid on, Stifel Nicolaus & Company, Incorporated-originated leveraged finance and high yield corporate debt opportunities consistent with our
investment strategy.
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•
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Disciplined Underwriting Policies and Rigorous Portfolio Management. Messrs. Mauer and Jansen have an
established credit analysis and investment process to analyze investment opportunities thoroughly. This process, followed by the Investment Team, includes structuring loans with appropriate covenants and pricing loans based on our knowledge of the
middle-market and our rigorous underwriting standards. We focus on capital preservation by extending loans to portfolio companies
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with assets that we believe will retain sufficient value to repay us even in depressed markets or under liquidation scenarios. Each investment is analyzed from its initial stages by either
Mr. Mauer or Mr. Jansen, as the Adviser’s Co-Chief Investment Officers, and a senior investment professional of the Investment Team. Every initial investment requires approval by a majority of the Adviser’s investment committee
and such majority must include both Messrs. Mauer and Jansen. The Adviser’s investment committee consists of Messrs. Mauer, Jansen, Muns and Nitka. Every follow-on investment decision in an existing portfolio company and every investment
disposition require approval by at least a majority of the Adviser’s investment committee. Under the supervision of Messrs. Mauer and Jansen, the Investment Team’s senior investment professionals also monitor the portfolio for developments
on a daily basis, perform credit updates on each investment, review financial performance on at least a quarterly basis, and have regular discussions with the management of portfolio companies. We believe the Adviser’s investment and monitoring
process and the depth and experience of the Investment Team gives us a competitive advantage in identifying investments and evaluating risks and opportunities throughout the life cycle of an investment.
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•
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Ability to Structure Investments Creatively. Our Investment Team has the expertise and ability to
structure investments across all levels of a company’s capital structure. These individuals have extensive experience in cash flow, asset-based lending, workout situations and investing in distressed debt, which should enable us to take
advantage of attractive investments in recently restructured companies. Furthermore, with the capital raised in our initial public offering, we believe we are in a better position to leverage the existing knowledge and relationships that the
Investment Team has developed to lead investments that meet our investment criteria. We believe that current market conditions allow us to structure attractively priced debt investments and may allow us to incorporate other return-enhancing
mechanisms such as commitment fees, original issue discounts, early redemption premiums, payment-in-kind (“PIK”) interest and certain forms of equity securities.
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Investment Strategy
We invest in
unitranche loans, standalone second and first lien loans, and selectively in unsecured debt, bonds and in the equity of portfolio companies through warrants and other instruments, in most cases taking advantage of a potential benefit from an
increase in the value of such portfolio company as part of an overall relationship. We seek to invest primarily in middle-market companies that have annual revenues of at least $50 million and EBITDA of at least $15 million. Our investments
typically range in size from $5 million to $25 million. We may invest in smaller or larger companies if there is an attractive opportunity, especially when there are dislocations in the capital markets, including the high yield and large syndicated
loan markets. During such dislocations, we expect to see more deep value investment opportunities offering prospective returns that are disproportionate to the associated risk profile. We focus on companies with leading market positions, significant
asset or franchise values, strong free cash flow and experienced senior management teams, with an emphasis on companies with high-quality sponsors.
Our primary investment objective is to maximize current income and capital appreciation by investing directly in privately held middle-market
companies. The Adviser pursues investments for us with favorable risk-adjusted returns, including debt investments that offer cash origination fees and lower leverage levels. The Adviser seeks to structure our debt investments with strong
protections, including default penalties, information rights, and affirmative and negative financial covenants, such as lien protection and restrictions concerning change of control. We believe these protections, coupled with the other features of
our investments, allow us to reduce our risk of capital loss and achieve attractive risk-adjusted returns, although there can be no assurance that we are always able to structure our investments to minimize risk of loss and achieve attractive
risk-adjusted returns.
83
Investment Criteria
The Investment Team uses the following investment criteria and guidelines to evaluate prospective portfolio companies. However, not all of
these criteria and guidelines are used or met in connection with each of our investments.
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•
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Established companies with a history of positive operating cash flow. We seek to invest in established
companies with sound historical financial performance. The Adviser typically focuses on companies with a history of profitability on an operating cash flow basis. We do not intend to invest in start-up companies or companies with speculative
business plans.
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•
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Defensible and sustainable business. We seek to invest in companies with proven products and/or services
that provide a competitive advantage versus its competitors or new entrants. The Adviser places an emphasis on the strength of historical operations and profitability and the generation of free cash flow to reinvest in the business or to utilize for
debt service. The Adviser also focuses on the relative strength of the valuation and liquidity of collateral used to provide security for our investments, when applicable.
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•
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Seasoned management team with meaningful equity ownership. The Adviser generally requires that our
portfolio companies have a seasoned management team, with strong corporate governance. The Adviser also seeks to invest in companies with management teams that have meaningful equity ownership. The Adviser believes that companies that have proper
incentives in place, including having significant equity interests, motivate management teams to enhance enterprise value, which will act in accordance with our interests.
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•
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Significant Invested Capital. The Adviser seeks investments in portfolio companies where it believes that
the aggregate enterprise value significantly exceeds aggregate indebtedness, after consideration of our investment. The Adviser believes that the existence of significant underlying equity value (i.e., the amount by which the aggregate enterprise
value exceeds the aggregate indebtedness) provides important support to our debt investments.
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•
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Investment Partnerships. We seek to invest where private equity sponsors have demonstrated capabilities in
building enterprise value. In addition, we seek to partner with specialty lenders and other financial institutions. The Adviser believes that private equity sponsors and specialty lenders can serve as committed partners and advisors that will
actively work with the Adviser, the company and its management team to meet company goals and create value.
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•
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Ability to exert meaningful influence. We target investment opportunities in which we will be a
significant investor in the tranche and in which we can add value through active participation in the direction of the company, sometimes through advisory positions.
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•
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Exit strategy. We generally seek to invest in companies that the Adviser believes possess attributes that
will provide us with the ability to exit our investments. We typically expect to exit our investments through one of three scenarios: (i) the sale of the company resulting in repayment of all outstanding debt, (ii) the recapitalization of
the company through which our loan is replaced with debt or equity from a third party or parties or (iii) the repayment of the initial or remaining principal amount of our loan then outstanding at maturity. In some investments, there may be
scheduled amortization of some portion of our loan, which would result in a partial exit of our investment prior to the maturity of the loan.
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Deal Origination
The
Adviser’s deal-originating efforts are focused on its direct corporate relationships and relationships with private equity firms, investment banks, restructuring advisers, law firms, boutique advisory firms and distressed/specialty lenders. The
Adviser’s investment team continues to enhance and expand these relationships. In addition, pursuant to the Stifel arrangement and subject to certain restrictions, Stifel uses its commercially
84
reasonable efforts to present to the Adviser to review and bid on Stifel Nicolaus & Company, Incorporated-originated leveraged finance and high yield corporate debt opportunities
consistent with our investment strategy, subject to the approval of our board of directors as necessary, under the 1940 Act and certain other limitations.
The origination process is designed to thoroughly evaluate potential financings and to identify the most attractive of these opportunities on
the basis of risk-adjusted returns. Each investment is analyzed from its initial stages through our investment by one of the Co-Chief Investment Officers of the Adviser and a senior investment professional. If an opportunity fits our criteria for
investment and merits further review and consideration, the investment is presented to the investment committee. This first stage of analysis involves a preliminary, but detailed, description of the potential financing. An investment summary is then
generated after preliminary due diligence. The opportunity may be discussed several times by members of the Investment Team. Prior to funding, every initial investment requires approval by a majority of the Adviser’s investment committee and
such majority must include both Messrs. Mauer and Jansen. The Adviser’s investment committee consists of Messrs. Mauer, Jansen, Muns and Nitka. Every follow-on investment decision in an existing portfolio
company and every investment disposition require approval by at least a majority of the Adviser’s investment committee.
If the
Adviser decides to pursue an opportunity, a preliminary term sheet will be produced for the target portfolio company. This term sheet serves as a basis for the discussion and negotiation of the critical terms of the proposed financing. At this
stage, the Adviser begins its formal underwriting and investment approval process as described below. After the negotiation of a transaction, the financing is presented to the investment committee of the Adviser for approval. Upon approval of a
financing transaction, the parties will prepare the relevant loan documentation. An investment is funded only after all due diligence is satisfactorily completed and all closing conditions have been satisfied. Each of the investments in our
portfolio is monitored on a daily basis by a member of our investment committee aided by the senior investment professionals of the Investment Team, who also perform credit updates on each investment quarterly.
Underwriting
Underwriting
Process and Investment Approval
The Adviser makes investment decisions only after considering a number of factors regarding the
potential investment including, but not limited to:
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•
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historical and projected financial performance;
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•
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company and industry specific characteristics, such as strengths, weaknesses, opportunities and threats;
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•
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composition and experience of the management team; and
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•
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track record of the private equity sponsor leading the transaction, if applicable.
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This methodology is employed to screen a high volume of potential investment opportunities on a consistent basis.
If an investment is deemed appropriate to pursue, a more detailed and rigorous evaluation is made after considering relevant investment
parameters. The following outlines the general parameters and areas of evaluation and due diligence for investment decisions, although not all are necessarily considered or given equal weighting in the evaluation process.
85
Business model and financial assessment
The Adviser undertakes a review and analysis of the financial and strategic plans for the potential investment. There is significant evaluation
of and reliance upon the due diligence performed by the private equity sponsor, if applicable, and third party experts, including accountants and consultants. Areas of evaluation include:
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•
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historical and projected financial performance;
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•
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quality of earnings, including source and predictability of cash flows;
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•
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customer and vendor interviews and assessments;
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•
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potential exit scenarios, including probability of a liquidity event;
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•
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internal controls and accounting systems; and
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•
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assets, liabilities and contingent liabilities.
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Industry dynamics
The
Adviser evaluates the portfolio company’s industry, and may, if considered appropriate, consult or retain industry experts. The following factors are among those the Adviser analyzes:
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•
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sensitivity to economic cycles;
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•
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competitive environment, including number of competitors, threat of new entrants or substitutes;
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•
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fragmentation and relative market share of industry leaders;
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•
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regulatory and legal environment.
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Management assessment
The Adviser makes an in-depth assessment of the management team, including evaluation along several key metrics:
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•
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the number of years in their current positions;
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•
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management incentive, including the level of direct investment in the enterprise; and
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•
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completeness of the management team (positions that need to be filled or added).
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Sponsor Assessment
Among
critical due diligence investigations is the evaluation of a private equity sponsor or specialty lender that has, or is also making, an investment in the portfolio company. A private equity sponsor is typically a controlling stockholder upon
completion of an investment and as such is considered critical to the success of the investment. In addition, a management team with meaningful equity ownership can serve as a committed partner to us and any private equity sponsor or specialty
lender. The Adviser evaluates a private equity sponsor or specialty lender along several key criteria, including:
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•
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investment track record;
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86
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•
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capacity and willingness to provide additional financial support to the company through additional capital
contributions, if necessary; and
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Investments
The following
describes the types of loans we generally make:
Unitranche loans. Unitranche loans are loans structured as first lien loans with
certain characteristics of mezzanine loan risk in one security. Unitranche loans typically provide for moderate loan amortization in the initial years of the loan with the majority of the principal repayment deferred until loan maturity. Unitranche
loans usually provide us with greater control over a portfolio company’s capital structure, as they provide a one-stop financing solution and limit “frictional costs” (e.g., negotiations with, and concessions to, other lien holders)
in the event of a workout process. Consistent with our focus on capital preservation, unitranche loans typically have less volatile returns than standalone second lien or mezzanine loans.
Standalone second lien loans. Standalone second lien loans are loans that are typically senior on a lien basis to other liabilities in
the issuer’s capital structure and have the benefit of a security interest over the assets of the borrower, although ranking junior to first lien loans. Standalone second lien loans may provide for moderate loan amortization in the early years
of the loan, with the majority of the amortization deferred until loan maturity. Standalone second lien loans can incur greater “frictional costs” (e.g., increased professional costs relating to resolving conflicts among the lenders) in
the event of a workout and, partly because of this possible impact on recovery rates, we expect to demand a significantly higher risk premium in the form of higher spreads, call protection and/or warrants for extending standalone second lien loans,
compared to first lien loans of similar credit quality.
Standalone first lien loans. Standalone first lien loans are loans that
are typically senior on a lien basis to other liabilities in the issuer’s capital structure and have the benefit of a security interest on the assets of the portfolio company. Standalone first lien loans may provide for moderate loan
amortization in the early years of the loan, with the majority of the amortization deferred until loan maturity.
Mezzanine
loans/structured equity. Mezzanine loans are subordinated to senior secured loans on a payment basis, are typically unsecured and rank pari passu with other unsecured creditors of the issuer. As with standalone second lien loans, we
expect to demand a significantly higher risk premium in the form of higher spreads, call protection and/or warrants for mezzanine loans, given the lower recovery rates for such securities due in part to the greater “frictional costs”
(e.g., increased professional costs relating to resolving conflicts among the lenders) in a protracted workout. We may take mezzanine type risk in the form of “structured equity” investments. In cases where portfolio companies may be
constrained in their ability to raise additional capital in the form of debt, we may have the opportunity to structure preferred equity or other equity-like instruments. These equity instruments typically have redemption rights and will either be
convertible into common equity at our option, or will have detachable warrants compensating us for the additional risk inherent in such investments. In most cases, these equity instruments will have debt-like characteristics, which provide more
downside protection than a typical equity instrument.
Equity components. In connection with some of our debt investments, we will
also invest in preferred or common stock or receive nominally priced warrants or options to buy an equity interest in the portfolio company. As a result, as a portfolio company appreciates in value, we may achieve additional investment return from
this equity interest. The Adviser may structure such equity investments and warrants to include provisions protecting our rights as a minority-interest holder, as well as a “put,” or right to sell such securities back to the issuer, upon
the occurrence of specified events. In many cases, we may also seek to obtain registration rights in connection with these equity interests, which may include demand and “piggyback” registration rights.
87
Portfolio Management Strategy
Each of the investments in our portfolio is monitored on a daily basis by a member of our investment committee aided by the senior investment
professionals of the Investment Team, who also perform credit updates on each investment quarterly.
Risk Ratings
In addition to various risk management and monitoring tools, we use the Adviser’s investment rating system to characterize and monitor the
credit profile and expected level of returns on each investment in our portfolio. This investment rating system uses a five-level numeric rating scale. The following is a description of the conditions
associated with each investment rating:
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Investment Rating 1
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Investments that are performing above expectations, and whose risks remain favorable compared to the expected risk at the time of the original investment.
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Investment Rating 2
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Investments that are performing within expectations and whose risks remain neutral compared to the expected risk at the time of the original investment. All new loans are initially rated 2.
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Investment Rating 3
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Investments that are performing below expectations and that require closer monitoring, but where no loss of return or principal is expected. Portfolio companies with a rating of 3 may be out of compliance with their financial
covenants.
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Investment Rating 4
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Investments that are performing substantially below expectations and whose risks have increased substantially since the original investment. These investments are often in workout. Investments with a rating of 4 are those for which
some loss of return but no loss of principal is expected.
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Investment Rating 5
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Investments that are performing substantially below expectations and whose risks have increased substantially since the original investment. These investments are almost always in workout. Investments with a rating of 5 are those
for which some loss of return and principal is expected.
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If the Adviser determines that an investment is underperforming, or circumstances suggest that the risk
associated with a particular investment has significantly increased, the Adviser will increase its monitoring intensity and prepare regular updates for the investment committee, summarizing current operating results and material impending events and
suggesting recommended actions. While the investment rating system identifies the relative risk for each investment, the rating alone does not dictate the scope and/or frequency of any monitoring that will be performed. The frequency of the
Adviser’s monitoring of an investment is determined by a number of factors, including, but not limited to, the trends in the financial performance of the portfolio company, the investment structure and the type of collateral securing the
investment.
The following table shows the investment rankings of the debt investments in our portfolio:
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As of December 31, 2018
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As of June 30, 2018
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Fair Value
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% of
Portfolio
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|
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Number of
Investments(1)
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Fair Value
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% of
Portfolio
|
|
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Number of
Investments
|
|
|
1
|
|
$
|
11,933,992
|
|
|
|
4.2
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%
|
|
|
3
|
|
|
$
|
6,458,750
|
|
|
|
2.2
|
%
|
|
|
1
|
|
|
2
|
|
|
249,958,456
|
|
|
|
88.2
|
|
|
|
29
|
|
|
|
267,055,281
|
|
|
|
91.0
|
|
|
|
29
|
|
|
3
|
|
|
21,442,735
|
|
|
|
7.6
|
|
|
|
2
|
|
|
|
8,765,286
|
|
|
|
3.0
|
|
|
|
1
|
|
|
4
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,580,954
|
|
|
|
3.6
|
|
|
|
2
|
|
|
5
|
|
|
119
|
|
|
|
—
|
|
|
|
4
|
|
|
|
731,742
|
|
|
|
0.2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
283,335,302
|
|
|
|
100.00
|
%
|
|
|
38
|
|
|
$
|
293,592,013
|
|
|
|
100.00
|
%
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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88
Determination of Net Asset Value and Portfolio Valuation Process
The net asset value per share of our outstanding shares of common stock is determined quarterly by dividing the value of total assets minus
liabilities by the total number of shares outstanding.
In calculating the value of our total assets, investment transactions will be
recorded on the trade date. Realized gains or losses will be computed using the specific identification method. Investments for which market quotations are readily available are valued at such market quotations. Debt and equity securities that are
not publicly traded or whose market price is not readily available are valued at fair value as determined in good faith by our board of directors based on the input of our management and audit committee. In addition, our board of directors retains
one or more independent valuation firms to review each quarter, the valuation of each portfolio investment for which a market quotation is not available. We also have adopted Accounting Standards Board Accounting Standards Codification 820, Fair
Value Measurements and Disclosures, or “ASC 820.” This accounting statement requires us to assume that the portfolio investment is assumed to be sold in the principal market to market participants, or in the absence of a principal
market, the most advantageous market, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact. In
accordance with ASC 820, the market in which we can exit portfolio investments with the greatest volume and level activity is considered our principal market.
Investments for which market quotations are readily available are valued at such market quotations unless the quotations are deemed not to
represent fair value. We generally obtain market quotations from recognized exchanges, market quotation systems, independent pricing services or one or more broker dealers or market makers.
Debt and equity securities for which market quotations are not readily available or for which market quotations are deemed not to represent
fair value are valued at fair value as determined in good faith by our board of directors. Because a readily available market value for many of the investments in our portfolio is often not available, we value many of our portfolio investments at
fair value as determined in good faith by our board of directors using a consistently applied valuation process in accordance with a documented valuation policy that has been reviewed and approved by our board of directors. Due to the inherent
uncertainty and subjectivity of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available
market value existed for such investments and may differ materially from the values that we may ultimately realize. In addition, changes in the market environment and other events may have differing impacts on the market quotations used to value
some of our investments than on the fair values of our investments for which market quotations are not readily available. Market quotations may also be deemed not to represent fair value in certain circumstances where we believe that facts and
circumstances applicable to an issuer, a seller or purchaser, or the market for a particular security causes current market quotations not to reflect the fair value of the security. Examples of these events could include cases where a security
trades infrequently, causing a quoted purchase or sale price to become stale, where there is a “forced” sale by a distressed seller, where market quotations vary substantially among market makers, or where there is a wide bid-ask spread or
significant increase in the bid ask spread.
With respect to investments for which market quotations are not readily available, our board
of directors undertakes a multi-step valuation process each quarter, as described below:
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•
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our quarterly valuation process begins with each portfolio company or investment being initially valued by the
investment professionals of the Investment Adviser responsible for the portfolio investment;
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•
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preliminary valuation conclusions are then documented and discussed our senior management and the Investment
Adviser;
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89
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•
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on a periodic basis, at least once annually, the valuation for each portfolio investment is reviewed by an
independent valuation firm engaged by our board of directors;
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•
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the valuation committee of our board of directors then reviews these preliminary valuations; and
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•
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the board of directors then discusses these preliminary valuations and determines the fair value of each
investment in our portfolio in good faith, based on the input of the Investment Adviser, the independent valuation firm and the valuation committee.
|
Those investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value
are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities
(including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market
expectations about those future amounts. In following these approaches, the types of factors that we may take into account in determining the fair value of our investments include, as relevant and among other factors: available current market data,
including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the
portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, merger and acquisition
comparables, our principal market (as the reporting entity) and enterprise values.
Realization of Investments
The potential exit scenarios of a portfolio company will play an important role in evaluating investment decisions. The Adviser will formulate
specific exit strategies at the time of such investment. Our debt orientation will provide for increased potential exit opportunities, including the sale of investments in the private markets, the refinancing of investments held, often due to
maturity or recapitalizations, and other liquidity events including the sale or merger of the portfolio company. Since we seek to maintain a debt orientation in our investments, we generally expect to receive interest income over the course of the
investment period, receiving a significant return on invested capital well in advance of final exit.
Derivatives
We may utilize hedging techniques such as interest rate swaps to mitigate potential interest rate risk on our indebtedness. Such interest rate
swaps would principally be used to protect us against higher costs on our indebtedness resulting from increases in both short-term and long-term interest rates. We also may use various hedging and other risk management strategies to seek to manage
various risks, including changes in currency exchange rates and market interest rates. Such hedging strategies would be utilized to seek to protect the value of our portfolio investments, for example, against possible adverse changes in the market
value of securities held in our portfolio.
Managerial Assistance
As a BDC, we offer, and must provide upon request, managerial assistance to our portfolio companies. This assistance could involve monitoring
the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. The Adviser will provide such
managerial assistance on our behalf to portfolio companies that request this assistance. We may receive fees for these services and will reimburse the Adviser for its allocated costs in providing such assistance, subject to the review by our board
of directors, including our independent directors.
90
Competition
Our primary competitors in providing financing to middle-market companies include public and private funds, other BDCs, commercial and
investment banks, commercial finance companies and, to the extent they provide an alternative form of financing, private equity funds and hedge funds. Many of our competitors are substantially larger and have considerably greater financial,
technical and marketing resources than we do. For example, we believe some competitors may have access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk
assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC or
to the distribution and other requirements we must satisfy to maintain our qualification as a RIC.
We use the expertise of the investment
professionals of the Adviser (including those provided to the Adviser under the Services Agreement) to assess investment risks and determine appropriate pricing for our investments in portfolio companies. In addition, we believe the relationships of
these investment professionals will enable us to learn about, and compete effectively for, financing opportunities with attractive middle-market companies in the industries in which we seek to invest.
Staffing
We do not have any direct
employees, and our day-to-day investment operations are managed by the Adviser. We have a Chief Executive Officer, President, Chief Financial Officer and Chief Compliance Officer. To the extent necessary, our board of directors may hire additional
personnel in the future. Our officers are all employees of the Adviser and our allocable portion of the cost of Rocco DelGuercio, as our Chief Financial Officer and Chief Compliance Officer, and his staff, is paid by us pursuant to the
Administration Agreement with the Adviser. The Adviser also has a strategic relationship with Cyrus Capital in which the Adviser can utilize the expertise of Cyrus Capital’s investment, accounting and back office professionals on an as needed
basis pursuant to a personnel sharing arrangement.
Properties
We do not own any real estate. Our principal executive offices are currently located at 65 East
55th Street, 15th Floor, New York, NY 10022, and our telephone number is (212) 257-5199. All locations are provided to us by the Adviser
pursuant to the Administration Agreement and indirectly by Cyrus Capital through the Services Agreement. We believe that our office facilities are and will be suitable and adequate for our business as we contemplate conducting it.
Legal Proceedings
We and the Adviser are
not subject to any material legal proceedings.
91
PORTFOLIO COMPANIES
The following table sets forth certain information as of December 31, 2018, for the portfolio companies in which we had a debt or equity
investment. Other than these investments, our only formal relationships with our portfolio companies are the managerial assistance ancillary to our investments and the board observer or participation rights we may receive in connection with our
investment. We do not “control” any of our portfolio companies, as defined in the 1940 Act. In general, under the 1940 Act, we would “control” a portfolio company if we owned more than 25.0% of its voting securities and would be
an “affiliate” of a portfolio company if we owned 5.0% or more of its voting securities.
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Description(1)
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Industry
|
|
Type of
Investment
|
|
Interest
Rate
|
|
|
Percentage of
Class Owned
|
|
|
Maturity
Date
|
|
|
Principal
Amount/
Shares(2)
|
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Amortized
Cost
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Fair Value
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1888 Industrial Services, LLC—Revolver(4)(5)(14)
41350 Country Road 33
Ault, CO 80610
|
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Energy Equipment &
Services
|
|
Senior Secured
First Lien
|
|
|
3M L+5.00%
(1.00% Floor)
|
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|
|
—
|
|
|
|
9/30/2021
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$
|
2,376,238
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|
$
|
1,485,149
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|
|
$
|
1,485,149
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1888 Industrial Services, LLC—Term A(4)(14)
41350 Country Road 33
Ault, CO 80610
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Energy Equipment &
Services
|
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Senior Secured
First Lien
|
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|
3M L+5.00%
(1.00% Floor)
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|
|
|
—
|
|
|
|
9/30/2021
|
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4,950,495
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4,950,495
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4,950,495
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1888 Industrial Services,
LLC—Term B(3)(4)(14)
41350 Country Road 33
Ault, CO 80610
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Energy Equipment &
Services
|
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Senior Secured
First Lien
|
|
|
3M L+8.00%
PIK (1.00%
Floor)
|
|
|
|
—
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|
|
|
9/30/2021
|
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|
|
12,304,681
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|
6,530,574
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9,228,511
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1888 Industrial Services, LLC(4)(11)(14)
41350 Country Road 33
Ault, CO 80610
|
|
Energy Equipment &
Services
|
|
Equity Interest
|
|
|
—
|
|
|
|
19.8%
|
|
|
|
—
|
|
|
|
11,880
|
|
|
|
—
|
|
|
|
119
|
|
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4L Technologies Inc(6)
2700 West Higgins Road, Suite 100
Hoffman Estates, IL
60169
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Technology Hardware,
Storage & Peripherals
|
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Senior Secured
First Lien
|
|
|
3M L+4.50%
(1.00% Floor)
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|
|
—
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|
5/8/2020
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8,959,162
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|
8,836,110
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8,815,815
|
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AP NMT Acquisition BV(6)(9)(10)
De Boelelaan 7
Amsterdam, 1083HJ Netherlands
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Media
|
|
Senior Secured
Second Lien
|
|
|
3M L+9.00%
(1.00% Floor)
|
|
|
|
—
|
|
|
|
8/22/2022
|
|
|
|
20,000,000
|
|
|
|
19,248,493
|
|
|
|
19,200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Bioplan USA, Inc.
1700 Broadway, 26th Floor
New York, NY 10019
|
|
Containers &
Packaging
|
|
Senior Secured
First Lien
|
|
|
3M L+4.75%
(1.00% Floor)
|
|
|
|
—
|
|
|
|
9/23/2021
|
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|
|
7,352,731
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|
|
7,080,193
|
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6,985,095
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Caelus Energy Alaska 03, LLC(6)
8401 North Central Expressway
Dallas, TX 75225
|
|
Oil, Gas &
Consumable Fuels
|
|
Senior Secured
Second Lien
|
|
|
3M L+7.50%
(1.25% Floor)
|
|
|
|
—
|
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|
|
4/15/2020
|
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24,266,667
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23,525,773
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24,024,000
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CareerBuilder, LLC(6)(7)
200 N. LaSalle St. Suite 1100
Chicago, IL 60601
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Professional Services
|
|
Senior Secured
First Lien
|
|
|
3M L+6.75%
(1.00% Floor)
|
|
|
|
—
|
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|
|
7/27/2023
|
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|
|
13,537,179
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|
|
13,268,520
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|
|
|
13,537,179
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Cook & Boardman Group LLC(6)
3916 Westpoint Blvd
Winston-Salem, NC 27103
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Distributors
|
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Senior Secured
First Lien
|
|
|
2M L+5.75%
(1.00% Floor)
|
|
|
|
—
|
|
|
|
10/17/2025
|
|
|
|
10,000,000
|
|
|
|
9,901,920
|
|
|
|
9,900,000
|
|
|
|
|
|
|
|
|
|
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Deluxe Toronto Ltd.(6)
2400 West Empire Avenue
Burbank, California 91504
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Media
|
|
Senior Secured
First Lien
|
|
|
3M L+5.50%
(1.00% Floor)
|
|
|
|
—
|
|
|
|
12/7/2020
|
|
|
|
4,974,874
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|
|
|
4,931,329
|
|
|
|
4,974,874
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|
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Exela Intermediate LLC
300 First Stamford
Place
Stamford, CT 06902
|
|
IT Services
|
|
Senior Secured
First Lien
|
|
|
3M L+6.50%
(1.00% Floor)
|
|
|
|
—
|
|
|
|
7/12/2023
|
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|
|
5,429,936
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|
|
5,483,082
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|
|
|
5,429,936
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|
Exela Intermediate LLC
300 First Stamford
Place
Stamford, CT 06902
|
|
IT Services
|
|
Senior Secured
First Lien
|
|
|
Fixed 10.00%
|
|
|
|
—
|
|
|
|
7/15/2023
|
|
|
|
5,500,000
|
|
|
|
5,663,681
|
|
|
|
5,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Fusion Connect Inc.
420 Lexington Avenue, Suite
1718
New York, NY 10170
|
|
Internet Software &
Services
|
|
Senior Secured
First Lien
|
|
|
3M L+7.50%
(1.00% Floor)
|
|
|
|
—
|
|
|
|
5/4/2023
|
|
|
|
11,517,092
|
|
|
|
11,124,874
|
|
|
|
10,941,238
|
|
|
|
|
|
|
|
|
|
|
|
|
GEE Group, Inc.(6)(8)
184 Shuman Boulevard, Suite 420
Naperville, IL 60563
|
|
Professional Services
|
|
Senior Secured
First Lien
|
|
|
2M L+18.00%
(1.00% Floor)
|
|
|
|
—
|
|
|
|
3/31/2021
|
|
|
|
11,612,863
|
|
|
|
11,612,863
|
|
|
|
11,612,863
|
|
|
|
|
|
|
|
|
|
|
|
|
Infrastructure & Energy Alternatives, Inc.(6)
6325 Digital Way Suite 460
Indianapolis, IN 46278
|
|
Construction &
Engineering
|
|
Senior Secured
First Lien
|
|
|
3M L+6.25%
(1.00% Floor)
|
|
|
|
—
|
|
|
|
11/4/2024
|
|
|
|
12,500,000
|
|
|
|
12,067,552
|
|
|
|
12,062,500
|
|
92
|
|
|
|
|
|
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|
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|
|
|
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|
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|
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|
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|
|
|
|
|
|
|
|
|
|
Description(1)
|
|
Industry
|
|
Type of
Investment
|
|
Interest
Rate
|
|
|
Percentage of
Class Owned
|
|
|
Maturity
Date
|
|
|
Principal
Amount/
Shares(2)
|
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
|
Immucor, Inc.(6)
3130 Gateway Drive
Norcross, GA 30071
|
|
Healthcare
Equipment & Supplies
|
|
Senior Secured
First Lien
|
|
|
3M L+5.00%
(1.00% Floor)
|
|
|
|
—
|
|
|
|
6/15/2021
|
|
|
$
|
7,387,500
|
|
|
$
|
7,338,613
|
|
|
$
|
7,461,375
|
|
|
|
|
|
|
|
|
|
|
|
|
Liberty Oilfield Services, LLC(6)(9)
950 17th Street, 20 Floor
Denver, CO 80202
|
|
Energy Equipment &
Services
|
|
Senior Secured
First Lien
|
|
|
1M L+7.625%
(1.00% Floor)
|
|
|
|
—
|
|
|
|
9/19/2022
|
|
|
|
6,383,750
|
|
|
|
6,285,315
|
|
|
|
6,383,750
|
|
|
|
|
|
|
|
|
|
|
|
|
Lionbridge Technologies, Inc.(3)(6)
1050 Winter Street, Suite 2300
Waltham, MA 02451
|
|
Commercial
Services & Supplies
|
|
Senior Secured
Second Lien
|
|
|
3M L+9.75%
(1.00% Floor)
|
|
|
|
—
|
|
|
|
2/28/2025
|
|
|
|
12,000,000
|
|
|
|
11,800,627
|
|
|
|
12,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Montreign Operating Company, LLC(6)
204 State Route 17B
Monticello, NY 12701
|
|
Hotels, Restaurants &
Leisure
|
|
Senior Secured
First Lien
|
|
|
1M L+8.25%
(1.00% Floor)
|
|
|
|
—
|
|
|
|
1/24/2023
|
|
|
|
13,133,574
|
|
|
|
13,211,906
|
|
|
|
12,214,224
|
|
|
|
|
|
|
|
|
|
|
|
|
PR Wireless, Inc.(5)
Carretera 165
City View Plaza #48, Suite 700
Guaynabo, PR 00970-7891
|
|
Wireless
Telecommunication
Services
|
|
Senior Secured
First Lien
|
|
|
3M L+5.25%
(1.00% Floor)
|
|
|
|
—
|
|
|
|
6/27/2020
|
|
|
|
2,305,453
|
|
|
|
1,012,919
|
|
|
|
1,012,919
|
|
|
|
|
|
|
|
|
|
|
|
|
PR Wireless, Inc.(11)
Carretera 165
City View Plaza #48, Suite 700
Guaynabo, PR 00970-7891
|
|
Wireless
Telecommunication
Services
|
|
Warrants
|
|
|
—
|
|
|
|
<1.00%
|
|
|
|
6/27/2024
|
|
|
|
201
|
|
|
|
1,374,009
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiere Global Services, Inc.(6)(9)
3280 Peachtree Road NE Suite 1000
Atlanta, Georgia 30305
|
|
Diversified
Telecommunication
Services
|
|
Senior Secured
First Lien
|
|
|
3M L+6.50%
(1.00% Floor)
|
|
|
|
—
|
|
|
|
12/8/2021
|
|
|
|
10,444,897
|
|
|
|
9,820,433
|
|
|
|
9,191,509
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiere Global Services, Inc.(6)
3280 Peachtree Road NE Suite 1000
Atlanta, Georgia 30305
|
|
Diversified
Telecommunication
Services
|
|
Senior Secured
Second Lien
|
|
|
3M L+5.00%
(1.00% Floor)
|
|
|
|
—
|
|
|
|
6/6/2022
|
|
|
|
15,000,000
|
|
|
|
14,665,954
|
|
|
|
12,750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
ProFrac Services, LLC(6)
777 Main Street, Suite 3900
Fort Worth, Texas 76102
|
|
Energy Equipment &
Services
|
|
Senior Secured
First Lien
|
|
|
3M L+5.75%
(1.00% Floor)
|
|
|
|
—
|
|
|
|
9/7/2023
|
|
|
|
7,481,250
|
|
|
|
7,411,970
|
|
|
|
7,406,438
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualtek USA LLC(6)
1150 First Avenue, Suite 600
King of Prussia, PA 19406
|
|
Construction &
Engineering
|
|
Senior Secured
First Lien
|
|
|
3M L+5.75%
(1.00% Floor)
|
|
|
|
—
|
|
|
|
7/18/2025
|
|
|
|
9,975,000
|
|
|
|
9,802,189
|
|
|
|
9,825,375
|
|
|
|
|
|
|
|
|
|
|
|
|
RPX Corporation(6)
One Market Plaza, Suite 1100
San Francisco, CA 94105
|
|
Professional Services
|
|
Senior Secured
First Lien
|
|
|
3M L+6.00%
|
|
|
|
—
|
|
|
|
6/7/2024
|
|
|
|
9,625,000
|
|
|
|
9,532,223
|
|
|
|
9,528,750
|
|
|
|
|
|
|
|
|
|
|
|
|
Sears Holding Company Delayed Draw(5)
3333 Beverly Road
Hoffman Estates, IL 60179
|
|
Retail
|
|
Senior Secured
Second Lien
|
|
|
3M L+10.00%
|
|
|
|
—
|
|
|
|
7/15/2019
|
|
|
|
10,000,000
|
|
|
|
2,083,721
|
|
|
|
2,078,571
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty Building Products Holdings
LLC
2160
Satellite Boulevard, Suite 450
Duluth, GA 30097
|
|
Construction Materials
|
|
Senior Secured
First Lien
|
|
|
3M L+5.75%
|
|
|
|
—
|
|
|
|
9/21/2025
|
|
|
|
10,000,000
|
|
|
|
9,853,681
|
|
|
|
9,850,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Techniplas LLC
N44W33341 Watertown Plank Rd.
Nashotah, WI 53058
|
|
Auto Components
|
|
Senior Secured
First Lien
|
|
|
Fixed 10.00%
|
|
|
|
—
|
|
|
|
5/1/2020
|
|
|
|
9,500,000
|
|
|
|
9,040,285
|
|
|
|
9,072,500
|
|
|
|
|
|
|
|
|
|
|
|
|
TouchTunes Interactive Networks, Inc.(6)
850 Third Avenue, Suite 15C
New York, NY 10022
|
|
Media
|
|
Senior Secured
Second Lien
|
|
|
1M L+8.25%
(1.00% Floor)
|
|
|
|
—
|
|
|
|
5/27/2022
|
|
|
|
12,000,000
|
|
|
|
11,986,143
|
|
|
|
12,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Trident USA Health Services, LLC— Holdco A Note
930 Ridgebrook Road 3rd FL
Sparks, MD 21152
|
|
Health Care
Providers & Services
|
|
Unsecured
Debt
|
|
|
—
|
|
|
|
—
|
|
|
|
7/31/2020
|
|
|
|
2,426,201
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Trident USA Health Services, LLC— Tranche A(3)
930 Ridgebrook Road 3rd FL
Sparks, MD 21152
|
|
Health Care
Providers & Services
|
|
Senior Secured
Second Lien
|
|
|
3M L+10.00%
PIK (1.25%
Floor)
|
|
|
|
—
|
|
|
|
7/31/2020
|
|
|
|
2,673,422
|
|
|
|
2,494,097
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Trident USA Health Services, LLC— Tranche B(3)
930 Ridgebrook Road 3rd FL
Sparks, MD 21152
|
|
Health Care
Providers & Services
|
|
Senior Secured
Second Lien
|
|
|
3M L+10.00%
PIK (1.25%
Floor)
|
|
|
|
—
|
|
|
|
7/31/2020
|
|
|
|
21,443,958
|
|
|
|
20,021,280
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Well Services, LLC(3)(7)(9)
770 South Post Oak Lane #405
Houston, TX 77056
|
|
Energy Equipment &
Services
|
|
Equity Interest
|
|
|
—
|
|
|
|
3.9%
|
|
|
|
—
|
|
|
|
77,212
|
|
|
|
772,125
|
|
|
|
501,878
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description(1)
|
|
Industry
|
|
Type of
Investment
|
|
Interest
Rate
|
|
|
Percentage of
Class Owned
|
|
|
Maturity
Date
|
|
|
Principal
Amount/
Shares(2)
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
ZeroChaos Parent, LLC(6)
420 South Orange Ave Suite 600
Orlando, FL 32801
|
|
Professional
Services
|
|
Senior Secured
Second Lien
|
|
|
3M
L+8.25%(1.00%
Floor)
|
|
|
|
—
%
|
|
|
|
10/31/2023
|
|
|
$
|
8,000,000
|
|
|
$
|
7,880,872
|
|
|
$
|
7,860,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Zinc Acquisition Holdings, LP(6)
600 Printwood Drive
Dickson, TN 37055
|
|
Chemicals
|
|
Senior Secured
First Lien
|
|
|
3M L+10.00%
(1.00% Floor)
|
|
|
|
—
|
|
|
|
9/30/2024
|
|
|
|
4,709,302
|
|
|
|
4,668,075
|
|
|
|
4,709,302
|
|
|
|
|
|
|
|
|
|
|
|
|
Zinc Acquisition Holdings, LP(12)
600 Printwood Drive
Dickson, TN 37055
|
|
Chemicals
|
|
Equity Interest –
Common Stock
|
|
|
—
|
|
|
|
1.46%
|
|
|
|
—
|
|
|
|
523
|
|
|
|
523,000
|
|
|
|
840,937
|
|
|
(1)
|
The Company’s investments are generally acquired in private transactions exempt from registration under
the Securities Act of 1933, as amended (the “Securities Act”) and, therefore, are generally subject to limitations on resale, and may be deemed to be “restricted securities’’ under the Securities Act of 1933.
|
|
(2)
|
All investments are non-controlled and non-affiliated issuers unless otherwise noted. All investments are
valued in good faith by the board of directors.
|
|
(3)
|
Principal amount includes capitalized PIK interest.
|
|
(4)
|
Effective 10/1/17, AAR Intermediate Holdings, LLC changed its name to 1888 Industrial Services, LLC.
|
|
(5)
|
Refer to Note 6 for more detail on the unfunded commitments.
|
|
(6)
|
A portion or all is held by the Company indirectly through CM Finance SPV Ltd. and pledged as collateral for
the Total Return Swaps and pledged as collateral for the revolving credit facility held through UBS AG, London Branch.
|
|
(7)
|
Security, or a portion thereof, unsettled as of December 31, 2018.
|
|
(8)
|
First Lien Unitranche Last Out Investment, which accounts for 4.10% of our investment portfolio at fair value.
|
|
(9)
|
The investment is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940, as amended
(the “1940 Act”). The Company may not acquire any non-qualifying asset unless, at the time of acquisition, qualifying assets represent at least 70% of the Company’s total assets. Non-qualifying assets represent 10.31% of total assets.
|
|
(10)
|
A portfolio company domiciled in the Netherlands. The jurisdiction of the security issuer may be a different
country than the domicile of the portfolio company.
|
|
(11)
|
Securities are non-income producing.
|
|
(12)
|
CM Finance Inc’s investments in Zinc Acquisition Holdings, LP are held through its wholly owned
subsidiary, Zinc Borrower Blocker, LLC.
|
|
(13)
|
Refer to Note 5 for more detail on the Total Return Swaps and the Embedded derivatives — Notes Payable.
|
|
(14)
|
As defined in the 1940 Act, the Company is deemed to be an “Affiliated Person” of this portfolio
company because it owns 5% or more of the portfolio company’s outstanding voting securities.
|
1M L - 1 month LIBOR (2.52% as of December 31, 2018)
2M L - 2 month LIBOR (2.62% as of December 31, 2018)
3M L - 3 month LIBOR (2.80% as of December 31, 2018)
PIK -
Payment-In-Kind
Set forth below is a brief description of
each portfolio company in which the fair value of our investment represents greater than 5% of our total assets as of December 31, 2018:
1888 Industrial Services, LLC (“1888 Industrial Services”) provides field support services to oil and gas producers, drilling
companies and midstream companies in the Denver- Julesburg Basin (“DJ Basin”). The Company builds, repairs, modifies and maintains oil and gas production equipment, sites, wells, and pipelines. In addition to general roustabout
services, 1888 Industrial Services offers well site excavation and preparation services, facility construction, gathering system construction, electrical services, oil rig services, equipment rentals and hydro excavation and trucking services.
94
AP NMT Acquisition BV, also known as Endemol Shine, was established in 1994 and is
comprised of more than 120 regional operating companies across all the world’s major markets. Endemol Shine is one of the world’s largest independent production companies and one of the world’s largest independent distributors of
finished programming. Endemol produces content across a wide variety of genres including reality TV, game shows, entertainment, drama, comedy, and children’s entertainment. Endemol creates, produces and distributes premium content/ IP for the
world’s major broadcasters and digital media platforms. Endemol has a library of over 2,800 formats which includes many iconic global hits such as Big Brother, Deal or No Deal, and The Money Drop, and airs on more than 275
channels around the world.
Caelus Energy Alaska 03 LLC (“Caelus”) is privately held independent exploration and
production company that currently operates the Oooguruk field on the North Slope of Alaska. Caelus specializes in exploration, development, and production of oil and gas. Caelus is currently focused on the pursuit, identification, and development of
strategic opportunities across Alaska, and beyond.
Caelus has announced a major discovery at Smith Bay, located about 150 miles west of
Prudhoe Bay. Caelus estimates the prospect contains 6-10 billion barrels of oil in place, which would make it about the size of the Kuparuk River field. Caelus plans to drill an additional appraisal well and acquire additional 3-D seismic. In
addition, Caelus has sanctioned the onshore Nuna oil development adjacent to Oooguruk and have acquired 350,000 acres of North Slope leases where we conducted two substantial 3-D seismic programs.
Lionbridge Technologies, Inc. The Company provides translation, online marketing, global content and testing solutions that ensure
local relevancy, global brand consistency and technical usability across languages, platforms and geographies. Using its global program management expertise, innovative cloud technology platforms and its global crowd of more than 100,000
independent, qualified professionals, it enables hundreds of world-leading brands to effectively reach, engage and support their customers in local markets worldwide.
Premiere Global Services, Inc. (“Premiere Global”) was established in 1991 and is one of the world’s largest dedicated
providers of collaboration software and services, and its broad portfolio of products has served the end-to-end collaboration needs of approximately 50,000 customers
around the world, including 75% of the Fortune 100™. Premiere Global created iMeet®, an expanding portfolio of purpose-built applications designed to meet the daily collaboration and
communications needs of business professionals, with solutions for web, video and audio conferencing, smart calendar management, webcasting, project management and sales productivity.
95
MANAGEMENT
Board of Directors and Its Leadership Structure
Our business and affairs are managed under the direction of our board of directors. The board of directors consists of six members, four of
whom are not “interested persons” of the Adviser, or its affiliates as defined in Section 2(a)(19) of the 1940 Act. We refer to these individuals as our “independent directors.” The board of directors elects our officers,
who serve at the discretion of the board of directors. The responsibilities of the board of directors include quarterly valuation of our assets, corporate governance activities, oversight of our financing arrangements and oversight of our investment
activities.
Oversight of our investment activities extends to oversight of the risk management processes employed by the Adviser as part
of its day-to-day management of our investment activities. The board of directors anticipates reviewing risk management processes at both regular and special board meetings throughout the year, consulting with appropriate representatives of the
Adviser as necessary and periodically requesting the production of risk management reports or presentations. The goal of the board of directors’ risk oversight function is to ensure that the risks associated with our investment activities are
accurately identified, thoroughly investigated and responsibly addressed. Investors should note, however, that the board of directors’ oversight function cannot eliminate all risks or ensure that particular events do not adversely affect the
value of investments.
The board of directors has established an audit committee, a valuation committee, a nominating and corporate
governance committee and a compensation committee, and may establish additional committees from time to time as necessary. The scope of the responsibilities assigned to each of these committees is discussed in greater detail below. Mr. Mauer
serves as our Chairman of the Board and Chief Executive Officer and the Co-Chief Investment Officer of the Adviser. We believe that Mr. Mauer’s history with the Adviser, his familiarity with its investment platform, and his extensive
knowledge of and experience in the financial services industry qualify him to serve as the Chairman of the Board.
The board of directors
does not have a lead independent director. We are aware of the potential conflicts that may arise when a non-independent director is Chairman of the Board, but believe these potential conflicts are offset by our strong corporate governance
practices. Our corporate governance practices include regular meetings of the independent directors in executive session without the presence of interested directors and management, the establishment of an audit committee, a valuation committee, a
nominating and corporate governance committee and a compensation committee, each of which is comprised solely of independent directors, and the appointment of a Chief Compliance Officer, with whom the independent directors meet without the presence
of interested directors and other members of management, for administering our compliance policies and procedures.
The board of directors
believes that its leadership structure is appropriate in light of our characteristics and circumstances because the structure allocates areas of responsibility among the individual directors and the committees in a manner that affords effective
oversight. Specifically, the board of directors believes that the relationship of Messrs. Mauer and Jansen with the Adviser provides an effective bridge between the board of directors and management, and encourages an open dialogue between
management and our board of directors, ensuring that these groups act with a common purpose. The board of directors also believes that its small size creates an efficient governance structure that provides ample opportunity for direct communication
and interaction among our management, the Adviser and the board of directors.
Board of Directors
We have adopted provisions in our articles of incorporation that divide our board of directors into three classes. At each annual meeting,
directors will be elected for staggered terms of three years (other than the initial terms, which extend for up to three years), with the term of office of only one of these three classes of directors expiring each year. Each director will hold
office for the term to which he or she is elected and until his or her successor is duly elected and qualifies.
96
Information regarding the board of directors is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Year of
Birth
|
|
|
Position
|
|
Director
Since
|
|
|
Term
Expires
|
|
|
Interested Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael C. Mauer
|
|
|
1961
|
|
|
Chief Executive Officer and Chairman of the Board
|
|
|
2013
|
|
|
|
2019
|
|
|
Christopher E. Jansen
|
|
|
1959
|
|
|
President, Secretary and Director
|
|
|
2013
|
|
|
|
2021
|
|
|
|
|
|
|
|
|
Independent Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Keith Lee
|
|
|
1971
|
|
|
Director
|
|
|
2013
|
|
|
|
2020
|
|
|
Julie Persily
|
|
|
1965
|
|
|
Director
|
|
|
2013
|
|
|
|
2020
|
|
|
Robert Ryder
|
|
|
1960
|
|
|
Director
|
|
|
2013
|
|
|
|
2019
|
|
|
Robert Wagner
|
|
|
1962
|
|
|
Director
|
|
|
2013
|
|
|
|
2021
|
|
The address for each of our directors is c/o CM Finance Inc, 65 East 55th Street, 15th Floor, New York, NY 10022.
Executive Officers Who Are Not Directors
Information regarding our executive officers who are not directors is as follows:
|
|
|
|
|
|
|
|
|
Name
|
|
Year of
Birth
|
|
|
Position
|
|
Rocco DelGuercio
|
|
|
1963
|
|
|
Chief Financial Officer, Chief Compliance Officer and Treasurer
|
The address for each of our executive officers is c/o CM Finance Inc, 65 East 55th Street, 15th Floor, New York, NY 10022.
Biographical Information
The board of
directors will consider whether each of the directors is qualified to serve as a director, based on a review of the experience, qualifications, attributes and skills of each director, including those described below. The board of directors will also
consider whether each director has significant experience in the investment or financial services industries and has held management, board or oversight positions in other companies and organizations. For the purposes of this presentation, our
directors have been divided into two groups—independent directors and interested directors. Interested directors are “interested persons” as defined in the 1940 Act.
Independent Directors
Keith
Lee serves as a member of our board of directors. Mr. Lee is the Chief Executive Officer of Feenix Venture Partners, LLC (“Feenix”), an investment firm that makes equity, debt and hybrid investments in small businesses that
need growth capital. Prior to Feenix, Mr. Lee was a Partner and Managing Director in charge of Capital Markets at H/2 Capital Partners, a multi-billion dollar investment manager focused on commercial real estate related debt investments.
He served on H/2’s Executive and Investment Committees. Mr. Lee has over 20 years of experience working with global financial institutions on the buy and sell side. Prior to H/2, Mr. Lee was a Managing Director and Head of Structured
Financing-Americas at UBS Investment Bank. He also held senior positions at Goldman Sachs and Lehman Brothers in principal funding and investments and as head of US CLO Origination. Mr. Lee has an MBA from the University of Chicago, Booth
School of Business and a BA in Economics and Philosophy from Knox College and serves on Knox’s board of trustees. We believe Mr. Lee’s extensive experience with financial institutions and his knowledge of capital markets and
structured financing brings important and valuable skills to our board of directors.
97
Julie Persily serves as a member of our board of directors. Ms. Persily has also
served as a director of Runway Growth Credit Fund Inc., a private closed-end management investment company that has elected to be regulated as a BDC, since 2016; and SEACOR Marine Holdings Inc. (NYSE: SMHI), a
global marine and support transportation services company, since April 2018. Ms. Persily retired in 2011 after serving as the Co-Head of Leveraged Finance and Capital Markets of Nomura Securities North
America, a unit of Nomura Holdings Inc. (NYSE: NMR), a securities and investment banking company, since July 2010. Ms. Persily previously served in various capacities at Citigroup Inc. (NYSE: C), a financial services company, including as the Co-Head of the Leveraged Finance Group from December 2006 to November 2008, the Head of Acquisition Finance Group from December 2001 to November 2006 and as Managing Director from July 1999 to November 2001. From
1990 to 1999, Ms. Persily served in various capacities including as a Managing Director, Leveraged Finance at BT Securities Corp., a financial services company and a subsidiary of Bankers Trust Corp., which was acquired by Deutsche Bank in
April 1999. From 1987 to 1989, Ms. Persily served as an analyst at Drexel Burnham Lambert, a securities and investment banking company. Ms. Persily received a B.A. in psychology and economics from Columbia College and a M.B.A in financing
and accounting from Columbia Business School. We believe Ms. Persily’s extensive experience with structuring, negotiating and marketing senior loans, high yield and mezzanine financings brings important and valuable skills to our board of
directors.
Robert Ryder serves as a member of our board of directors. Mr. Ryder currently serves as the chief executive
officer of Horsepower Advisors, a consulting company focused on improving business performance. Mr. Ryder previously served from 2007 to July 2015 as Executive Vice President and Chief Financial Officer of Constellation Brands, Inc. (NYSE:
STZ), a wine, beer and spirits company. From 2005 to 2006, Mr. Ryder served as Executive Vice President and Chief Financial and Administrative Officer of IMG, an international sports marketing and media company. From 2002 to 2005,
Mr. Ryder was Senior Vice President and Chief Financial Officer of American Greetings Corporation (NYSE: AM), a publicly traded, multinational consumer products company. From 1989 to 2002, Mr. Ryder held several management positions of
increasing responsibility with PepsiCo, Inc (NYSE: PEP). These included control, strategic planning, mergers and acquisitions, CFO and Controller positions serving at PepsiCo’s corporate headquarters and at its
Frito-Lay International and Frito-Lay North America divisions. Mr. Ryder began his career at Price Waterhouse & Co., where he left as a manager in 1989.
Mr. Ryder received a B.S. in Accounting from the University of Scranton and is a certified public accountant. We believe Mr. Ryder’s extensive experience with public companies, public boards and knowledge of accounting and public
company regulatory issues brings important and valuable skills to our board of directors.
Robert Wagner serves as a member of our
board of directors. In recent years, Mr. Wagner has been a self-employed management consultant, working closely with client management on company strategy, financing, investor relations and compensation policies since 2013. In February 2012,
Mr. Wagner retired from Silver Point Capital, L.P., a credit opportunity hedge fund, where he had served as a senior management leader and operating committee member and Director of Marketing and Investor Relations since May 2006. While at
Silver Point Capital, L.P., Mr. Wagner ran its Global Markets team, a deal-sourcing and relationship development team, and served on the firm’s private-side, direct lending investment committee. From 1999 to 2005, Mr. Wagner served as
a Managing Director and a senior leader in the fixed income division at Goldman, Sachs & Co. (NYSE: GS), a global investment banking, securities and investment management firm. From 1993 to 1999, Mr. Wagner served as a Managing
Director and team leader of the leveraged loan capital markets group at BT Securities Corp., a financial services company and a subsidiary of Bankers Trust Corp., which was acquired by Deutsche Bank in April 1999. Mr. Wagner served in a similar
capacity at Bank of America from 1989 to 1993. Mr. Wagner has also served as a director of the Loan Syndication & Trading Association on multiple occasions, most recently from 2006 to 2010. Mr. Wagner received a B.B.A. in Finance
and Accounting from the University of Michigan and an M.S. in Journalism from Columbia University—Graduate School of Journalism. We believe Mr. Wagner’s extensive experience in deal-sourcing, investor relations and credit underwriting
brings important and valuable skills to our board of directors.
98
Interested Directors
Michael C. Mauer has served as our Chief Executive Officer and Chairman of our board of directors and as
Co-Chief Investment Officer of CM Investment Partners LLC (our “Adviser”) since February 2014. Mr. Mauer has also served as Chairman and Chief Executive Officer of CM Credit Opportunities BDC I
Inc., a private closed-end management investment company that intends to elect to be regulated as a business development company (“BDC”), since 2017. From January 2012 to February 2014,
Mr. Mauer served as the Managing Partner and Co-Chief Investment Officer of CM Investment Partners, LP. Mr. Mauer is also a member of our Adviser’s investment committee and board of managers.
Mr. Mauer served as a Senior Managing Director and head of the leveraged loan effort at Cyrus Capital Partners, L.P. (“Cyrus Capital”) from September 2011 to February 2014. Mr. Mauer resigned from Cyrus Capital upon our election
to be regulated as a BDC. From July 2009 to September 2010, Mr. Mauer worked for Icahn Capital where he was a Senior Managing Director and a member of the investment team. In addition, he was in charge of the firm’s Marketing and Investor
Relations. Prior to that, Mr. Mauer was a Managing Director at Citigroup Inc. (NYSE: C), a financial services company, from 2001 to 2009. During that time he led several businesses including Global
Co-Head of Leveraged Finance and Global Co-Head of Fixed Income Currency and Commodity Distribution. In addition, during this period he was a senior member of Citigroup
Inc.’s credit committee responsible for all underwriting and principal commitments of leveraged finance capital worldwide. From 1988 to 2001, Mr. Mauer held several positions at JPMorgan including Head of North American Investment Grade
and Leverage Loan Syndicate, Sales and Trading businesses. Mr. Mauer began his career in 1982 at Price Waterhouse & Co., where he was a Senior Accountant and a C.P.A. Mr. Mauer received a B.S. from the University of Scranton and
an M.B.A. from Columbia University. We believe Mr. Mauer’s extensive investing, finance, and restructuring experience bring important and valuable skills to our board of directors.
Christopher E. Jansen has served as our President, Secretary and a member of our board of directors and as Co-Chief Investment Officer of our Adviser since February 2014. Mr. Jansen has also served as President and Secretary of CM Credit Opportunities BDC I Inc., a private
closed-end management investment company that intends to elect to be regulated as a BDC, since 2017. From June 2012 to February 2014, Mr. Jansen served as a Partner and
Co-Chief Investment Officer of CM Investment Partners, LP. Mr. Jansen is also a member of our Adviser’s investment committee and board of managers. Mr. Jansen also served as a Senior Managing
Director at Cyrus Capital from April 2012 to February 2014. Mr. Jansen resigned from Cyrus Capital upon our election to be regulated as a BDC. Formerly, Mr. Jansen was a senior advisor at Sound Harbor Partners from April 2011 to March
2012. Prior to that, Mr. Jansen was a founding Managing Partner and Senior Portfolio Manager for Stanfield Capital Partners from inception in 1998 until the sale of the company in 2010. As a member of Stanfield Capital Partners’ Management
Committee, Mr. Jansen was involved in planning the strategic direction of the firm. Additional responsibilities included the oversight and administration of the investment process and the implementation of portfolio management procedures of the
company’s Collateralized Loan Obligation and bank loan businesses. During his tenure at Stanfield, Jansen was responsible for the management of 15 different portfolios aggregating in excess of $7 billion in assets. These portfolios were
comprised of large corporate loans, middle-market loans, second lien loans, high yield bonds and structured finance securities. Prior to Stanfield Capital Partners, Mr. Jansen was Managing Director and Portfolio Manager at Chancellor Senior
Secured Management from 1990 to 1998. While at Chancellor, Jansen was responsible for the management of 11 different portfolios aggregating in excess of $4 billion in assets. These portfolios were comprised of large corporate loans,
middle-market loans and second lien loans. From 1983 to 1990, Mr. Jansen held various positions at Manufacturers Hanover Trust Company, including as Vice President in the Bank’s Acquisition Finance Group and LBO Management Group.
Mr. Jansen received a B.A. from Rutgers College and a M.M. from the Kellogg School of Management at Northwestern University. We believe Mr. Jansen’s extensive investing, finance, and restructuring experience bring important and
valuable skills to our board of directors.
99
Executive Officers Who Are Not Directors
Rocco DelGuercio has served as our Chief Financial Officer and Treasurer since June 2016 and as our Chief Compliance Officer since
September 2016. Mr. DelGuercio has also served as Chief Financial Officer, Chief Compliance Officer, and Treasurer of CM Credit Opportunities BDC I Inc., a private closed-end management investment company
that intends to elect to be regulated as a BDC, since 2017. Mr. DelGuercio has also served as Chief Financial Officer of our Adviser since June 2016 and as Chief Compliance Officer of our Adviser since September 2016. Mr. DelGuercio spent
over 10 years at Credit Suisse Assets Management and served in various capacities, including as Chief Financial Officer and Treasurer of Credit Suisse Park View BDC, Inc., a BDC, and Credit Suisse Asset Management Income Fund Inc. and Credit Suisse
High Yield Bond Fund, each a closed-end management investment company. Mr. DelGuercio also served as the Chief Financial Officer and Treasurer of ten open-end
management investment companies managed by Credit Suisse Assets Management. From February 2012 to April 2013, Mr. DelGuercio was an independent contractor consulting for a 12 billion dollar money manager and a large global service
provider. Prior to that, Mr. DelGuercio served as Director of Legg Mason & Co., LLC from March 2004 to January 2012. Mr. DelGuercio earned a B.A. in Liberal Arts from The College of Staten Island, a B.A. in Business from Chadwick
University and an M.B.A. in Finance from New York Institute of Technology.
Board Meetings
Our Board met six times during the fiscal year ended June 30, 2018. Each director attended at least 75% of the total number of meetings of
the Board and committees on which the director served that were held while the director was a member. The Board’s standing committees are set forth below. We require each director to make a diligent effort to attend all Board and committee
meetings, as well as each Annual Meeting of Stockholders. All of our directors attended our 2017 Annual Meeting of Stockholders.
Audit Committee
The members of the Audit Committee are Mr. Lee, Ms. Persily, Mr. Ryder and Mr. Wagner, each of whom is independent
for purposes of the 1940 Act and NASDAQ corporate governance regulations. Mr. Ryder serves as chairman of the Audit Committee. Our Board has determined that Mr. Ryder is an “audit committee financial expert” as that term is
defined under Item 407 of Regulation S-K of the Securities Act. The Board has adopted a charter of the Audit Committee, which is available in print to any stockholder who requests it and it is also available
on the Company’s website at www.cmfn-inc.com. The Audit Committee met five times during the fiscal year ended June 30, 2018.
The Audit Committee is responsible for approving our independent accountants, reviewing with our independent accountants the plans and results
of the audit engagement, approving professional services provided by our independent accountants, reviewing the independence of our independent accountants and reviewing the adequacy of our internal accounting controls.
Compensation Committee
The members of
the Compensation Committee are Mr. Lee, Ms. Persily, Mr. Ryder and Mr. Wagner, each of whom is independent for purposes of the 1940 Act and the NASDAQ corporate governance regulations. Ms. Persily serves as chairperson of
the Compensation Committee. The Compensation Committee is responsible for overseeing our compensation policies generally, evaluating executive officer performance, overseeing and setting compensation for our directors and, as applicable, our
executive officers and, as applicable, preparing the report on executive officer compensation that SEC rules require to be included in our annual proxy statement. Currently, none of our executive officers is compensated by us, and as such, the
compensation committee is not required to produce a report on executive officer compensation for inclusion in our annual proxy statement.
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The Compensation Committee has the sole authority to retain and terminate any compensation
consultant assisting the Compensation Committee, including sole authority to approve all such compensation consultants’ fees and other retention terms. The Compensation Committee may delegate its authority to subcommittees or the chairperson of
the Compensation Committee when it deems appropriate and in our best interests.
The Compensation Committee met one time during the fiscal
year ended June 30, 2018.
Nominating and Corporate Governance Committee
The members of the Nominating and Corporate Governance Committee are Mr. Lee, Ms. Persily, Mr. Ryder and Mr. Wagner, each
of whom is independent for purposes of the 1940 Act and the NASDAQ corporate governance regulations. Mr. Lee serves as chairman of the Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee is
responsible for selecting, researching and nominating directors for election by our stockholders, selecting nominees to fill vacancies on the board or a committee of the board, developing and recommending to the board a set of corporate governance
principles and overseeing the evaluation of the board and our management.
The Nominating and Corporate Governance Committee will consider
nominees to the Board recommended by a stockholder if such stockholder complies with the advance notice provisions of our bylaws. Our bylaws provide that a stockholder who wishes to nominate a person for election as a director at a meeting of
stockholders must deliver written notice to our corporate secretary. This notice must contain, as to each nominee, all of the information relating to such person as would be required to be disclosed in a proxy statement meeting the requirements of
Regulation 14A under the Securities Exchange Act of 1934, as amended, and certain other information set forth in the bylaws. In order to be eligible to be a nominee for election as a director by a stockholder, such potential nominee must deliver to
our corporate secretary a written questionnaire providing the requested information about the background and qualifications of such person, and would be in compliance with all of our publicly disclosed corporate governance, conflict of interest,
confidentiality and stock ownership and trading policies and guidelines.
The Nominating and Corporate Governance Committee has not
adopted a formal policy with regard to the consideration of diversity in identifying individuals for election as members of the Board, but the committee will consider such factors as it may deem are in our best interests and those of our
stockholders. Those factors may include a person’s differences of viewpoint, professional experience, education and skills, as well as his or her race, gender and national origin. In addition, as part of the board’s annual self-assessment,
the members of the Nominating and Corporate Governance Committee will evaluate the membership of the Board and whether the board maintains satisfactory policies regarding membership selection.
A charter of the Nominating and Corporate Governance Committee is available in print to any stockholder who requests it, and it is also
available on the Company’s website at www.cmfn-inc.com. The Nominating and Corporate Governance Committee met one time during the fiscal year ended June 30, 2018.
Valuation Committee
The Valuation
Committee is composed of Mr. Lee, Ms. Persily, Mr. Ryder and Mr. Wagner, each of whom is not an interested person for purposes of the 1940 Act and is independent for purposes of the NASDAQ corporate governance regulations.
Mr. Wagner serves as the chairman of the Valuation Committee. The Valuation Committee is responsible for aiding our board of directors in fair value pricing of our debt and equity investments that are not publicly traded or for which current
market values are not readily available. The Board and the Valuation Committee utilize the services of an independent valuation firm to help them determine the fair value of these securities. The Board has engaged an independent valuation firm to
review, on a periodic basis, at least once annually, the valuation for each of our Level 3 investments. We invest primarily in investments classified as Level 3. The Board, including the members of the Valuation Committee, also meet with
the
101
independent valuation firm periodically review the methodology of the independent valuation firm. The Valuation Committee reviews subsequent transactions to test the accuracy of the independent
valuation firm’s valuations. The Valuation Committee met four times during the fiscal year ended June 30, 2018.
Compensation of Directors
The following table shows information regarding the compensation received by our independent directors for the fiscal year ended
June 30, 2018. No compensation is paid to directors who are “interested persons” for their service as directors.
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Name
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Aggregate
Cash
Compensation
from CM
Finance Inc(1)
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Total
Compensation
from CM
Finance Inc
Paid to
Director(1)
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Interested Directors
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Michael C. Mauer
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$
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—
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$
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—
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Christopher E. Jansen
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$
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—
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$
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—
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Independent Directors
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Keith Lee
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$
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97,500
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$
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97,500
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Julie Persily
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$
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97,500
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$
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97,500
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Robert Ryder
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$
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102,500
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$
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102,500
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Robert Wagner
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$
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97,500
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$
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97,500
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(1)
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For a discussion of the independent directors’ compensation, see below. We do not have a profit-sharing or
retirement plan, and directors do not receive any pension or retirement benefits.
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The independent directors receive an
annual fee of $75,000. They also receive $2,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending in person or telephonically
each regular board of directors meeting and each special telephonic meeting. They also receive $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in
connection with each committee meeting attended in person and each telephonic committee meeting. The chair of the Audit Committee receives an annual fee of $7,500. The chairs of the Valuation Committee, the Nominating and Corporate Governance
Committee and the Compensation Committee receive an annual fee of $2,500, $2,500 and $2,500, respectively. We have obtained directors’ and officers’ liability insurance on behalf of our directors and officers. Independent directors have
the option of having their directors’ fees paid in shares of our common stock issued at a price per share equal to the greater of NAV or the market price at the time of payment. No compensation is paid to directors who are “interested
persons” for their service as directors.
Corporate Governance
Corporate Governance Documents
We
maintain a corporate governance webpage at the “Investor Relations” link at www.cmfn-inc.com.
Our Corporate Governance Procedures, Code of Ethics and Business Conduct, Code of Ethics and Board committee charters are available at our corporate
governance webpage at www.cmfn-inc.com and are also available to any stockholder who requests them by writing to our Secretary, Christopher E. Jansen, at CM Finance Inc, 65 East 55th Street, 15th Floor, New York, NY 10022.
Director Independence
In
accordance with rules of NASDAQ, the Board annually determines the independence of each director. No director is considered independent unless the Board has determined that he or she has no material relationship
102
with the Company. The Company monitors the status of its directors and officers through the activities of the Nominating and Corporate Governance Committee and through a questionnaire to be
completed by each director no less frequently than annually, with updates periodically if information provided in the most recent questionnaire has changed.
In order to evaluate the materiality of any such relationship, the Board uses the definition of director independence set forth in the NASDAQ
listing rules. Section 5605 provides that a director of a BDC shall be considered to be independent if he or she is not an “interested person” of the Company, as defined in Section 2(a)(19) of the 1940 Act. Section 2(a)(19)
of the 1940 Act defines an “interested person” to include, among other things, any person who has, or within the last two years had, a material business or professional relationship with the Company or our Adviser.
The Board has determined that each of the directors is independent and has no relationship with the Company, except as a director and
stockholder of the Company, with the exception of Messrs. Mauer and Jansen, who are interested persons of the Company due to their positions as officers of the Company and as officers of our Adviser.
Annual Evaluation
Our directors
perform an evaluation, at least annually, of the effectiveness of the Board and its committees. This evaluation includes an annual questionnaire and Board and Board committee discussion.
Communication with the Board
We
believe that communications between our Board, our stockholders and other interested parties are an important part of our corporate governance process. Stockholders with questions about the Company are encouraged to contact the Company’s
Investor Relations department at (212) 257-5199. However, if stockholders believe that their questions have not been addressed, they may communicate with the Company’s Board by sending their
communications to CM Finance Inc 65 East 55th Street, 15th Floor, New York, NY 10022, Attn.: Board of Directors. All stockholder communications
received in this manner will be delivered to one or more members of the Board.
All communications involving accounting, internal
accounting controls and auditing matters, possible violations of, or non-compliance with, applicable legal and regulatory requirements or policies, or retaliatory acts against anyone who makes such a complaint
or assists in the investigation of such a complaint, will be referred to our Audit Committee.
The acceptance and forwarding of a
communication to any director does not imply that the director owes or assumes any fiduciary duty to the person submitting the communication, all such duties being only as prescribed by applicable law.
Code of Business Conduct and Ethics
Our code of ethics, which is signed by directors and executive officers of the Company, requires that directors and executive officers avoid
any conflict, or the appearance of a conflict, between an individual’s personal interests and the interests of the Company. Pursuant to the code of ethics, which is available on our website under the “Investor Relations” link at www.cmfn-inc.com, each director and executive officer must disclose any conflicts of interest, or actions or relationships that might give rise to a conflict, to the Audit Committee. Certain actions or
relationships that might give rise to a conflict of interest are reviewed and approved by the Board.
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Compensation Committee Interlocks and Insider Participation
All members of the Compensation Committee are independent directors and none of the members is a present or past employee of the Company. No
member of the Compensation Committee: (i) has had any relationship with the Company requiring disclosure under Item 404 of Regulation S-K under the Securities Exchange Act of 1934, as amended; or
(ii) is an executive officer of another entity, at which one of our executive officers serves on the Board.
Investment Committee and Portfolio
Management
The Adviser’s investment committee consists of Messrs. Mauer, Jansen, Muns and Nitka. Stifel has appointed Mr. Nitka
to the Adviser’s investment committee as its designee. The investment committee of the Adviser meets regularly to consider our investments, direct our strategic initiatives and supervise the actions taken by the Adviser on our behalf. Every
initial investment requires approval by a majority of the Adviser’s investment committee and such majority must include both Messrs. Mauer and Jansen. Every follow-on investment decision in an existing portfolio company and every investment
disposition require approval by at least a majority of the Adviser’s investment committee. The investment committee also monitors the performance of our investment portfolio. After the completion of this offering, the Adviser may increase the
size of its investment committee from time to time.
In addition, temporary investments, such as those in cash equivalents, U.S.
government securities and other high quality debt investments that mature in one year or less, may require approval by the investment committee. The day-to-day management of investments approved by the investment committee will be overseen by
Messrs. Mauer and Jansen. Biographical information with respect to Messrs. Mauer and Jansen is set out under “—Biographical Information—Interested Directors.”
The members of the investment committee, receive compensation by the Adviser that includes an annual base salary, an annual individual
performance bonus, contributions to 401(k) plans, and a portion of the incentive fee earned in connection with their services.
Executive Compensation
None of our executive officers receive compensation from us. Each of Messrs. Mauer and Jansen has a direct ownership and financial
interest in, and may receive compensation and/or profit distributions from, the Adviser. None of Mr. Mauer, Mr. Jansen, Mr. Muns or Mr. Nitka receives any direct compensation from us. See “Related Party Transactions and Certain
Relationships.” Rocco DelGuercio, our Chief Financial Officer, Treasurer and Chief Compliance Officer, is paid by the Adviser, as our administrator, subject to reimbursement by us of an allocable portion of such compensation for services
rendered by Mr. DelGuercio to us. To the extent that the Adviser outsources any of its functions we will pay the fees associated with such functions on a direct basis without profit to the Adviser.
104
MANAGEMENT AGREEMENTS
The Adviser was formed in July 2013 and is registered as an investment adviser under the Advisers Act.
Investment Advisory Agreement
Subject to
the overall supervision of our board of directors and in accordance with the 1940 Act, the Adviser will manage our day-to-day operations and provide investment advisory services to us. Under the terms of the Investment Advisory Agreement, the
Adviser:
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•
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determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner
of implementing such changes;
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•
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identifies, evaluates and negotiates the structure of the investments we make;
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•
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executes, closes, services and monitors the investments we make;
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•
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determines the securities and other assets that we will purchase, retain or sell;
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•
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performs due diligence on prospective portfolio companies; and
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•
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provides us with such other investment advisory, research and related services as we may, from time to time,
reasonably require for the investment of our funds.
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Pursuant to the Investment Advisory Agreement, we have agreed to
pay the Adviser a fee for investment advisory and management services consisting of two components—a base management fee and an incentive fee. The cost of both the base management fee and the incentive fee will ultimately be borne by our
stockholders.
Management Fee
The base management fee is calculated at an annual rate of 1.75% of our gross assets, including assets purchased with borrowed funds or other
forms of leverage and excluding cash and cash equivalents. For services rendered under the Investment Advisory Agreement, the base management fee is payable quarterly in arrears. The base management fee is calculated based on the average value of
our gross assets, excluding cash and cash equivalents, at the end of the two most recently completed calendar quarters. Base management fees for any partial month or quarter will be appropriately pro-rated.
Incentive Fee
We will pay the
Adviser an incentive fee. Incentive fees are calculated as below and payable quarterly in arrears (or, upon termination of the Investment Advisory Agreement, as of the termination date). The incentive fee, which provides the Adviser with a share of
the income that it generates for us, has two components, ordinary income and capital gains, calculated as follows:
The ordinary income
component is calculated and payable quarterly in arrears based on our pre-incentive fee net investment income for the immediately preceding calendar quarter, subject to a total return requirement and deferral of non-cash amounts, and is 20.0% of the
amount, if any, by which our pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets attributable to our common stock, for the immediately preceding calendar quarter, exceeds a 2.0% (which is 8.0%
annualized) hurdle rate and a “catch-up” provision measured as of the end of each calendar quarter. Under this provision, in any calendar quarter, the Adviser receives no incentive fee until our pre-incentive fee net investment income
equals the hurdle rate of 2.0%, but then receives, as a “catch-up,” 100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but
is less than 2.5% (which is 10.0% annualized). The effect of the “catch-up” provision is that, subject to the total return and deferral provisions discussed below, if pre-incentive fee net investment income exceeds 2.5% in any
105
calendar quarter, the Adviser receives 20.0% of our pre-incentive fee net investment income as if a hurdle rate did not apply. For this purpose, pre-incentive fee net investment income means
interest income, dividend income and any other income (including any other fees, such as commitment, origination, structuring, diligence, managerial assistance and consulting fees or other fees that we receive from portfolio companies) accrued
during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under the Administration Agreement and any interest expense and any distributions paid on any issued and outstanding
preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as OID, debt instruments with PIK interest and zero coupon securities), accrued
income that we have not yet received in cash. The foregoing incentive fee is subject to a total return requirement, which provides that no incentive fee in respect of the Company’s pre-incentive fee net investment income is payable except to
the extent 20.0% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding quarters exceeds the cumulative incentive fees accrued and/or paid for the 11 preceding quarters. In other words, any
ordinary income incentive fee that is payable in a calendar quarter is limited to the lesser of (i) 20.0% of the amount by which our pre-incentive fee net investment income for such calendar quarter exceeds the 2.0% hurdle, subject to the
“catch-up” provision, and (ii) (x) 20.0% of the cumulative net increase in net assets resulting from operations for the then current and 11 preceding calendar quarters minus (y) the cumulative incentive fees accrued
and/or paid for the 11 preceding calendar quarters. For the foregoing purpose, the “cumulative net increase in net assets resulting from operations” is the amount, if positive, of the sum of pre-incentive fee net investment income,
realized gains and losses and unrealized appreciation and depreciation of the Company for the then current and 11 preceding calendar quarters. In addition, the portion of such incentive fee that is attributable to deferred interest (such as PIK
interest or OID) will be paid to the Adviser only if and to the extent we actually receive such interest in cash, and any accrual thereof will be reversed if and to the extent such interest is reversed in connection with any write-off or similar
treatment of the investment giving rise to any deferred interest accrual. Any reversal of such accounts would reduce net income for the quarter by the net amount of the reversal (after taking into account the reversal of incentive fees payable) and
would result in a reduction and possible elimination of the incentive fees for such quarter. Notwithstanding any such incentive fee reduction or elimination, there is no accumulation of amounts on the hurdle rate from quarter to quarter, and
accordingly there is no clawback of amounts previously paid if subsequent quarters are below the quarterly hurdle, and there is no delay of payment if prior quarters are below the quarterly hurdle.
Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital
appreciation or depreciation. Because of the structure of the incentive fee, it is possible that we may pay an incentive fee in a quarter where we incur a loss, subject to the total return requirement and deferral of non-cash amounts. For example,
if we receive pre-incentive fee net investment income in excess of the quarterly minimum hurdle rate, we would pay the applicable incentive fee even if we have incurred a loss in that quarter due to realized and unrealized capital losses. Our net
investment income used to calculate this component of the incentive fee is also included in the amount of our gross assets used to calculate the 1.75% base management fee. These calculations are appropriately prorated for any period of less than
three months and adjusted for any share issuances or repurchases during the current quarter.
106
The following is a graphic representation of the calculation of the income-related portion of the
incentive fee:
Quarterly Incentive Fee Based on Net Investment Income
Pre-incentive Fee Net Investment Income
(expressed as a percentage of the value of net assets)
Percentage of Pre-incentive Fee Net Investment Income
Allocated to Income-Related Portion of Incentive Fee
The capital gains component of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination
of the Investment Advisory Agreement, as of the termination date), commencing on December 31, 2014, and is equal to 20.0% of our cumulative aggregate realized capital gains from inception through the end of that calendar year, computed net of
our aggregate cumulative realized capital losses and our aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid capital gains incentive fees, provided that the incentive
fee determined as of December 31, 2014 will be calculated for a period of shorter than twelve calendar months to take into account any realized capital gains computed net of all realized capital losses and unrealized capital depreciation for
the period ending December 31, 2014. If such amount is negative, then no capital gains incentive fee will be payable for such year. Additionally, if the Investment Advisory Agreement is terminated as of a date that is not a calendar year end,
the termination date will be treated as though it were a calendar year end for purposes of calculating and paying the capital gains incentive fee.
Under GAAP, we calculate the capital gains component of the incentive fee as if we had realized all assets at their fair values as of the
reporting date. Accordingly, we accrue a provisional capital gains incentive fee taking into account any unrealized gains or losses. As the provisional capital gains incentive fee is subject to the performance of investments until there is a
realization event, the amount of the provisional capital gains incentive fee accrued at a reporting date may vary from the capital gains incentive that is ultimately realized and the differences could be material.
Examples of Quarterly Incentive Fee Calculation
Example 1: Income Related Portion of Incentive Fee before Total Return Requirement Calculation:
Alternative 1
Assumptions
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Investment income (including interest, dividends, fees, etc.) = 1.25%
Hurdle rate(1) = 2.0%
Management fee(2) = 0.4375%
Other expenses (legal, accounting, custodian, transfer agent,
etc.)(3) = 0.2%
Pre-incentive fee net investment
income
(investment income – (management fee + other expenses) = 0.6125%
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Pre-incentive fee net investment income does not exceed hurdle rate, therefore there is no income-related
incentive fee.
107
Alternative 2
Assumptions
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Investment income (including interest, dividends, fees, etc.) = 2.9%
Hurdle rate(1) = 2.0%
Management fee(2) = 0.4375%
Other expenses (legal, accounting, custodian, transfer agent,
etc.)(3) = 0.2%
Pre-incentive fee net investment
income
(investment income – (management fee + other expenses) = 2.2625%
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Incentive fee = 100% × Pre-incentive fee net investment income (subject to
“catch-up”)(4)
= 100% × (2.2625% –
2.0%)
= 0.2625%
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Pre-incentive fee net investment income exceeds the hurdle rate, but does not fully satisfy the
“catch-up” provision, therefore the income related portion of the incentive fee is 0.2625%.
Alternative 3
Assumptions
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Investment income (including interest, dividends, fees, etc.) = 3.5%
Hurdle rate(1) = 2.0%
Management fee(2) = 0.4375%
Other expenses (legal, accounting, custodian, transfer agent,
etc.)(3) = 0.2%
Pre-incentive fee net investment
income
(investment income – (management fee + other expenses) = 2.8625%
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Incentive fee = 100% × Pre-incentive fee net investment income (subject to
“catch-up”)(4)
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Incentive fee = 100% × “catch-up” + (20.0% × (Pre-Incentive Fee Net Investment
Income –2.5%))
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“Catch-up” = 2.5% – 2.0%
= 0.5%
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Incentive fee = (100% × 0.5%) + (20.0% × (2.8625% – 2.5%))
= 0.5% + (20.0% × 0.3625%)
= 0.5% + 0.725%
= 0.5725%
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Pre-incentive fee net investment income exceeds the hurdle rate, and fully satisfies the
“catch-up” provision, therefore the income related portion of the incentive fee is 0.5725%.
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(1)
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Represents 8.0% annualized hurdle rate.
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(2)
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Represents 1.75% annualized base management fee.
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(3)
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Excludes organizational and offering expenses.
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(4)
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The “catch-up” provision is intended to provide the Adviser with an incentive fee of 20.0% on all
pre-incentive fee net investment income as if a hurdle rate did not apply when our net investment income exceeds 2.5% in any fiscal quarter.
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108
Example 2: Income Portion of Incentive Fee with Total Return Requirement Calculation:
Alternative 1:
Assumptions
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Investment income (including interest, dividends, fees, etc.) = 3.5%
Hurdle rate(1) = 2.0%
Management fee(2) = 0.4375%
Other expenses (legal, accounting, custodian, transfer agent,
etc.)(3) = 0.2%
Pre-incentive fee net investment
income
(investment income – (management fee + other expenses) = 2.8625%
Cumulative incentive compensation accrued and/or paid for preceding 11 calendar quarters = $9,000,000
20.0% of cumulative net increase in net assets resulting from operations over current and preceding 11 calendar quarters = $8,000,000
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Although our pre-incentive fee net investment income exceeds the hurdle rate of 2.0% (as shown in
Alternative 3 of Example 1 above), no incentive fee is payable because 20.0% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding calendar quarters did not exceed the cumulative income and
capital gains incentive fees accrued and/or paid for the preceding 11 calendar quarters.
Alternative 2:
Assumptions
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Investment income (including interest, dividends, fees, etc.) = 3.5%
Hurdle rate(1) = 2.0%
Management fee(2) = 0.4375%
Other expenses (legal, accounting, custodian, transfer agent,
etc.)(3) = 0.2%
Pre-incentive fee net investment
income
(investment income – (management fee + other expenses) = 2.8625%
Cumulative incentive compensation accrued and/or paid for preceding 11 calendar quarters = $9,000,000
20.0% of cumulative net increase in net assets resulting from operations over current and preceding 11 calendar quarters = $10,000,000
|
Because our pre-incentive fee net investment income exceeds the hurdle rate of 2.0% and because 20.0% of
the cumulative net increase in net assets resulting from operations over the then current and 11 preceding calendar quarters exceeds the cumulative income and capital gains incentive fees accrued and/or paid for the preceding 11 calendar quarters,
an incentive fee would be payable, as shown in Alternative 3 of Example 1 above.
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(1)
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Represents 8.0% annualized hurdle rate.
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(2)
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Represents 1.75% annualized base management fee.
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(3)
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Excludes organizational and offering expenses.
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(4)
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The “catch-up” provision is intended to provide the Adviser with an incentive fee of 20.0% on all
pre-incentive fee net investment income as if a hurdle rate did not apply when our net investment income exceeds 2.5% in any fiscal quarter.
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109
Example 3: Capital Gains Portion of Incentive Fee(*):
Alternative 1:
Assumptions
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|
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Year 1: $2.0 million investment made in Company A (“Investment A”), and $3.0 million investment made in Company B (“Investment
B”)
Year 2: Investment A sold for $5.0 million and fair market value
(“FMV”) of Investment B determined to be $3.5 million
Year 3: FMV of
Investment B determined to be $2.0 million
Year 4: Investment B sold for $3.25
million
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The capital gains portion of the incentive fee would be:
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Year 1: None
Year 2: Capital gains incentive fee of $0.6 million—($3.0 million realized capital gains on sale of Investment A multiplied by 20.0%)
Year 3: None—$0.4 million (20.0% multiplied by ($3.0 million cumulative capital
gains less $1.0 million cumulative capital depreciation)) less $0.6 million (previous capital gains fee paid in Year 2)
Year 4: Capital gains incentive fee of $50,000—$0.65 million ($3.25 million cumulative realized capital gains multiplied by 20%) less $0.6 million
(capital gains incentive fee taken in Year 2)
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Alternative 2
Assumptions
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Year 1: $2.0 million investment made in Company A (“Investment A”), $5.25 million investment made in Company B (“Investment
B”) and $4.5 million investment made in Company C (“Investment C”)
Year 2: Investment A sold for $4.5 million, FMV of Investment B determined to be $4.75 million and FMV of Investment C determined to be $4.5 million
Year 3: FMV of Investment B determined to be $5.0 million and Investment C sold for $5.5
million
Year 4: FMV of Investment B determined to be $6.0 million
Year 5: Investment B sold for $4.0 million
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The capital gains incentive fee, if any, would be:
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Year 1: None
Year 2: $0.4 million capital gains incentive fee—20.0% multiplied by $2.0 million ($2.5 million realized capital gains on Investment A less $0.5 million
unrealized capital depreciation on Investment B)
Year 3: $0.25 million capital gains
incentive fee(1)—$0.65 million (20.0% multiplied by $3.25 million ($3.5 million cumulative realized capital gains less $0.25 million unrealized capital depreciation)) less $0.4 million
capital gains incentive fee received in Year 2
Year 4: Capital gains incentive fee
of $50,000—$0.7 million ($3.5 million cumulative realized capital gains multiplied by 20.0%) less $0.65 million cumulative capital gains incentive fee paid in Year 2 and Year 3
Year 5: None—$0.45 million (20.0% multiplied by $2.25 million (cumulative realized
capital gains of $3.5 million less realized capital losses of $1.25 million)) less $0.7 million cumulative capital gains incentive fee paid in Year 2, Year 3 and Year 4(2)
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110
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*
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The hypothetical amounts of returns shown are based on a percentage of our total net assets and assume no
leverage. There is no guarantee that positive returns will be realized and actual returns may vary from those shown in this example.
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(1)
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As illustrated in Year 3 of Alternative 1 above, if a portfolio company were to be wound up on a date
other than its fiscal year end of any year, it may have paid aggregate capital gains incentive fees that are more than the amount of such fees that would be payable if such portfolio company had been wound up on its fiscal year end of such year.
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(2)
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As noted above, it is possible that the cumulative aggregate capital gains fee received by the Adviser
($0.70 million) is effectively greater than $0.45 million (20% of cumulative aggregate realized capital gains less net realized capital losses or net unrealized depreciation ($2.25 million)).
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Payment of Our Expenses
The base
management fee and incentive compensation remunerates the Adviser for work in identifying, evaluating, negotiating, closing and monitoring our investments. We bear all other out-of-pocket costs and expenses of our operations and transactions,
including, without limitation, those relating to:
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•
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our organization, the formation transactions and this offering;
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•
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calculating our net asset value (including the cost and expenses of any independent valuation firm);
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•
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fees and expenses payable to third parties, including agents, consultants or other advisors, in monitoring
financial and legal affairs for us and in monitoring our investments and performing due diligence on our prospective portfolio companies or otherwise relating to, or associated with, evaluating and making investments;
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•
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interest payable on debt, if any, incurred to finance our investments and expenses related to unsuccessful
portfolio acquisition efforts;
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•
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other offerings of our common stock and other securities;
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•
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administration fees and expenses, if any, payable under the Administration Agreement (including our allocable
portion of the Adviser’s overhead in performing its obligations under the Administration Agreement, including rent and the allocable portion of the cost of our chief compliance officer, chief financial officer and his respective staff’s
compensation and compensation-related expenses);
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•
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transfer agent, dividend agent and custodial fees and expenses;
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•
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costs associated with our reporting and compliance obligations under the 1940 Act, as amended, and other
applicable federal and state securities laws, and stock exchange listing fees;
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•
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fees and expenses associated with independent audits and outside legal costs;
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•
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federal, state and local taxes;
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•
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independent directors’ fees and expenses;
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•
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costs of any reports, proxy statements or other notices to or communications and meetings with stockholders;
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•
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costs associated with investor relations;
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•
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costs and fees associated with any fidelity bond, directors and officers/errors and omissions liability
insurance, and any other insurance premiums;
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•
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direct costs and expenses of administration, including printing, mailing, long distance telephone, copying,
secretarial and other staff; and
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•
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all other expenses incurred by us or the Adviser in connection with administering our business.
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111
Duration and Termination
Unless terminated earlier as described below, the Investment Advisory Agreement will remain in effect from year to year if approved annually by
our board of directors or by the affirmative vote of the holders of a majority of our outstanding voting securities, and, in either case, if also approved by a majority of our directors who are not “interested persons.” The Investment
Advisory Agreement automatically terminates in the event of its assignment, as defined in the 1940 Act, by the Adviser and may be terminated by either party without penalty upon not less than 60 days’ written notice to the other. The holders of
a majority of our outstanding voting securities may also terminate the Investment Advisory Agreement without penalty upon 60 days’ written notice.
Indemnification
The Investment
Advisory Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations under the Investment Advisory Agreement, the Adviser
and its officers, managers, partners, agents, employees, controlling persons and members, and any other person or entity affiliated with it, are entitled to indemnification from us for any damages, liabilities, costs and expenses (including
reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of the Adviser’s services under the Investment Advisory Agreement or otherwise as the Adviser.
Board Approval of the Investment Advisory Agreement
Our board of directors approved the Investment Advisory Agreement at its first meeting, held on October 8, 2013, which became effective in
February 2014. At a meeting of our board of directors held in November 2018, our board of directors, including a majority of the independent directors, approved the annual continuation of the Investment Advisory Agreement. In its consideration of
the Investment Advisory Agreement, the board of directors reviewed a significant amount of information and considered, among other things: (a) the nature, quality and extent of the advisory and other services to be provided to us by our
Adviser; (b) comparative data with respect to advisory fees or similar expenses paid by other business development companies with similar investment objectives; (c) any existing and potential sources of indirect income to our Adviser from
its relationships with us and the profitability of those relationships; (d) information about the services to be performed and the personnel performing such services under the Investment Advisory Agreement; (e) the organizational
capability and financial condition of our Adviser; and (f) various other factors.
In voting to approve the Investment Advisory
Agreement, our board of directors, including all of the directors who are not “interested persons,” of the Company, made the following conclusions:
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•
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Nature, Extent and Quality of Services. Our board of directors considered the nature, extent and quality
of the advisory and other services to be provided by the Adviser, including the investment performance of the Investment Team. Our board of directors also considered the investment selection process expected to be employed by the Adviser, including
the flow of transaction opportunities resulting from the Investment Team’s significant experience in structuring strategic capital for business expansion, refinancings, capital restructuring, post-reorganization financing and servicing the
general corporate needs of middle-market companies; the employment of the Adviser’s investment philosophy, diligence procedures, credit recommendation process, investment structuring, and ongoing relationships with and monitoring of portfolio
companies, in light of the investment objective of the Company. Our board of directors also considered the Adviser’s personnel and their prior experience in connection with the types of investments made by us, including such personnel’s
corporate relationships and relationships with private equity firms, investment banks, restructuring advisors, law firms, boutique advisory firms and distressed/specialty lenders. In addition, our board of directors considered the other terms and
conditions of the Investment Advisory Agreement, including the fact that we have the ability to terminate the Investment Advisory Agreement without penalty upon 60 days’ notice to the Adviser. As a result, our board of directors determined that
the substantive terms of
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112
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the Investment Advisory Agreement (other than the fees payable thereunder, which our board of directors reviewed separately), including the services to be provided, are similar to those of
comparable BDCs described in the available market data and in the best interests of our stockholders. Moreover, our board of directors concluded that although the substantive terms of the Investment Advisory Agreement, including the services to be
provided, are generally the same as those of comparable BDCs described in the market data then available, it would be difficult to obtain similar services from other third-party service providers in light of the nature, quality and extent of the
advisory and other services provided to us by the Adviser.
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•
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Projected Costs of the Services Provided to the Company. Our board of directors considered (i) comparative
data based on publicly available information with respect to services rendered and the advisory fees (including the base management fee and incentive fees) of other externally managed BDCs that invest in similar securities, our total expenses, and
expense ratios compared to other BDCs of similar size and with similar investment objectives, (ii) the administrative services that the Adviser will provide to us at cost pursuant to the Administration Agreement, and (iii) potential fee waiver by
the Adviser. Based upon its review, our board of directors concluded that the fees to be paid under the Investment Advisory Agreement are generally comparable to or more favorable than those payable under agreements of comparable BDCs and reasonable
in relation to the services expected to be provided by the Adviser.
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•
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Projected Profitability of the Adviser. Our board of directors considered information about the Adviser,
including the anticipated costs of the services to be provided by the Adviser and the anticipated profits to be realized by the Adviser, including as a result of our investment performance, which would generally be equal or similar to the
profitability of investment advisers managing comparable BDCs. Our board of directors reviewed our investment performance, as well as comparative data with respect to the investment performance of other externally-managed BDCs, as it relates to the
management and incentive fees we pay the Adviser. As a result of this review, our board of directors determined that our investment performance supported the renewal of the Investment Advisory Agreement.
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•
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Economies of Scale. Our board of directors considered the extent to which economies of scale would be
realized as the Company grows, and whether the fees payable under the Advisory Agreement reflect these economies of scale for the benefit of the our stockholders. Taking into account such information, our board of directors determined that the
advisory fee structure under the Investment Advisory Agreement was reasonable with respect to any economies of scale that may be realized as the Company grows.
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•
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Limited Potential for Additional Benefits Derived by the Adviser. Our board of directors considered
existing and potential sources of indirect income the Adviser would receive as a result of the relationship with us, and whether there would be potential for additional benefits to be derived by the Adviser as a result of our relationship with the
Adviser, and was advised any such potential would be limited.
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Conclusions. In view of the wide variety of
factors that our board of directors considered in connection with its evaluation of the Investment Advisory Agreement, it is not practical to quantify, rank or otherwise assign relative weights to the specific factors it considered in reaching its
decision. Our board of directors did not undertake to make any specific determination as to whether any particular factor, or any aspect of any particular factor, was favorable or unfavorable to the ultimate determination of our board of directors.
Rather, our board of directors based its approval on the totality of information presented to, and the investigation conducted by, it. In considering the factors discussed above, individual directors may have given different weights to different
factors.
Based on the information reviewed and the discussions, the board of directors, including a majority of the non-interested
directors, concluded that the investment management fee rates and terms are reasonable in relation
113
to the services to be provided and approved the Investment Advisory Agreement as being in the best interests of our stockholders. Our board of directors expects to next consider the Investment
Advisory Agreement at a meeting in November 2019.
Administration Agreement
Under the Administration Agreement, the Adviser furnishes us with office facilities and equipment and will provides us with clerical,
bookkeeping, recordkeeping and other administrative services at such facilities. Under the Administration Agreement, the Adviser performs, or oversees the performance of, our required administrative services, which includes, among other things,
being responsible for the financial and other records that we are required to maintain and preparing reports to our stockholders and reports and other materials filed with the SEC. In addition, the Adviser assists us in determining and publishing
our net asset value, oversees the preparation and filing of our tax returns and the printing and dissemination of reports and other materials to our stockholders, and generally oversees the payment of our expenses and the performance of
administrative and professional services rendered to us by others. Under the Administration Agreement, the Adviser also provides managerial assistance on our behalf to those portfolio companies that have accepted our offer to provide such
assistance. The Adviser may satisfy certain of its obligations under the Administration Agreement to us through the Services Agreement with Cyrus Capital, including supplying us with accounting and back-office professionals upon the request of the
Adviser. See “Related Party Transactions and Certain Relationships—Cyrus Capital Relationship.”
Payments under the
Administration Agreement equal an amount based upon our allocable portion (subject to the review of our board of directors) of the Adviser’s overhead in performing its obligations under the Administration Agreement, including rent, the fees and
expenses associated with performing compliance functions and our allocable portion of the cost of our chief financial officer and chief compliance officer and his respective staff’s compensation and compensation-related expenses. In addition,
if requested to provide significant managerial assistance to our portfolio companies, the Adviser will be paid an additional amount based on the services provided, which shall not exceed the amount we receive from such portfolio companies for
providing this assistance. The Administration Agreement has an initial term of two years and may be renewed with the approval of our board of directors. The Administration Agreement may be terminated by either party without penalty upon 60
days’ written notice to the other party. To the extent that the Adviser outsources any of its functions, we pay the fees associated with such functions on a direct basis without any incremental profit to the Adviser.
Indemnification
The
Administration Agreement provides that, absent criminal conduct, willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, the Adviser and its officers,
managers, partners, agents, employees, controlling persons and members, and any other person or entity affiliated with it, are entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’
fees and amounts reasonably paid in settlement) arising from the rendering of the Adviser’s services under the Administration Agreement or otherwise as our administrator.
License Agreement
We have entered into a
license agreement with the Adviser under which the Adviser has agreed to grant us a non-exclusive, royalty-free license to use the name “CM Finance.” Under this agreement, we have a right to use the “CM Finance” name for so long
as the Adviser or one of its affiliates remains the Adviser. Other than with respect to this limited license, we have no legal right to the “CM Finance” name. This license agreement will remain in effect for so long as the Investment
Advisory Agreement with the Adviser is in effect.
114
RELATED PARTY TRANSACTIONS AND CERTAIN RELATIONSHIPS
Policies and Procedures for Managing Conflicts; Co-investment Opportunities
We have entered into agreements with the Adviser, in which our senior management and members of the Adviser’s investment committee have
direct ownership and other financial interests. Mr. Mauer, our Chief Executive Officer, Mr. Jansen, our President and Secretary, hold, in the aggregate, a 42% interest in the Adviser. The Adviser may in the future manage other investment
funds, accounts or investment vehicles that invest or may invest in assets eligible for purchase by us. To the extent that we compete with entities managed by the Adviser or any of its affiliates for a particular investment opportunity, the Adviser
will allocate investment opportunities across the entities for which such opportunities are appropriate, consistent with (a) its internal investment allocation policies, (b) the requirements of the Advisers Act, and (c) certain
restrictions under the 1940 Act regarding co-investments with affiliates.
Stifel Arrangement
Stifel owns approximately 16% of our total outstanding common stock, and also owns a 20% interest in our Adviser. As a result, Stifel will
benefit from our performance and our investments. Pursuant to an irrevocable proxy, Stifel has granted us the right to vote the shares of our common stock held by it in excess of 4.9% of our total outstanding common stock in the same percentages as
our other stockholders. Stifel has the right to nominate for election a member of our board of directors, who will be considered “interested” (that is, not independent for purposes of the 1940 Act). Stifel has not exercised its right to
nominate for election a member of our board of directors. In addition, Stifel has the right to appoint a representative to our Adviser’s three-member board of managers and a member of our Adviser’s investment committee. Stifel has
appointed Michael Nitka to our Adviser’s investment committee. Stifel does not have any rights to exercise a controlling influence over our day-to-day operations or the operations or investment management function of the Adviser.
Three members of the Investment Team are dual employees of the Adviser and Stifel Nicolaus & Company, Incorporated or its affiliates
pursuant to a personnel sharing arrangement with Stifel Nicolaus & Company, Incorporated. Although the members of the Investment Team that are dual employees dedicate substantially all of their time to the business and activities of the Adviser,
they may continue to engage in investment advisory activities for Stifel Nicolaus & Company, Incorporated and its affiliates from time to time. This arrangement could result in a conflict of interest and may distract these investment
professionals from their responsibilities to us. Messrs. Mauer and Jansen monitor the activities of the members of the Investment Team for any conflicts of interest and will seek to resolve them on our behalf, subject to the oversight of our Board.
In addition, Mr. Nitka, Stifel’s designee to the Adviser’s investment committee, is a managing director and head of the Credit Investments Group at Stifel Nicolaus & Company, Incorporated. Should any conflicts arise as a result of
Mr. Nitka’s membership on the Adviser’s investment committee and his role at Stifel Nicolaus & Company, Incorporated, Mr. Nitka will recuse himself from consideration of any potential conflict related to Stifel Nicolaus &
Company, Incorporated and its affiliates.
Subject to certain restrictions, Stifel will use its commercially reasonable efforts to present
to the Adviser the opportunity to review and bid on all Stifel Nicolaus & Company, Incorporated-originated leveraged finance and high yield corporate debt opportunities consistent with our investment strategy. Subject to the approval of our
board of directors, as necessary under the 1940 Act, and certain other limitations, Stifel may invest in the same portfolio companies that we invest in, and (regardless of whether our investment arose from a Stifel-originated opportunity)
Stifel may, through such investments, have interests that conflict with ours, including receiving fees from the portfolio company directly as well as through its interest in our Adviser. We believe that we may co-invest with Stifel and its
affiliates upon approval of the “required majority” of our directors as defined in Section 57(o) of the 1940 Act.
Cyrus Capital
Relationship
The Cyrus Funds, managed by Cyrus Capital, own approximately 28% of our outstanding common stock, and also hold a 38%
indirect economic interest, but no voting interest, in our Adviser. As a result, Cyrus Capital
115
benefits from our performance and our investments. Pursuant to an irrevocable proxy, the Cyrus Funds’ shares of our common stock must be voted in the same percentages as our other
stockholders (excluding Stifel) vote their shares. Cyrus Capital does not have any rights to exercise a controlling influence over our operations or the operations or investment management function of our Adviser. As a result of the relationship
with Cyrus Capital and the Cyrus Funds, we could be presumed to be an affiliate of the Cyrus Funds under the 1940 Act. We believe we may co-invest with the Cyrus Funds upon approval of the “required majority” of our directors as defined in
Section 57(o) of the 1940 Act. In addition, the Cyrus Funds may, through such co-investments, have interests that conflict with ours, including receiving fees from the portfolio company directly as well as through its economic interest in our
Adviser. Cyrus Capital may also provide us with investment opportunities.
Pursuant to the Services Agreement, our Adviser can utilize the
expertise of the investment professionals of Cyrus Capital to provide investment services to us from time to time on an as needed basis as part of our Adviser’s Investment Team and in connection with our Adviser’s obligations to us under
the Investment Advisory Agreement. If our Adviser determines it is in our best interests to utilize the expertise of any of the investment professionals of Cyrus Capital, such investment professionals will also continue to engage in investment
advisory activities for the private investment funds managed by Cyrus Capital, including the Cyrus Funds, which could result in a conflict of interest, and may distract them from their responsibilities to us. Our Adviser currently utilizes the
investment professionals that perform analyst functions provided under the Services Agreement for less than 10% of the aggregate time dedicated to the business by our Adviser’s Investment Team. In addition, we may receive other administrative
services from our Adviser, pursuant to the Administration Agreement, which, in turn, upon request by the Adviser, may be provided to us on behalf of the Adviser by Cyrus Capital under the terms of the Services Agreement.
Investment Advisory Agreement
We have
entered into an Investment Advisory Agreement with the Adviser. Pursuant to this agreement, we have agreed to pay to the Adviser a base management fee and an incentive fee. Messrs. Mauer and Jansen, each an interested member of our board of
directors, has a direct or indirect pecuniary interest in the Adviser. See “Management Agreements.” The incentive fee will be computed and paid on income that we may not have yet received in cash at the time of payment. This fee structure
may create an incentive for the Adviser to invest in certain types of speculative securities. Additionally, we will rely on investment professionals from the Adviser to assist our board of directors with the valuation of our portfolio investments.
The Adviser’s management fee and incentive fee is based on the value of our investments and, therefore, there may be a conflict of interest when personnel of the Adviser are involved in the valuation process for our portfolio investments.
License Agreement
We have entered into a
license agreement with the Adviser pursuant to which the Adviser has granted us a non-exclusive, royalty-free license to use the name “CM Finance.”
Administration Agreement
We have entered
into an Administration Agreement with the Adviser pursuant to which the Adviser will furnish us with office facilities and equipment and will provide us with the clerical, bookkeeping, recordkeeping and other administrative services necessary to
conduct day-to-day operations. Under this Administration Agreement, the Adviser will perform, or oversees the performance of, our required administrative services, which include, among other things, being responsible for the financial records which
we are required to maintain and preparing reports to our stockholders and reports filed with the SEC. See “Management Agreements.” We will reimburse the Adviser for the allocable portion (subject to the review of our board of directors) of
overhead and other expenses incurred by it in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions, and our allocable portion of the cost of our chief
financial officer and chief compliance officer and his respective staff. In addition, the Adviser may satisfy certain of its obligations to us under the Administration Agreement through the Services Agreement with Cyrus Capital, including supplying
us with accounting and back-office professionals upon request of the Adviser.
116
CONTROL PERSONS AND PRINCIPAL STOCKHOLDERS
The following table sets forth, as of April 5, 2019, the beneficial ownership of each current director, each nominee for director, the
Company’s executive officers, each person known to us to beneficially own 5% or more of the outstanding shares of our common stock, and the executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission (the “SEC”) and includes
voting or investment power with respect to the securities. Common stock subject to options or warrants that are currently exercisable or exercisable within 60 days of April 5, 2019 are deemed to be outstanding and beneficially owned by the person
holding such options or warrants. Such shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person. Percentage of ownership is based on 13,613,707 shares of common stock outstanding as of
April 5, 2019.
Unless otherwise indicated, to our knowledge, each stockholder listed below has sole voting and investment power with
respect to the shares beneficially owned by the stockholder, except to the extent authority is shared by their spouses under applicable law. Unless otherwise indicated, the address of all executive officers and directors is c/o CM Finance Inc, 65
East 55th Street, 15th Floor, New York, NY 10022.
The Company’s directors are divided into two groups—interested directors and independent directors. Interested directors are
“interested persons” as defined in Section 2(a)(19) of the 1940 Act.
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Name and Address of Beneficial Owner
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Number of
Shares
Owned
Beneficially(1)
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Percentage
of Class
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Interested Directors
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Michael C. Mauer
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104,000
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(2)
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*
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Christopher E. Jansen
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87,669
|
(3)
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*
|
|
|
|
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Independent Directors
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Keith Lee
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10,003
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*
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Robert Ryder
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|
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33,062
|
|
|
|
*
|
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Julie Persily
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|
|
11,240
|
|
|
|
*
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Robert Wagner
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|
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5,365
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*
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Executive Officers
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Rocco DelGuercio
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4,146
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*
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|
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Executive officers and directors as a group
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255,485
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1.88
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%
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5% Holders
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Caxton Corporation
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1,028,355
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(4)
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7.55
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%
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Cyrus Opportunities Master Fund II, Ltd.
Crescent 1, L.P.
CRS Master Fund, L.P.
Cyrus Select Opportunities Master Fund, Ltd.
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3,818,186
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(5)
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28.05
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%
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Stifel Venture Corp.
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2,181,818
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(6)
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16.03
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%
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(1)
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Beneficial ownership has been determined in accordance with Rule 13d-3 of the Securities Exchange Act of 1934,
as amended.
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(2)
|
Includes one share held by Mr. Mauer’s daughter, one share held by Mr. Mauer’s son and one
share held by Mr. Mauer’s wife.
|
|
(3)
|
Includes 10,000 shares held by Patricia McInerney Jansen Children’s Trust, of which Mr. Jansen is a
Trustee and one share held by Mr. Jansen’s wife.
|
117
|
(4)
|
Based on information obtained in a Schedule 13G/A filed by Caxton Corporation on February 14, 2019. The
principal business address of Caxton Corporation is 731 Alexander Road, Building 2, Suite 500, Princeton, New Jersey 08540.
|
|
(5)
|
Includes 2,077,092 shares held by Cyrus Opportunities Master Fund II, Ltd., 717,819 shares held by Crescent 1,
L.P., 645,274 shares held by CRS Master Fund, L.P., and 378,001 shares held by Cyrus Select Opportunities Master Fund, Ltd. Pursuant to an irrevocable proxy, the shares held by each of Cyrus Opportunities Master Fund II, Ltd., Crescent 1, L.P., CRS
Master Fund, L.P. and Cyrus Select Opportunities Master Fund, Ltd. (the “Cyrus Funds”) must be voted in the same manner that our other stockholders, excluding Stifel Venture Corp., vote their shares. The principal business address of the
Cyrus Funds is 65 East 55th Street, 35th Floor, New York, New York 10022.
|
|
(6)
|
Based on information obtained in a Schedule 13D filed jointly by Stifel Financial Corp. and Stifel Venture
Corp. on February 18, 2014. All shares are owned directly by Stifel Venture Corp., which is a direct wholly owned subsidiary of Stifel Financial Corp. Pursuant to an irrevocable proxy, Stifel has granted us the right to vote the shares of our
common stock held by it in excess of 4.9% of our total outstanding common stock in the same percentages that our other stockholders vote their shares. The principal business address of Stifel Financial Corp. and Stifel Venture Corp. is One Financial
Plaza, 501 North Broadway, St. Louis, Missouri 63102.
|
The following table sets forth as of April 5, 2019, the dollar
range of our securities owned by our directors and executive officers.
|
|
|
|
|
|
|
Name
|
|
Dollar Range of Equity
Securities Beneficially
Owned(1)(2)
|
|
|
Interested Director:
|
|
|
|
|
|
Michael C. Mauer
|
|
|
Over $100,000
|
|
|
Christopher E. Jansen
|
|
|
Over $100,000
|
|
|
|
|
|
Independent Directors:
|
|
|
|
|
|
Keith Lee
|
|
|
$50,001 – $100,000
|
|
|
Robert Ryder
|
|
|
Over $100,000
|
|
|
Julie Persily
|
|
|
$50,001 – $100,000
|
|
|
Robert Wagner
|
|
|
$10,001 – $50,000
|
|
|
|
|
|
Executive Officers:
|
|
|
|
|
|
Rocco DelGuercio
|
|
|
$10,001 – $50,000
|
|
|
(1)
|
The dollar range of equity securities beneficially owned is based on the closing price for our common stock of
$7.35 on April 5, 2019 on the NASDAQ Global Select Market. Beneficial ownership has been determined in accordance with Rule 16a-1(a)(2) of the Securities Exchange Act of 1934, as amended.
|
|
(2)
|
Dollar ranges are as follows: None, $1 – $10,000, $10,001 – $50,000, $50,001 – $100,000, or Over
$100,000.
|
118
SELLING STOCKHOLDERS
This prospectus also relates to 6,000,004 shares being offered for resale on behalf of the selling stockholders identified below. We are
registering the shares to permit the selling stockholders to resell the shares when and as they deem appropriate. The following table sets forth:
|
|
•
|
|
the name of the selling stockholders;
|
|
|
•
|
|
the number and percent of shares of our common stock that the selling stockholders beneficially owned prior to
the offering for resale of the shares under this registration statement;
|
|
|
•
|
|
the number of shares of our common stock that may be offered for resale for the account of the stockholders under
this registration statement, some or all of which shares may be sold pursuant to this prospectus and any prospectus supplement; and
|
|
|
•
|
|
the number and percent of shares of our common stock to be beneficially owned by the selling stockholders after
an offering under this registration statement (assuming all of the offered resale shares are sold by the selling stockholder).
|
The number of shares in the column “Number of Shares Being Offered” represents all of the shares that the selling stockholders may
offer under this registration statement. We do not know how long the selling stockholders will hold the shares before selling them or how many shares it will sell and we currently have no agreements, arrangements or understandings with the
stockholder regarding the sale of any of the shares under this registration statement. The shares offered by this prospectus may be offered from time to time by the selling stockholder listed below.
This table is prepared solely based on information supplied to us by the listed stockholder and any public documents filed with the SEC, and
assumes the sale of all of the resale shares. The applicable percentages of beneficial ownership are based on an aggregate of 13,613,707 shares of our common stock issued and outstanding on April 5, 2019, adjusted as may be required by rules
promulgated by the SEC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholder
|
|
Shares Beneficially Owned
Prior to Offering
|
|
|
Number of
Shares
Being
Offered
|
|
|
Shares Beneficially
Owned
After Offering
|
|
|
|
Number
|
|
|
Percent
|
|
|
Number
|
|
|
Percent
|
|
|
Cyrus Opportunities Master Fund II, Ltd.
65 East 55th Street, 35th Floor
New York, New York 10022
|
|
|
2,077,092
|
|
|
|
15.26
|
%
|
|
|
2,077,092
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Crescent 1, L.P.
65 East 55th Street, 35th Floor
New York, New York 10022
|
|
|
717,819
|
|
|
|
5.27
|
%
|
|
|
717,819
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
CRS Master Fund, L.P.
65 East 55th Street, 35th Floor
New York, New York 10022
|
|
|
645,274
|
|
|
|
4.74
|
%
|
|
|
645,274
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Cyrus Select Opportunities Master Fund, Ltd.
65 East 55th Street, 35th Floor
New York, New York 10022
|
|
|
378,001
|
|
|
|
2.78
|
%
|
|
|
378,001
|
|
|
|
—
|
|
|
|
—
|
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholder
|
|
Shares Beneficially Owned
Prior to Offering
|
|
|
Number of
Shares
Being
Offered
|
|
|
Shares Beneficially
Owned
After Offering
|
|
|
|
Number
|
|
|
Percent
|
|
|
Number
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
Stifel Venture Corp.
One Financial Plaza
501 North Broadway
St. Louis, Missouri 63102
|
|
|
2,181,818
|
|
|
|
16.03
|
%
|
|
|
2,181,818
|
|
|
|
—
|
|
|
|
—
|
|
Shares of our common stock sold by the selling stockholders will generally be freely tradable. Sales of substantial amounts of our common
stock, including by the selling stockholders, or the availability of such common stock for sale, whether or not sold, could adversely affect the prevailing market prices for our common stock.
120
DETERMINATION OF NET ASSET VALUE
Our board of directors has adopted a written fair value policy in accordance with the 1940 Act. The net asset value per share of our
outstanding shares of common stock is determined quarterly by dividing the value of total assets minus liabilities by the total number of shares outstanding.
In calculating the value of our total assets, investment transactions are recorded on the trade date. Realized gains or losses are computed
using the specific identification method. Investments for which market quotations are readily available will be valued at such market quotations. Debt and equity securities that are not publicly traded or whose market price is not readily available
are valued at fair value as determined in good faith by our board of directors based on the input of our management and audit committee. In addition, our board of directors retains one or more independent valuation firms to review the valuation of
each portfolio investment for which a market quotation is not available at least quarterly. We also have adopted SFAS 157 (ASC Topic 820). This accounting statement requires us to assume that the portfolio investment is assumed to be sold in the
principal market to market participants, or in the absence of a principal market, the most advantageous market, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal or most advantageous market
that are independent, knowledgeable, and willing and able to transact. In accordance with SFAS 157 (ASC Topic 820), the market in which we can exit portfolio investments with the greatest volume and level activity is considered our principal market.
The valuation process is conducted at the end of each fiscal quarter, with all of our valuations of portfolio companies without market
quotations subject to review by one or more independent valuation firms each quarter. When an external event with respect to one of our portfolio companies, such as a purchase transaction, public offering or subsequent equity sale occurs, we
consider the pricing indicated by the external event to corroborate our valuation.
A readily available market value is not expected to
exist for most of the investments in our portfolio, and we value these portfolio investments at fair value as determined in good faith by our board of directors under our valuation policy and process. The types of factors that our board of directors
may take into account in determining the fair value of our investments generally include, as appropriate, comparisons of financial ratios of the portfolio companies that issued such private equity securities to peer companies that are public, the
nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, and other relevant factors. When an external
event such as a purchase transaction, public offering or subsequent equity sale occurs, the company considers the pricing indicated by the external event to corroborate the private equity valuation. 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 the investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and
the differences could be material. In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different from the
valuations currently assigned. See “Risk Factors—Risks Related to our Investments—Price declines and illiquidity in the corporate debt markets may adversely affect the fair value of our portfolio investments, reducing our net asset
value through increased net unrealized depreciation.”
With respect to investments for which market quotations are not readily
available, our board of directors undertakes a multi-step valuation process each quarter, as described below:
|
|
•
|
|
our quarterly valuation process begins with each portfolio company or investment being initially valued by the
investment professionals of the Adviser responsible for the portfolio investment;
|
|
|
•
|
|
preliminary valuation conclusions are then documented and discussed with our senior management and the Adviser;
|
|
|
•
|
|
the audit committee of our board of directors then reviews these preliminary valuations;
|
121
|
|
•
|
|
on a period basis, at least once annually, the valuation for each portfolio investment is reviewed by an
independent valuation firm engaged by our board of directors; and
|
|
|
•
|
|
the board of directors then discusses these preliminary valuations and determines the fair value of each
investment in our portfolio in good faith, based on the input of the Adviser, the independent valuation firm and the valuation committee.
|
In following these approaches, the types of factors that are taken into account in fair value pricing investments include, as relevant, but
not be limited to:
|
|
•
|
|
available current market data, including relevant and applicable market trading and transaction comparables;
|
|
|
•
|
|
applicable market yields and multiples;
|
|
|
•
|
|
call protection provisions;
|
|
|
•
|
|
the nature and realizable value of any collateral;
|
|
|
•
|
|
the portfolio company’s ability to make payments, its earnings and discounted cash flows and the markets in
which it does business;
|
|
|
•
|
|
comparisons of financial ratios of peer companies that are public;
|
|
|
•
|
|
comparable merger and acquisition transactions; and
|
|
|
•
|
|
the principal market and enterprise values.
|
Determination of fair values involves subjective judgments and estimates not susceptible to substantiation by auditing procedures. Under
current auditing standards, the notes to our financial statements refer to the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our financial statements.
122
SALES OF COMMON STOCK BELOW NET ASSET VALUE
At a meeting initially convened on November 6, 2018 and reconvened on December 18, 2018, our stockholders voted to allow us to issue
our common stock at a price below the then-current net asset value (“NAV”) per share for the period ending on the earlier of the one year anniversary of the date of our 2018 Annual Meeting of Stockholders and the date of our 2019
Annual Meeting of Stockholders, which we expect to be held in November 2019. Our stockholders did not specify a maximum discount below net asset value at which we are able to issue our common stock, although the number of shares sold in each
offering may not exceed 25% of our outstanding common stock as of the date of stockholder approval. In order to sell shares pursuant to this authorization:
|
|
•
|
|
a majority of our independent directors who have no financial interest in the sale must have approved the sale;
|
|
|
•
|
|
a majority of such directors, who are not interested persons of the Company, in consultation with the underwriter
or underwriters of the offering if it is to be underwritten, must have determined in good faith, and as of a time immediately prior to the first solicitation by us or on our behalf of firm commitments to purchase such shares or immediately prior to
the issuance of such shares, that the price at which such shares are to be sold is not less than a price which closely approximates the market value of those shares, less any underwriting commission or discount.
|
We are also permitted to sell shares of common stock below net asset value per share in rights offerings. Any offering of common stock below
net asset value per share will be designed to raise capital for investment in accordance with our investment objectives and business strategies.
In making a determination that an offering below net asset value per share is in our and our stockholders’ best interests, our board of
directors would consider a variety of factors including:
|
|
•
|
|
the effect that an offering below net asset value per share would have on our stockholders, including the
potential dilution they would experience as a result of the offering;
|
|
|
•
|
|
the amount per share by which the offering price per share and the net proceeds per share are less than the most
recently determined net asset value per share;
|
|
|
•
|
|
the relationship of recent market prices of our common stock to net asset value per share and the potential
impact of the offering on the market price per share of our common stock;
|
|
|
•
|
|
whether the proposed offering price would closely approximate the market value of our shares;
|
|
|
•
|
|
the potential market impact of being able to raise capital during the current financial market difficulties;
|
|
|
•
|
|
the nature of any new investors anticipated to acquire shares in the offering;
|
|
|
•
|
|
the anticipated rate of return on and quality, type and availability of investments to be funded with the
proceeds from the offering, if any; and
|
|
|
•
|
|
the leverage available to us, both before and after any offering, and the terms thereof.
|
Sales by us of our common stock at a discount from net asset value pose potential risks for our existing stockholders whether or not they
participate in the offering, as well as for new investors who participate in the offering.
123
The following three headings and accompanying tables will explain and provide hypothetical
examples on the impact of an offering at a price less than net asset value per share on three different sets of investors:
|
|
•
|
|
existing stockholders who do not purchase any shares in the offering;
|
|
|
•
|
|
existing stockholders who purchase a relatively small amount of shares in the offering or a relatively large
amount of shares in the offering; and
|
|
|
•
|
|
new investors who become stockholders by purchasing shares in the offering.
|
Impact on Existing Stockholders Who Do Not Participate in the Offering
Our existing stockholders who do not participate in an offering below NAV per share or who do not buy additional shares in the secondary market
at the same or lower price we obtain in the offering (after expenses and commissions) face the greatest potential risks. All stockholders will experience an immediate decrease (often called dilution) in the NAV of the shares they hold. Stockholders
who do not participate in the offering will also experience a disproportionately greater decrease in their participation in our earnings and assets and their voting power than stockholders who do participate in the offering. All stockholders may
also experience a decline in the market price of their shares, which often reflects, to some degree, announced or potential decreases in NAV per share. This decrease could be more pronounced as the size of the offering and level of discount to NAV
increases. Further, if the stockholder does not purchase any shares to maintain the stockholder’s percentage interest, regardless of whether such offering is at a price above or below the then current NAV, the stockholder’s voting power,
as well as other interests, will be diluted.
Examples of Dilutive Effect
The following table illustrates the reduction to NAV and dilution that would be experienced by a nonparticipating stockholder in different
hypothetical offerings of different sizes and levels of discount from NAV, although it is not possible to predict the level of market price decline that may occur. Sales prices and discounts are hypothetical in the presentation below and the actual
sales price in an offering may change the presentation.
124
The examples assume that Company XYZ has 13,500,000 common shares outstanding, $300,000,000 in
total assets and $100,000,000 in total liabilities. The current NAV and NAV per share are thus $200,000,000 and $14.81. The table illustrates the dilutive effect on nonparticipating Stockholder A of (1) an offering of 675,000 shares (5% of the
outstanding shares) at $14.07 per share after offering expenses and commissions (a 5% discount from net asset value), (2) an offering of 1,350,000 shares (10% of the outstanding shares) at $13.33 per share after offering expenses and
commissions (a 10% discount from NAV), (3) an offering of 3,375,000 shares (25% of the outstanding shares) at $12.59 per share after offering expenses and commissions (a 15% discount from NAV) and, (4) an offering of 3,375,000 shares (25% of
the outstanding shares) at $11.11 per share after offering expenses and commissions (a 25% discount from NAV). Under this proposal, there is no limit on the discount at which the Company may sell it shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to
Sale
Below NAV
|
|
|
Example 1
5% Offering
at 5% Discount
|
|
|
Example 2
10% Offering
at 10% Discount
|
|
|
Example 3
25% Offering
at 15% Discount
|
|
|
Example 4
25% Offering
at 25% Discount
|
|
|
|
Following
Sale
|
|
|
%
Change
|
|
|
Following
Sale
|
|
|
%
Change
|
|
|
Following
Sale
|
|
|
%
Change
|
|
|
Following
Sale
|
|
|
%
Change
|
|
|
Offering Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price per Share to Public
|
|
|
—
|
|
|
$
|
14.81
|
|
|
|
—
|
|
|
$
|
14.04
|
|
|
|
—
|
|
|
$
|
13.26
|
|
|
|
—
|
|
|
$
|
11.70
|
|
|
|
—
|
|
|
Net Proceeds per Share to Issuer
|
|
|
—
|
|
|
$
|
14.07
|
|
|
|
—
|
|
|
$
|
13.33
|
|
|
|
—
|
|
|
$
|
12.59
|
|
|
|
—
|
|
|
$
|
11.11
|
|
|
|
—
|
|
|
Decrease to NAV
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shares Outstanding
|
|
|
13,500,000
|
|
|
|
14,175,000
|
|
|
|
5.0
|
%
|
|
|
14,850,000
|
|
|
|
10.0
|
%
|
|
|
16,875,000
|
|
|
|
25.0
|
%
|
|
|
16,875,000
|
|
|
|
25.0
|
%
|
|
NAV per Share
|
|
$
|
14.81
|
|
|
$
|
14.78
|
|
|
|
(0.24
|
)%
|
|
$
|
14.68
|
|
|
|
(0.91
|
)%
|
|
$
|
14.37
|
|
|
|
(3.0
|
)%
|
|
$
|
14.07
|
|
|
|
(5.0
|
)%
|
|
Share Dilution to Stockholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Held by Stockholder A
|
|
|
135,000
|
|
|
|
135,000
|
|
|
|
0.00
|
%
|
|
|
135,000
|
|
|
|
0.00
|
%
|
|
|
135,000
|
|
|
|
0.00
|
%
|
|
|
135,000
|
|
|
|
0.00
|
%
|
|
Percentage of Shares Held by Stockholder A
|
|
|
1.0
|
%
|
|
|
0.95
|
%
|
|
|
(4.76
|
)%
|
|
|
0.91
|
%
|
|
|
(9.09
|
)%
|
|
|
0.8
|
%
|
|
|
(20.00
|
)%
|
|
|
0.8
|
%
|
|
|
(20.00
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Asset Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NAV Held by Stockholder A
|
|
$
|
2,000,000
|
|
|
$
|
1,995,238
|
|
|
|
(0.24
|
)%
|
|
$
|
1,981,818
|
|
|
|
(1.00
|
)%
|
|
$
|
1,940,000
|
|
|
|
(3.0
|
)%
|
|
$
|
1,900,000
|
|
|
|
(5.0
|
)%
|
|
Total Investment by Stockholder A (Assumed to Be $10.00 per Share)
|
|
$
|
2,000,000
|
|
|
$
|
2,000,000
|
|
|
|
0.00
|
%
|
|
$
|
2,000,000
|
|
|
|
0.00
|
%
|
|
$
|
2,000,000
|
|
|
|
0.00
|
%
|
|
$
|
2,000,000
|
|
|
|
0.00
|
%
|
|
Total Dilution to Stockholder A (Change in Total NAV Held By Stockholder)
|
|
|
—
|
|
|
$
|
(4,762
|
)
|
|
|
(0.24
|
)%
|
|
$
|
(18,182
|
)
|
|
|
(1.00
|
)%
|
|
$
|
(60,000
|
)
|
|
|
(3.00
|
)%
|
|
$
|
(100,000
|
)
|
|
|
(5.00
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NAV per Share Held by Stockholder A
|
|
|
14.81
|
|
|
$
|
14.78
|
|
|
|
—
|
|
|
$
|
14.68
|
|
|
|
—
|
|
|
$
|
14.37
|
|
|
|
—
|
|
|
$
|
14.07
|
|
|
|
—
|
|
|
Investment per Share Held by Stockholder A (Assumed to be $10.00 per Share on Shares Held Prior to
Sale)
|
|
$
|
14.81
|
|
|
$
|
14.81
|
|
|
|
—
|
|
|
$
|
14.81
|
|
|
|
—
|
|
|
$
|
14.81
|
|
|
|
—
|
|
|
$
|
14.81
|
|
|
|
—
|
|
|
Dilution per Share Held by Stockholder A
|
|
|
—
|
|
|
$
|
(0.04
|
)
|
|
|
—
|
|
|
$
|
(0.13
|
)
|
|
|
—
|
|
|
$
|
(0.44
|
)
|
|
|
—
|
|
|
$
|
(0.74
|
)
|
|
|
—
|
|
|
Dilution per Share Held by Stockholder A
|
|
|
—
|
|
|
|
(0.24
|
)%
|
|
|
—
|
|
|
|
(0.91
|
)%
|
|
|
—
|
|
|
|
(3.0
|
)%
|
|
|
—
|
|
|
|
(5.0
|
)%
|
|
|
—
|
|
125
Impact on Existing Stockholders who do Participate in the Offering
Our existing stockholders who participate in an offering below net asset value per share or who buy additional shares in the secondary market
at the same or lower price as we obtain in the offering (after expenses and commissions) will experience the same types of net asset value dilution as the nonparticipating stockholders, albeit at a lower level, to the extent they purchase less than
the same percentage of the discounted offering as their interest in our shares immediately prior to the offering. The level of net asset value dilution to such stockholders will decrease as the number of shares such stockholders purchase increases.
Existing stockholders who buy more than their proportionate percentage will experience net asset value dilution but will, in contrast to existing stockholders who purchase less than their proportionate share of the offering, experience an increase
(often called accretion) in net asset value per share over their investment per share and will also experience a disproportionately greater increase in their participation in our earnings and assets and their voting power than our increase in
assets, potential earning power and voting interests due to the offering. The level of accretion will increase as the excess number of shares purchased by such stockholder increases. Even a stockholder who over-participates will, however, be subject
to the risk that we may make additional discounted offerings in which such stockholder does not participate, in which case such a stockholder will experience net asset value dilution as described above in such subsequent offerings. These
stockholders may also experience a decline in the market price of their shares, which often reflects to some degree announced or potential decreases in net asset value per share. This decrease could be more pronounced as the size of the offering and
the level of discount to net asset value increases.
The following chart illustrates the level of dilution and accretion in the
hypothetical 25% offering at a 15% discount from the prior chart (Example 2) for a stockholder that acquires shares equal to (1) 50% of its proportionate share of the offering (i.e., 16,875 shares, which is 0.5% of an offering of 3,375,000
shares rather than its 1.0% proportionate share) and (2) 150% of such percentage (i.e., 50,625 shares, which is 1.5% of an offering of 3,375,000 shares rather than its 1.0% proportionate share). It is not possible to predict the level of market
price decline that may occur.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to Sale
Below NAV
|
|
|
50% Participation
|
|
|
150% Participation
|
|
|
|
Following
Sale
|
|
|
%
Change
|
|
|
Following
Sale
|
|
|
%
Change
|
|
|
Offering Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price per Share to Public(1)
|
|
|
—
|
|
|
$
|
13.26
|
|
|
|
|
|
|
$
|
13.26
|
|
|
|
|
|
|
Net Proceeds per Share to Issuer
|
|
|
—
|
|
|
$
|
12.59
|
|
|
|
—
|
|
|
$
|
12.59
|
|
|
|
—
|
|
|
Increase in Shares and Decrease to NAV
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shares Outstanding
|
|
|
13,500,000
|
|
|
|
16,875,000
|
|
|
|
25.00
|
%
|
|
|
16,875,000
|
|
|
|
25.00
|
%
|
|
NAV per Share
|
|
$
|
14.81
|
|
|
$
|
14.37
|
|
|
|
(3.00
|
)%
|
|
$
|
14.37
|
|
|
|
(3.00
|
)%
|
|
Dilution/Accretion to Participating Stockholder A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Dilution/Accretion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Held by Stockholder A
|
|
|
135,000
|
|
|
|
151,875
|
|
|
|
12.50
|
%
|
|
|
185,625
|
|
|
|
37.50
|
%
|
|
Percentage Outstanding Held by Stockholder A
|
|
|
1.00
|
%
|
|
|
0.90
|
%
|
|
|
(10.00
|
)%
|
|
|
1.10
|
%
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
NAV Dilution/Accretion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NAV Held by Stockholder A
|
|
$
|
2,000,000
|
|
|
$
|
2,182,500
|
|
|
|
9.10
|
%
|
|
$
|
2,667,500
|
|
|
|
33.40
|
%
|
|
Total Investment by Stockholder A (Assumed to be $14.81 per Share on Shares Held Prior to
Sale)
|
|
|
—
|
|
|
$
|
2,223,684
|
|
|
|
|
|
|
$
|
2,671,053
|
|
|
|
|
|
|
Total Dilution/Accretion to Stockholder A (Total NAV Less Total Investment)
|
|
|
—
|
|
|
$
|
(41,184
|
)
|
|
|
|
|
|
$
|
(3,553
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
NAV Dilution/Accretion per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NAV per Share Held by Stockholder A
|
|
|
—
|
|
|
$
|
14.37
|
|
|
|
|
|
|
$
|
14.37
|
|
|
|
|
|
|
Investment per Share Held by Stockholder A (Assumed to be $14.81 per Share on Shares Held Prior to
Sale)
|
|
$
|
14.81
|
|
|
$
|
14.64
|
|
|
|
(1.17
|
)%
|
|
$
|
14.39
|
|
|
|
(2.87
|
)%
|
|
NAV Dilution/Accretion per Share Experienced by Stockholder A (NAV per Share Less Investment per
Share)
|
|
|
—
|
|
|
$
|
(0.27
|
)
|
|
|
|
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
Percentage NAV Dilution/Accretion Experienced by Stockholder A (NAV Dilution/Accretion per Share
Divided by Investment per Share)
|
|
|
—
|
|
|
|
|
|
|
|
(1.85
|
)%
|
|
|
|
|
|
|
(0.13
|
)%
|
|
(1)
|
Assumes 5% in selling compensation and expenses paid by us.
|
126
Impact on New Investors
Investors who are not currently stockholders, but who participate in an offering below net asset value and whose investment per share is
greater than the resulting net asset value per share due to selling compensation and expenses paid by us will experience an immediate decrease, albeit small, in the net asset value of their shares and their net asset value per share compared to the
price they pay for their shares (Example 1 below). On the other hand, investors who are not currently stockholders, but who participate in an offering below net asset value per share and whose investment per share is also less than the resulting net
asset value per share will experience an immediate increase in the net asset value of their shares and their net asset value per share compared to the price they pay for their shares (Examples 2, 3 and 4 below). These latter investors will
experience a disproportionately greater participation in our earnings and assets and their voting power than our increase in assets, potential earning power and voting interests. These investors will, however, be subject to the risk that we may make
additional discounted offerings in which such new stockholder does not participate, in which case such new stockholder will experience dilution as described above in such subsequent offerings. These investors may also experience a decline in the
market price of their shares, which often reflects to some degree announced or potential decreases in net asset value per share. This decrease could be more pronounced as the size of the offering and level of discount to net asset value increases.
127
The following chart illustrates the level of dilution or accretion for new investors that would
be experienced by a new investor in the same hypothetical discounted offerings as described in the first chart above. The illustration is for a new investor who purchases the same percentage (1.00%) of the shares in the offering as Stockholder
A in the prior examples held immediately prior to the offering. The prospectus supplement pursuant to which any discounted offering is made will include a chart for these examples based on the actual number of shares in such offering and the actual
discount from the most recently determined net asset value per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to
Sale Below
NAV
|
|
|
Example 1
5% Offering at
5% Discount
|
|
|
Example 2
10% Offering at
10% Discount
|
|
|
Example 3
25% Offering at
15% Discount
|
|
|
Example 4
25% Offering at
25% Discount
|
|
|
|
Following
Sale
|
|
|
%
Change
|
|
|
Following
Sale
|
|
|
%
Change
|
|
|
Following
Sale
|
|
|
%
Change
|
|
|
Following
Sale
|
|
|
%
Change
|
|
|
Offering Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price per Share to Public(1)
|
|
|
—
|
|
|
$
|
14,81
|
|
|
|
—
|
|
|
$
|
14.04
|
|
|
|
—
|
|
|
$
|
13.26
|
|
|
|
—
|
|
|
$
|
11.70
|
|
|
|
—
|
|
|
Net Proceeds per Share to Issuer
|
|
|
—
|
|
|
$
|
14.07
|
|
|
|
—
|
|
|
$
|
13.33
|
|
|
|
—
|
|
|
$
|
12.59
|
|
|
|
—
|
|
|
$
|
11.11
|
|
|
|
—
|
|
|
Increase in Shares and Decrease to NAV
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shares Outstanding
|
|
|
13,500,000
|
|
|
$
|
14,175,000
|
|
|
|
5.00%
|
|
|
$
|
14,850,000
|
|
|
|
10.00
|
%
|
|
|
16,875,000
|
|
|
|
20.00
|
%
|
|
|
16,875,000
|
|
|
|
25.00
|
%
|
|
NAV per Share
|
|
$
|
14.81
|
|
|
$
|
14.78
|
|
|
|
(0.24)%
|
|
|
$
|
14.68
|
|
|
|
(0.91
|
)%
|
|
$
|
14.37
|
|
|
|
(2.50
|
)%
|
|
$
|
14.07
|
|
|
|
(5.00
|
)%
|
|
Dilution to New Investor A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Dilution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Held by Investor A
|
|
|
|
|
|
|
135,000
|
|
|
|
—
|
|
|
|
135,000
|
|
|
|
—
|
|
|
|
135,000
|
|
|
|
—
|
|
|
|
135,000
|
|
|
|
—
|
|
|
Percentage Outstanding Held by Investor A
|
|
|
0.00
|
%
|
|
|
(0.95)%
|
|
|
|
—
|
|
|
|
(0.91
|
)%
|
|
|
—
|
|
|
|
(0.80
|
)%
|
|
|
—
|
|
|
|
(0.80
|
)%
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NAV Dilution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NAV Held by Investor A
|
|
|
—
|
|
|
$
|
1,995,238
|
|
|
|
—
|
|
|
$
|
1,981,818
|
|
|
|
—
|
|
|
$
|
1,940,000
|
|
|
|
|
|
|
$
|
1,900,000
|
|
|
|
|
|
|
Total Investment by Investor A (At Price to Public)
|
|
|
—
|
|
|
$
|
2,000,000
|
|
|
|
—
|
|
|
$
|
1,894,737
|
|
|
|
—
|
|
|
$
|
1,789,474
|
|
|
|
—
|
|
|
$
|
1,578,947
|
|
|
|
—
|
|
|
Total Dilution/Accretion to Investor A (Total NAV Less Total Investment)
|
|
|
—
|
|
|
$
|
(4,762)
|
|
|
|
—
|
|
|
$
|
87,081
|
|
|
|
—
|
|
|
$
|
150,526
|
|
|
|
—
|
|
|
$
|
321,053
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NAV Dilution per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NAV per Share Held by Investor A
|
|
|
—
|
|
|
$
|
14.78
|
|
|
|
—
|
|
|
$
|
14.68
|
|
|
|
—
|
|
|
$
|
14.37
|
|
|
|
—
|
|
|
$
|
14.07
|
|
|
|
—
|
|
|
Investment per Share Held by Investor A
|
|
|
—
|
|
|
$
|
14.81
|
|
|
|
—
|
|
|
$
|
14.04
|
|
|
|
—
|
|
|
$
|
13.26
|
|
|
|
—
|
|
|
$
|
11.70
|
|
|
|
—
|
|
|
NAV Dilution/Accretion per Share Experienced by Investor A (NAV per Share Less Investment per
Share)
|
|
|
—
|
|
|
$
|
(0.04)
|
|
|
|
—
|
|
|
$
|
0.65
|
|
|
|
—
|
|
|
$
|
1.12
|
|
|
|
—
|
|
|
$
|
2.38
|
|
|
|
—
|
|
|
Percentage NAV Dilution/Accretion Experienced by Investor A (NAV Dilution/Accretion per Share
Divided by Investment per Share)
|
|
|
—
|
|
|
|
(0.24)%
|
|
|
|
—
|
|
|
|
4.60
|
%
|
|
|
|
|
|
|
8.91
|
%
|
|
|
|
|
|
|
20.33
|
%
|
|
|
|
|
|
(1)
|
Assumes 5% in selling compensation and expenses paid by us.
|
128
DIVIDEND REINVESTMENT PLAN
We have adopted a dividend reinvestment plan that provides for reinvestment of our stockholder distributions, unless a stockholder elects to
receive cash as provided below. As a result, if our board of directors authorizes, and we declare, a cash distribution, then our stockholders who have not “opted out” of such dividend reinvestment plan will have their cash distribution
automatically reinvested in additional shares of our common stock, rather than receiving the cash distribution.
No action is required on
the part of a registered stockholder to have its cash distribution reinvested in shares of our common stock. A registered stockholder may elect to receive an entire distribution in cash by notifying American Stock Transfer and Trust Company, LLC,
the plan administrator and our transfer agent, registrar and distribution disbursing agent, in writing so that such notice is received by the plan administrator by the record date for distributions to stockholders. The plan administrator will set up
an account for shares acquired through the plan for each stockholder who has not elected to receive distributions in cash and hold such shares in non-certificated form. Upon request by a stockholder participating in the plan, received in writing not
less than three business days prior to the payment date, the plan administrator will, instead of crediting shares to the participant’s account, issue a certificate registered in the participant’s name for the number of whole shares of our
common stock and a check for any fractional share. The plan administrator is authorized to deduct a $15.00 transaction fee plus a brokerage commission of $0.10 per share from the proceeds of the sale of any fractional share.
Those stockholders whose shares are held by a broker or other financial intermediary may receive distributions in cash by notifying their
broker or other financial intermediary of their election.
We expect to use primarily newly issued shares to implement the plan, whether
our shares are trading at a premium or at a discount to net asset value. Under such circumstances, the number of shares to be issued to a stockholder is determined by dividing the total dollar amount of the distribution payable to such stockholder
by 95% of the market price per share of our common stock at the close of trading on the payment date fixed by our board of directors. Market price per share on that date will be the closing price for such shares on The Nasdaq Global Select Market
or, if no sale is reported for such day, at the average of their reported bid and asked prices. We reserve the right to purchase shares in the open market in connection with our implementation of the plan. Shares purchased in open market
transactions by the plan administrator will be allocated to a stockholder based on the average purchase price, excluding any brokerage charges or other charges, of all shares of common stock purchased in the open market.
There will be no brokerage charges or other charges to stockholders who participate in the plan. The plan administrator’s fees will be
paid by us. If a participant elects by written notice to the plan administrator prior to termination of his or her account to have the plan administrator sell part or all of the shares held by the plan administrator in the participant’s account
and remit the proceeds to the participant, the plan administrator is authorized to deduct a $15.00 transaction fee plus a brokerage commission of $0.10 per share from the proceeds.
Stockholders who receive distributions in the form of stock are generally subject to the same U.S. federal, state and local tax consequences
as are stockholders who elect to receive their distributions in cash. The amount of the distribution for U.S. federal income tax purposes will be equal to the fair market value of the stock received. However, since a participating stockholder’s
cash distributions will be reinvested, such stockholder will not receive cash with which to pay any applicable taxes on reinvested distributions. A stockholder’s basis for determining gain or loss upon the sale of stock received in a
distribution from us will generally be equal to the amount treated as a distribution for U.S. federal income tax purposes. Any stock received in a distribution will have a new holding period for tax purposes commencing on the day following the day
on which the shares are credited to the U.S. stockholder’s account.
Participants may terminate their accounts under the plan by
notifying the plan administrator by filling out the transaction request form located at the bottom of the participant’s statement and sending it to the plan
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administrator at the address below. Those stockholders whose shares are held by a broker or other nominee who wish to terminate his or her account under the plan may do so by notifying his or her
broker or nominee. You may also terminate your account online at www.amstock.com or via the toll free number (800) 937-5449. You may also call the toll free number with any inquiries you may have. Representatives are available Monday to
Friday 8 a.m. to 8 p.m. Eastern Standard Time.
The plan may be terminated by us upon notice in writing mailed to each participant at
least 30 days prior to any record date for the payment of any stockholder distribution by us. All correspondence concerning the plan should be directed to the plan administrator by mail at American Stock Transfer and Trust Company LLC, 6201 15th Avenue, Brooklyn, New York, 11219, or by calling the plan administrator at (718) 921-8124.
If you withdraw or the plan is terminated, you will receive the number of whole shares in your account under the plan and a cash payment for
any fraction of a share in your account.
If you hold your common stock with a brokerage firm that does not participate in the plan, you
will not be able to participate in the plan and any distribution reinvestment may be effected on different terms than those described above. Consult your financial adviser for more information.
Neither we nor American Stock Transfer & Trust Co, LLC will be liable for any act performed in good faith or for any good faith
omission to act or failure to act, including, without limitation, any claim of liability (a) arising out of failure to terminate a participant’s account, sell shares held in the Plan or reinvest dividends; (b) with respect to the
prices at which stock is purchased or sold for the participant’s account and the time such purchases or sales are made. Without limiting the foregoing, American Stock Transfer & Trust Co, LLC will not be liable for any claim made more
than 30 days after any instruction to buy or sell stock was given to American Stock Transfer & Trust Co, LLC.
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a general summary of certain U.S. federal income tax considerations applicable to us and an investment in shares
of our common stock. The discussion is based upon the Internal Revenue Code of 1986, as amended, which we refer to as the “Code”, the regulations of the U.S. Department of Treasury promulgated thereunder, which we refer to as the
“Treasury regulations”, the legislative history of the Code, current administrative interpretations and practices of the Internal Revenue Service, which we refer to as the “IRS”, (including administrative interpretations and
practices of the IRS expressed in private letter rulings which are binding on the IRS only with respect to the particular taxpayers that requested and received those rulings) and judicial decisions, each as of the date of this prospectus and all of
which are subject to change or differing interpretations, possibly retroactively, which could affect the continuing validity of this discussion. The U.S federal income tax laws addressed in this summary are highly technical and complex, and certain
aspects of their application to us are not completely clear. In addition, certain U.S. federal income tax consequences described in this summary depend upon certain factual matters, including (without limitation) the value and tax basis ascribed to
our assets and the manner in which the we operate, and certain complicated tax accounting calculations. We have not sought, and will not seek, any ruling from the IRS regarding any matter discussed in this summary, and this summary is not binding on
the IRS. Accordingly, there can be no assurance that the IRS will not assert, and a court will not sustain, a position contrary to any of the tax consequences discussed below. This summary does not purport to be a complete description of all the tax
aspects affecting us and our stockholders. For example, this summary does not describe all U.S. federal income tax consequences that may be relevant to certain types of stockholders subject to special treatment under U.S. federal income tax laws,
including stockholders subject to the alternative minimum tax, tax-exempt organizations, insurance companies, partnerships or other pass-through entities and their owners, persons that hold shares of our common stock through a foreign financial
institution, persons that hold shares of our common stock through a non-financial foreign entity, Non-U.S. stockholders (as defined below) engaged in a trade or business in the United States or Non-U.S. stockholders entitled to claim the benefits of
an applicable income tax treaty, persons who have ceased to be U.S. citizens or to be taxed as resident aliens, persons holding our common stock in connection with a hedging, straddle, conversion or other integrated transaction, dealers in
securities, a trader in securities that elects to use a market-to-market method of accounting for its securities holdings, pension plans and trusts, and financial institutions. This summary assumes that stockholders hold our common stock as capital
assets for U.S. federal income tax purposes (generally, assets held for investment). This summary generally does not discuss any aspects of U.S. estate or gift tax or foreign, state or local tax. It does not discuss the special treatment under U.S.
federal income tax laws that could result if we invested in tax-exempt securities or certain other investment assets.
A “U.S.
stockholder” is a beneficial owner of shares of our common stock that is for U.S. federal income tax purposes:
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an individual who is a citizen or resident of the United States;
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a corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created or
organized in or under the laws of the United States or any state thereof or the District of Columbia;
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an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
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a trust if either a U.S. court can exercise primary supervision over its administration and one or more U.S.
persons have the authority to control all of its substantial decisions or the trust was in existence on August 20, 1996, was treated as a U.S. person prior to that date, and has made a valid election to be treated as a U.S. person.
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A “Non-U.S. stockholder” is a beneficial owner of shares of our common stock that is not a U.S. stockholder.
If a partnership (including an entity treated as a partnership for U.S. federal income tax purposes) is the beneficial owner of shares of
our common stock, the tax treatment of a partner in the partnership will generally
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depend upon the status of the partner and the activities of the partnership. A prospective investor that is a partner in a partnership that will hold shares of our common stock should consult its
tax advisors with respect to the partnership’s purchase, ownership and disposition of shares of our common stock.
Tax matters are
very complicated and the tax consequences to an investor of an investment in our shares of common stock will depend on the facts of his, her or its particular situation. We encourage investors to consult their tax advisors regarding the specific
consequences of such an investment, including tax reporting requirements, the applicability of U.S. federal, state, local and foreign tax laws, eligibility for the benefits of any applicable tax treaty, and the effect of any possible changes in the
tax laws.
Election to be Taxed as a RIC
As a BDC, we have elected to be treated as a RIC under Subchapter M of the Code. As a RIC, we generally will not have to pay corporate-level
U.S. federal income taxes on any ordinary income or capital gains that we timely distribute to our stockholders as dividends. To maintain our qualification as a RIC, we must, among other things, meet certain source-of-income and asset
diversification requirements (as described below). In addition, we must distribute to our stockholders, for each taxable year, at least 90% of our “investment company taxable income,” which is generally our net ordinary taxable income plus
the excess of our realized net short-term capital gains over our realized net long-term capital losses, or the Annual Distribution Requirement.
Taxation as a RIC
For any taxable year
in which we:
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satisfy the Annual Distribution Requirement;
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We generally will not be subject to U.S. federal income tax on the portion of our investment company taxable income and net capital gain,
defined as net long-term capital gains in excess of net short-term capital losses, we distribute to stockholders. We will be subject to U.S. federal income tax at the regular corporate rates on any net income or net capital gain not distributed (or
deemed distributed) to our stockholders.
We will be subject to a 4% nondeductible U.S. federal excise tax on our undistributed income
unless we distribute in a timely manner an amount at least equal to the sum of (a) 98% of our net ordinary income for each calendar year, (b) 98.2% of our capital gain net income for the one-year period ending October 31 in that
calendar year and (c) any income and gains recognized, but not distributed, in the preceding year and on which we paid no U.S. federal income tax, or the Excise Tax Avoidance Requirement. For this purpose, however, any net ordinary income or
capital gain net income retained by us that is subject to corporate income tax for the tax year ending in that calendar year will be considered to have been distributed by year end (or earlier if estimated taxes are paid). We currently intend to
make sufficient distributions each calendar year to satisfy the Excise Tax Avoidance Requirement, but may in the future defer distributions and incur excise tax.
In order to maintain our qualification as a RIC for U.S. federal income tax purposes, we must, among other things:
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qualify to be regulated as a BDC under the 1940 Act at all times during each taxable year;
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derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to
certain securities loans, gains from the sale of stock or other securities, or other income derived with respect to our business of investing in such stock or securities, and net income derived from interests in “qualified publicly traded
partnerships” (which generally are partnerships that are
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traded on an established securities market or tradable on a secondary market, other than partnerships that derive 90% of their income from interest, dividends and other permitted RIC income), or
the 90% Income Test; and
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diversify our holdings so that at the end of each quarter of the taxable year:
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at least 50% of the value of our assets consists of cash, cash equivalents, U.S. government securities,
securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of the issuer; and
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no more than 25% of the value of our assets is invested in the securities, other than U.S. government securities
or securities of other RICs, of one issuer or of two or more issuers that are controlled, as determined under applicable tax rules, by us and that are engaged in the same or similar or related trades or businesses or in the securities of one or more
qualified publicly traded partnerships, or the Diversification Tests.
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We may invest in partnerships, including
qualified publicly traded partnerships, which may result in our being subject to state, local or foreign income, franchise or withholding liabilities.
Any underwriting fees paid by us are not deductible. We may be required to recognize taxable income in circumstances in which we do not
receive cash. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments with PIK interest or, in certain cases, with increasing interest rates or issued with
warrants), we must include in income each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. Because any
original issue discount accrued will be included in our investment company taxable income for the year of accrual, we may be required to make a distribution to our stockholders in order to satisfy the Annual Distribution Requirement, even though we
will not have received any corresponding cash amount. If we are not able to obtain sufficient cash from other sources to satisfy the Annual Distribution Requirement, we may fail to maintain our qualification as a RIC and become subject to
corporate-level U.S. federal income taxes on all of our taxable income without the benefit of the dividends-paid deduction.
Although we
do not presently expect to do so, we are authorized to borrow funds and to sell assets in order (i) to satisfy the Annual Distribution Requirement and to otherwise eliminate our liability for U.S. federal income and excise taxes and
(ii) to satisfy the Diversification Tests. However, under the 1940 Act, we are not permitted to borrow additional funds or to make distributions to our stockholders while our debt obligations and other senior securities are outstanding unless
certain “asset coverage” tests are met. See “Regulation—Senior Securities.” Moreover, our ability to dispose of assets to meet the Annual Distribution Requirement, the Excise Tax Avoidance Requirement or the Diversification
Tests may be limited by (a) the illiquid nature of our portfolio and/or (b) other requirements relating to our qualification as a RIC. If we dispose of assets in order to meet the Annual Distribution Requirement, the Excise Tax Avoidance
Requirement, or the Diversification Tests, we may make such dispositions at times that, from an investment standpoint, are not advantageous.
Certain of our investment practices may be subject to special and complex U.S. federal income tax provisions that may, among other things,
(a) treat dividends that would otherwise constitute qualified dividend income as non-qualified dividend income, (b) treat dividends that would otherwise be eligible for the corporate dividends received deduction as ineligible for such
treatment, (c) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (d) convert lower-taxed long term capital gain into higher-taxed short-term capital gain or ordinary income, (e) convert an ordinary
loss or a deduction into a capital loss (the deductibility of which is more limited), (f) cause us to recognize income or gain without a corresponding receipt of cash, (g) adversely affect the time as to when a purchase or sale of stock or
securities is deemed to occur, (h) adversely alter the characterization of certain complex financial transactions and (i) produce income that will
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not be qualifying income for purposes of the 90% Income Test. We intend to monitor our transactions and may make certain tax elections to mitigate the effect of these provisions and prevent our
disqualification as a RIC.
Gain or loss realized by us from warrants acquired by us as well as any loss attributable to the lapse of such
warrants generally will be treated as capital gain or loss. Such capital gain or loss generally will be long term or short term, depending on how long we held a particular warrant.
Some of the income and fees that we may recognize will not satisfy the 90% Income Test. In order to ensure that such income and fees do not
disqualify us as a RIC for a failure to satisfy the 90% Income Test, we may hold assets that generate such income and provide services that generate such fees indirectly through one or more entities treated as corporations for U.S. federal income
tax purposes. Such corporations will be required to pay U.S. federal corporate income tax on their earnings, which ultimately will reduce our return on such income and fees.
The remainder of this discussion assumes that we will maintain our qualification as a RIC and will satisfy the Annual Distribution
Requirement.
A RIC is limited in its ability to deduct expenses in excess of its “investment company taxable income” (which is,
generally, ordinary income plus net realized short-term capital gains in excess of net realized long-term capital losses). If our expenses in a given year exceed gross taxable income (e.g., as the result of large amounts of equity-based
compensation), we would experience a net operating loss for that year. However, a RIC is not permitted to carry forward net operating losses to subsequent years. In addition, expenses can be used only to offset investment company taxable income, not
net capital gain. Due to these limits on the deductibility of expenses, we may for tax purposes have aggregate taxable income for several years that we are required to distribute and that is taxable to our stockholders even if such income is greater
than the aggregate net income we actually earned during those years. Such required distributions may be made from our cash assets or by liquidation of investments, if necessary. We may realize gains or losses from such liquidations. In the event we
realize net capital gains from such transactions, you may receive a larger capital gain distribution than you would have received in the absence of such transactions.
Investment income received from sources within foreign countries, or capital gains earned by investing in securities of foreign issuers, may
be subject to foreign income taxes withheld at the source. In this regard, withholding tax rates in countries with which the United States does not have a tax treaty are often as high as 35% or more. The United States has entered into tax treaties
with many foreign countries that may entitle us to a reduced rate of tax or exemption from tax on this related income and gains. The effective rate of foreign tax cannot be determined at this time since the amount of our assets to be invested within
various countries is not now known. We do not anticipate being eligible for the special election that allows a RIC to treat foreign income taxes paid by such RIC as paid by its stockholders.
If we acquire stock in certain foreign corporations that receive at least 75% of their annual gross income from passive sources (such as
interest, dividends, rents, royalties or capital gain) or hold at least 50% of their total assets in investments producing such passive income (“passive foreign investment companies”), we could be subject to U.S. federal income tax and
additional interest charges on “excess distributions” received from such companies or gain from the sale of stock in such companies, even if all income or gain actually received by us is timely distributed to our stockholders. We would not
be able to pass through to our stockholders any credit or deduction for such a tax. Certain elections may, if available, ameliorate these adverse tax consequences, but any such election requires us to recognize taxable income or gain without the
concurrent receipt of cash. Under proposed regulations, amounts required to be included in income from a passive foreign investment company for which we have made such an election would not be good income for purposes of the 90% Income Test unless
we receive a cash distribution from such passive foreign investment company in the same year attributable to the included income. If these regulations are finalized, we will carefully monitor our investments in passive foreign investment companies
to avoid disqualification as a RIC. We intend to limit and/or manage our holdings in passive foreign investment companies to minimize our tax liability.
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Foreign exchange gains and losses realized by us in connection with certain transactions
involving non-dollar debt securities, certain foreign currency futures contracts, foreign currency option contracts, foreign currency forward contracts, foreign currencies, or payables or receivables denominated in a foreign currency are subject to
Code provisions that generally treat such gains and losses as ordinary income and losses and may affect the amount, timing and character of distributions to our stockholders. Any such transactions that are not directly related to our investment in
securities (possibly including speculative currency positions or currency derivatives not used for hedging purposes) could, under future Treasury regulations, produce income not among the types of “qualifying income” from which a RIC must
derive at least 90% of its annual gross income.
Tax on Investment Income
A 3.8% tax is imposed on the “net investment income” of certain individuals, and on the undistributed “net investment
income” of certain estates and trusts. Among other items, net investment income generally includes gross income from interest, dividends and net gains from certain property sales, less certain deductions. U.S. stockholders should consult their
tax advisors regarding the possible implications of this legislation in their particular circumstances.
Taxation of U.S. Stockholders
Distributions by us generally are taxable to U.S. stockholders as ordinary income or capital gains. Distributions of our “investment
company taxable income” (which is, generally, our net ordinary income plus net short-term capital gains in excess of net long-term capital losses) will be taxable as ordinary income to U.S. stockholders to the extent of our current and
accumulated earnings and profits, whether paid in cash or reinvested in additional shares of our common stock. To the extent such distributions paid by us to non-corporate stockholders (including individuals) are attributable to dividends from U.S.
corporations and certain qualified foreign corporations and if certain holding period requirements are met, such distributions generally will be treated as qualified dividend income and will be eligible for a maximum U.S. federal income tax rate of
20%. In this regard, it is anticipated that distributions paid by us will generally not be attributable to dividends and, therefore, generally will not qualify for the 20% maximum U.S. federal income tax rate. Distributions of our net capital gains
(which is generally our realized net long-term capital gains in excess of realized net short-term capital losses) properly reported by us as “capital gain dividends” will be taxable to a U.S. stockholder as long-term capital gains
(currently at a maximum U.S. federal income tax rate of 20%) in the case of individuals, trusts or estates, regardless of the U.S. stockholder’s holding period for his, her or its common stock and regardless of whether paid in cash or
reinvested in additional shares of common stock. Distributions in excess of our earnings and profits first will reduce a U.S. stockholder’s adjusted tax basis in such stockholder’s common stock and, after the adjusted basis is reduced to
zero, will constitute capital gains to such U.S. stockholder. U.S. stockholders receiving distributions in the form of additional shares of our common stock purchased in the market should be treated for U.S. federal income tax purposes as receiving
a distribution in an amount equal to the amount of money that the stockholders receiving cash distributions will receive, and should have a cost basis in the shares received equal to such amount. A U.S. stockholder receiving a distribution in newly
issued shares of our common stock will be treated as receiving a distribution equal to the value of the shares received, and should have a cost basis of such amount.
Although we currently intend to distribute any net long-term capital gains at least annually, we may in the future decide to retain some or
all of our net long-term capital gains but designate the retained amount as a “deemed distribution.” In that case, among other consequences, we will pay tax on the retained amount, each U.S. stockholder will be required to include its
share of the deemed distribution in income as if it had been distributed to the U.S. stockholder, and the U.S. stockholder will be entitled to claim a credit equal its allocable share of the tax paid on the deemed distribution by us. The amount of
the deemed distribution net of such tax will be added to the U.S. stockholder’s tax basis for their shares of common stock. Since we expect to pay tax on any retained capital gains at our regular corporate tax rate, and since that rate is in
excess of the maximum rate currently payable by individuals on long-term capital gains, the amount of tax that individual U.S. stockholders
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will be treated as having paid and for which they will receive a credit will exceed the tax they owe on the retained net capital gain. Such excess generally may be claimed as a credit against the
U.S. stockholder’s other U.S. federal income tax obligations or may be refunded to the extent it exceeds a stockholder’s liability for U.S. federal income tax. A stockholder that is not subject to U.S. federal income tax or otherwise
required to file a U.S. federal income tax return would be required to file a U.S. federal income tax return on the appropriate form in order to claim a refund for the taxes we paid. In order to utilize the deemed distribution approach, we must
provide written notice to our stockholders prior to the expiration of 60 days after the close of the relevant taxable year. We cannot treat any of our investment company taxable income as a “deemed distribution.”
For purposes of determining (a) whether the Annual Distribution Requirement is satisfied for any year and (b) the amount of capital
gain dividends paid for that year, we may, under certain circumstances, elect to treat a dividend that is paid during the following taxable year as if it had been paid during the taxable year in question. If we make such an election, the U.S.
stockholder will still be treated as receiving the dividend in the taxable year in which the distribution is made. However, any dividend declared by us in October, November or December of any calendar year, payable to stockholders of record on a
specified date in such a month and actually paid during January of the following year, will be treated as if it had been received by our stockholders on December 31 of the year in which the dividend was declared.
If an investor purchases shares of our common stock shortly before the record date of a distribution, the price of the shares of our common
stock will include the value of the distribution and the investor will be subject to tax on the distribution even though it represents a return of their investment.
A U.S. stockholder generally will recognize taxable gain or loss if the stockholder sells or otherwise disposes of their shares of our common
stock. Any gain arising from such sale or disposition generally will be treated as long-term capital gain or loss if the stockholder has held their shares of common stock for more than one year. Otherwise, it would be classified as short-term
capital gain or loss. However, any capital loss arising from the sale or disposition of shares of our common stock held for six months or less will be treated as long-term capital loss to the extent of the amount of capital gain dividends received,
or undistributed capital gain deemed received, with respect to such shares. In addition, all or a portion of any loss recognized upon a disposition of shares of our common stock may be disallowed if other shares of our common stock are purchased
(whether through reinvestment of distributions or otherwise) within 30 days before or after the disposition. In such a case, the basis of the common stock acquired will be increased to reflect the disallowed loss.
In general, individual U.S. stockholders currently are subject to a maximum U.S. federal income tax rate of 20% on their net capital gain,
(i.e., the excess of realized net long-term capital gain over realized net short-term capital loss for a taxable year), including a long-term capital gain derived from an investment in our shares of common stock. Such rate is lower than the
maximum rate on ordinary income currently payable by individuals. Corporate U.S. stockholders currently are subject to U.S. federal income tax on net capital gain at the maximum 21% rate also applied to ordinary income. Non-corporate stockholders
with net capital losses for a year (i.e., net capital losses in excess of net capital gains) generally may deduct up to $3,000 of such losses against their ordinary income each year; any net capital losses of a non-corporate stockholder in
excess of $3,000 generally may be carried forward and used in subsequent years as provided in the Code. Corporate stockholders generally may not deduct any net capital losses for a year, but may carryback such losses for three years or carry forward
such losses for five years.
We or the applicable withholding agent will send to each of our U.S. stockholders, as promptly as possible
after the end of each calendar year, a notice reporting the amounts includible in such U.S. stockholder’s taxable income for such year as ordinary income and as long-term capital gain. In addition, the U.S. federal income tax status of each
year’s distributions generally will be reported to the IRS. Distributions may also be subject to additional state, local and foreign taxes depending on a U.S. stockholder’s particular situation. Dividends distributed by us generally will
not be eligible for the dividends-received deduction or the lower tax rates applicable to certain qualified dividends.
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We may be required to withhold U.S. federal income tax (“backup withholding”) from all
distributions to any non-corporate U.S. stockholder (a) who fails to furnish us with a correct taxpayer identification number or a certificate that such stockholder is exempt from backup withholding or (b) with respect to whom the IRS
notifies us that such stockholder has failed to properly report certain interest and dividend income to the IRS and to respond to notices to that effect. An individual’s taxpayer identification number is his or her social security number. Any
amount withheld under backup withholding is allowed as a credit against the U.S. stockholder’s U.S. federal income tax liability and may entitle such stockholder to a refund, provided that proper information is timely provided to the IRS.
Taxation of Non-U.S. Stockholders
Whether an investment in the shares of our common stock is appropriate for a Non-U.S. stockholder will depend upon that person’s
particular circumstances. Non-U.S. stockholders should consult their tax advisors before investing in our common stock.
Distributions of
our “investment company taxable income” to Non-U.S. stockholders (including interest income, net short-term capital gain or foreign-source dividend and interest income, which generally would be free of withholding if paid to Non-U.S.
stockholders directly) will be subject to withholding of U.S. federal income tax at a 30% rate (or lower rate provided by an applicable treaty) to the extent of our current and accumulated earnings and profits unless the distributions are
effectively connected with a U.S. trade or business of the Non-U.S. stockholder, and, if an income tax treaty applies, attributable to a permanent establishment in the United States, in which case the distributions will be subject to U.S. federal
income tax at the rates applicable to U.S. persons. In that case, we will not be required to withhold U.S. federal income tax if the Non-U.S. stockholder complies with applicable certification and disclosure requirements. Special certification
requirements apply to a Non-U.S. stockholder that is a foreign partnership or a foreign trust, and such entities are urged to consult their tax advisors.
We or the applicable withholding agent generally are not required to withhold any amounts with respect to certain distributions of (i) U.S.
source interest income, and (ii) net short term capital gains in excess of net long term capital losses, in each case to the extent we properly report such distributions as “interest-related dividends” or “short-term capital gain
dividends” and certain other requirements were satisfied. We anticipate that a portion of our distributions will be eligible for this exemption from withholding; however, we cannot determine what portion of our distributions (if any) will be
eligible for this exception until after the end of our taxable year. No certainty can be provided that any of our distributions will be reported as eligible for this exception.
Actual or deemed distributions of our net capital gains to a Non-U.S. stockholder, and gains realized by a Non-U.S. stockholder upon the sale
of our common stock, will not be subject to U.S. federal withholding tax and generally will not be subject to U.S. federal income tax unless the distributions or gains, as the case may be, are effectively connected with a U.S. trade or business of
the Non-U.S. stockholder and, if an income tax treaty applies, are attributable to a permanent establishment maintained by the Non-U.S. stockholder in the United States or, in the case of an individual Non-U.S. stockholder, the stockholder is
present in the United States for 183 days or more during the year of the sale or capital gain dividend and certain other conditions are met.
If we distribute our net capital gains in the form of deemed rather than actual distributions (which we may do in the future), a Non-U.S.
stockholder will be entitled to a U.S. federal income tax credit or tax refund equal to the stockholder’s allocable share of the tax we pay on the capital gains deemed to have been distributed. In order to obtain the refund, the Non-U.S.
stockholder must obtain a U.S. taxpayer identification number and file a U.S. federal income tax return even if the Non-U.S. stockholder would not otherwise be required to obtain a U.S. taxpayer identification number or file a U.S. federal income
tax return. For a corporate Non-U.S. stockholder, distributions (both actual and deemed), and gains realized upon the sale of our common stock that are effectively connected with a U.S. trade or business may, under certain circumstances, be subject
to an additional “branch profits tax” at a 30% rate (or at a lower rate if provided for by an applicable treaty).
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A Non-U.S. stockholder who is a non-resident alien individual, and who is otherwise subject to
withholding of U.S. federal income tax, may be subject to information reporting and backup withholding of U.S. federal income tax on dividends unless the Non-U.S. stockholder provides us or the distribution paying agent with an IRS Form W-8BEN,
W-8BEN-E (or an acceptable substitute form) or otherwise meets documentary evidence requirements for establishing that it is a Non-U.S. stockholder or otherwise establishes an exemption from backup withholding.
An investment in shares by a non-U.S. person may also be subject to U.S. estate tax. Non-U.S. persons should consult their tax advisors with
respect to the U.S. federal income tax and withholding tax, U.S. estate tax and state, local and foreign tax consequences of an investment in the shares of our common stock.
Non-U.S. persons should consult their own tax advisers with respect to the U.S. federal income tax and withholding tax, and state, local and
foreign tax consequences of an investment in the shares.
Foreign Account Tax Compliance Act
Legislation commonly referred to as the “Foreign Account Tax Compliance Act,” or “FATCA,” generally imposes a 30%
withholding tax on payments of certain types of income to foreign financial institutions (“FFIs”) unless such FFIs either (i) enter into an agreement with the U.S. Treasury to report certain required information with respect to accounts
held by U.S. persons (or held by foreign entities that have U.S. persons as substantial owners) or (ii) reside in a jurisdiction that has entered into an intergovernmental agreement (“IGA”) with the United States to collect and share such
information and are in compliance with the terms of such IGA and any enabling legislation or regulations. The types of income subject to the tax include U.S. source interest and dividends and the gross proceeds from the sale of any property that
could produce U.S. source interest or dividends received after December 31, 2018. The information required to be reported includes the identity and taxpayer identification number of each account holder that is a U.S. person and transaction
activity within the holder’s account. In addition, subject to certain exceptions, this legislation also imposes a 30% withholding on payments to foreign entities that are not FFIs unless the foreign entity certifies that it does not have a
greater than 10% U.S. owner or provides the withholding agent with identifying information on each greater than 10% U.S. owner. Depending on the status of a stockholder and the status of the intermediaries through which it holds its units, a
stockholder could be subject to this 30% withholding tax with respect to distributions on our stock and proceeds from the sale of our stock. Under certain circumstances, a Non-U.S. stockholder might be eligible for refunds or credits of such taxes.
Failure to Maintain our Qualification as a RIC
If we are unable to qualify for treatment as a RIC, and if certain remedial provisions are not available, we would be subject to tax on all of
our taxable income at regular corporate rates. We would be subject to tax on all of our taxable income at regular corporate rates, regardless of whether we make any distributions to our stockholders. Distributions would not be required, and any
distributions would be taxable to our stockholders as ordinary dividend income to the extent of our current and accumulated earnings and profits and, subject to certain limitations, may be eligible for the 20% maximum rate for noncorporate taxpayers
provided certain holding period and other requirements were met. Subject to certain limitations under the Code, corporate distributees would be eligible for the dividends-received deduction. Distributions in excess of our current and accumulated
earnings and profits would be treated first as a return of capital to the extent of the stockholder’s tax basis, and any remaining distributions would be treated as a capital gain. To requalify as a RIC in a subsequent taxable year, we would be
required to satisfy the RIC qualification requirements for that year and dispose of any earnings and profits from any year in which we failed to qualify as a RIC. Subject to a limited exception applicable to RICs that qualified as such under the
Code for at least one year prior to disqualification and that requalify as a RIC no later than the second year following the nonqualifying year, we could be subject to tax on any unrealized net built-in gains in the assets held by us during the
period in which we failed to qualify as a RIC that are recognized within the subsequent 5 years, unless we made a special election to pay corporate-level U.S. federal income tax on such built-in gain at the time of our requalification as a RIC.
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DESCRIPTION OF OUR COMMON STOCK
The following description is based on relevant portions of the Maryland General Corporation Law and our articles of incorporation and
bylaws. This summary is not necessarily complete, and we refer you to the Maryland General Corporation Law and our articles of incorporation and bylaws for a more detailed description of the provisions summarized below.
Our authorized stock consists of 100,000,000 shares of stock, par value $0.001 per share, all of which are initially designated as common
stock. Our common stock is listed on the Nasdaq Global Select Market under the ticker symbol “CMFN.” There are no outstanding options or warrants to purchase our stock. No stock has been authorized for issuance under any equity
compensation plans. Our fiscal year-end is June 30th. Under Maryland law, our stockholders generally are not personally liable for our debts or obligations.
The following presents our outstanding classes of securities as of April 5, 2019.
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(1)
Title of Class
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(2)
Amount
Authorized
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(3)
Amount
Held
by Us
or for
Our
Account
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(4)
Amount
Outstanding
Exclusive of
Amounts
Shown Under
(3)
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Common Stock
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100,000,000
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—
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13,613,707
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Under our charter, our board of directors is authorized to classify and reclassify any unissued shares of
stock into other classes or series of stock without obtaining stockholder approval. As permitted by the Maryland General Corporation Law, our charter provides that the board of directors, without any action by our stockholders, may amend the charter
from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have authority to issue.
Common Stock
All shares of our common
stock have equal rights as to earnings, assets, voting, and distributions and, when they are issued, will be duly authorized, validly issued, fully paid and nonassessable. Distributions may be paid to the holders of our common stock if, as and when
authorized by our board of directors and declared by us out of assets legally available therefor. Shares of our common stock have no preemptive, conversion or redemption rights and are freely transferable, except where their transfer is restricted
by federal and state securities laws or by contract. In the event of our liquidation, dissolution or winding up, each share of our common stock would be entitled to share ratably in all of our assets that are legally available for distribution after
we pay all debts and other liabilities and subject to any preferential rights of holders of our preferred stock, if any preferred stock is outstanding at such time. Each share of our common stock is entitled to one vote on all matters submitted to a
vote of stockholders, including the election of directors. Except as provided with respect to any other class or series of stock, the holders of our common stock will possess exclusive voting power. There is no cumulative voting in the election of
directors, which means that holders of a majority of the outstanding shares of common stock can elect all of our directors, and holders of less than a majority of such shares will be unable to elect any director.
Limitation on Liability of Directors and Officers; Indemnification and Advance of Expenses
Maryland law permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty established by a final
judgment and which is material to the cause of action. Our charter contains such a provision which eliminates directors’ and officers’ liability to the maximum extent permitted by Maryland law, subject to the requirements of the 1940 Act.
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Our charter authorizes us, to the maximum extent permitted by Maryland law and subject to the
requirements of the 1940 Act, to indemnify any present or former director or officer or any individual who, while a director and at our request, serves or has served another corporation, real estate investment trust, partnership, joint venture,
trust, employee benefit plan or other enterprise as a director, officer, partner or trustee, from and against any claim or liability to which that person may become subject or which that person may incur by reason of his or her status as a present
or former director or officer and to pay or reimburse their reasonable expenses in advance of final disposition of a proceeding. Our bylaws obligate us, to the maximum extent permitted by Maryland law and subject to the requirements of the 1940 Act,
to indemnify any present or former director or officer or any individual who, while a director and at our request, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or
other enterprise as a director, officer, partner or trustee and who is made a party to the proceeding by reason of his service in that capacity from and against any claim or liability to which that person may become subject or which that person may
incur by reason of his or her status as a present or former director or officer and to pay or reimburse their reasonable expenses in advance of final disposition of a proceeding. The charter and bylaws also permit us to indemnify and advance
expenses to any person who served a predecessor of us in any of the capacities described above and any of our employees or agents or any employees or agents of our predecessor. In accordance with the 1940 Act, we will not indemnify any person for
any liability to which such person would be subject by reason of such person’s willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office.
Maryland law requires a corporation (unless its charter provides otherwise, which our charter does not) to indemnify a director or officer who
has been successful in the defense of any proceeding to which he or she is made a party by reason of his or her service in that capacity. Maryland law permits a corporation to indemnify its present and former directors and officers, among others,
against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service in those or other capacities unless it is established
that (a) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (1) was committed in bad faith or (2) was the result of active and deliberate dishonesty, (b) the director or
officer actually received an improper personal benefit in money, property or services or (c) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. However, under
Maryland law, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that a personal benefit was improperly received, unless in either case a court
orders indemnification, and then only for expenses. In addition, Maryland law permits a corporation to advance reasonable expenses to a director or officer upon the corporation’s receipt of (a) a written affirmation by the director or
officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation and (b) a written undertaking by him or her or on his or her behalf to repay the amount paid or reimbursed
by the corporation if it is ultimately determined that the standard of conduct was not met.
Our insurance policy does not currently
provide coverage for claims, liabilities and expenses that may arise out of activities that our present or former directors or officers have performed for another entity at our request. There is no assurance that such entities will in fact carry
such insurance. However, we note that we do not expect to request our present or former directors or officers to serve another entity as a director, officer, partner or trustee unless we can obtain insurance providing coverage for such persons for
any claims, liabilities or expenses that may arise out of their activities while serving in such capacities.
Certain Provisions of the Maryland
General Corporation Law and Our Charter and Bylaws
The Maryland General Corporation Law and our charter and bylaws contain provisions
that could make it more difficult for a potential acquirer to acquire us by means of a tender offer, proxy contest or otherwise. These provisions are expected to discourage certain coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of us to negotiate first with our board of directors. We believe that
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the benefits of these provisions outweigh the potential disadvantages of discouraging any such acquisition proposals because, among other things, the negotiation of such proposals may improve
their terms.
Classified Board of Directors
Our board of directors are divided into three classes of directors serving staggered three-year terms. Upon expiration of their terms,
directors of each class will be elected to serve for three-year terms and until their successors are duly elected and qualify and each year one class of directors will be elected by the stockholders. A classified board may render a change in control
of us or removal of our incumbent management more difficult. We believe, however, that the longer time required to elect a majority of a classified board of directors will help to ensure the continuity and stability of our management and policies.
Election of Directors
Our
charter and bylaws provide that the affirmative vote of the holders of a plurality of the outstanding shares of stock entitled to vote in the election of directors cast at a meeting of stockholders duly called and at which a quorum is present will
be required to elect a director. Pursuant to our charter our board of directors may amend the bylaws to alter the vote required to elect directors.
Number of Directors; Vacancies; Removal
Our charter provides that the number of directors will be set only by the board of directors in accordance with our bylaws. Our bylaws provide
that a majority of our entire board of directors may at any time increase or decrease the number of directors. However, unless our bylaws are amended, the number of directors may never be less than one nor more than nine. Our charter provides that,
at such time as we have at least three independent directors and our common stock is registered under the Securities Exchange Act of 1934, as amended, we elect to be subject to the provision of Subtitle 8 of Title 3 of the Maryland General
Corporation Law regarding the filling of vacancies on the board of directors. Accordingly, at such time, except as may be provided by the board of directors in setting the terms of any class or series of preferred stock, any and all vacancies on the
board of directors may be filled only by the affirmative vote of a majority of the remaining directors in office, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy will serve for the remainder of
the full term of the directorship in which the vacancy occurred and until a successor is elected and qualifies, subject to any applicable requirements of the 1940 Act.
Our charter provides that a director may be removed only for cause, as defined in our charter, and then only by the affirmative vote of at
least two-thirds of the votes entitled to be cast in the election of directors.
Action by Stockholders
Under the Maryland General Corporation Law, stockholder action can be taken only at an annual or special meeting of stockholders or (unless the
charter provides for stockholder action by less than unanimous written consent, which our charter does not) by unanimous written consent in lieu of a meeting. These provisions, combined with the requirements of our bylaws regarding the calling of a
stockholder-requested special meeting of stockholders discussed below, may have the effect of delaying consideration of a stockholder proposal until the next annual meeting.
Advance Notice Provisions for Stockholder Nominations and Stockholder Proposals
Our bylaws provide that with respect to an annual meeting of stockholders, nominations of persons for election to the board of directors and
the proposal of business to be considered by stockholders may be made only (a) pursuant to our notice of the meeting, (b) by the board of directors or (c) by a stockholder who is entitled to vote at the meeting and who has complied
with the advance notice procedures of our bylaws. With respect to
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special meetings of stockholders, only the business specified in our notice of the meeting may be brought before the meeting. Nominations of persons for election to the board of directors at a
special meeting may be made only (1) pursuant to our notice of the meeting, (2) by the board of directors or (3) provided that the board of directors has determined that directors will be elected at the meeting, by a stockholder who
is entitled to vote at the meeting and who has complied with the advance notice provisions of the bylaws. The purpose of requiring stockholders to give us advance notice of nominations and other business is to afford our board of directors a
meaningful opportunity to consider the qualifications of the proposed nominees and the advisability of any other proposed business and, to the extent deemed necessary or desirable by our board of directors, to inform stockholders and make
recommendations about such qualifications or business, as well as to provide a more orderly procedure for conducting meetings of stockholders. Although our bylaws do not give our board of directors any power to disapprove stockholder nominations for
the election of directors or proposals recommending certain action, they may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals if proper procedures are not followed and of
discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal without regard to whether consideration of such nominees or proposals might be harmful or beneficial
to us and our stockholders.
Calling of Special Meetings of Stockholders
Our bylaws provide that special meetings of stockholders may be called by our board of directors and certain of our officers. Additionally, our
bylaws provide that, subject to the satisfaction of certain procedural and informational requirements by the stockholders requesting the meeting, a special meeting of stockholders will be called by the secretary of the corporation upon the written
request of stockholders entitled to cast not less than a majority of all the votes entitled to be cast at such meeting.
Approval of Extraordinary
Corporate Action; Amendment of Charter and Bylaws
Under Maryland law, a Maryland corporation generally cannot dissolve, amend its
charter, merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business, unless approved by the affirmative vote of stockholders entitled to cast at least
two-thirds of the votes entitled to be cast on the matter. However, a Maryland corporation may provide in its charter for approval of these matters by a lesser percentage, but not less than a majority of all of the votes entitled to be cast on the
matter. Our charter generally provides for approval of charter amendments and extraordinary transactions by the stockholders entitled to cast at least a majority of the votes entitled to be cast on the matter. Our charter also provides that certain
charter amendments, any proposal for our conversion, whether by charter amendment, merger or otherwise, from a closed-end company to an open-end company and any proposal for our liquidation or dissolution requires the approval of the stockholders
entitled to cast at least 80% of the votes entitled to be cast on such matter. However, if such amendment or proposal is approved by a majority of our continuing directors (in addition to approval by our board of directors), such amendment or
proposal may be approved by a majority of the votes entitled to be cast on such a matter. In either event, in accordance with the requirements of the 1940 Act, any such amendment or proposal that would have the effect of changing the nature of our
business so as to cause us to cease to be, or to withdraw our election as, a business development company would be required to be approved by a majority of our outstanding voting securities, as defined under the 1940 Act. The “continuing
directors” are defined in our charter as (a) our current directors, (b) those directors whose nomination for election by the stockholders or whose election by the directors to fill vacancies is approved by a majority of our current
directors then on the board of directors or (c) any successor directors whose nomination for election by the stockholders or whose election by the directors to fill vacancies is approved by a majority of continuing directors or the successor
continuing directors then in office.
Our charter and bylaws provide that the board of directors have the exclusive power to make, alter,
amend or repeal any provision of our bylaws.
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No Appraisal Rights
Except with respect to appraisal rights arising in connection with the Control Share Act discussed below, as permitted by the Maryland General
Corporation Law, our charter provides that stockholders will not be entitled to exercise appraisal rights unless a majority of the board of directors shall determine such rights apply.
Control Share Acquisitions
The
Maryland General Corporation Law provides that control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the
matter, or the Control Share Act. Shares owned by the acquirer, by officers or by directors who are employees of the corporation are excluded from shares entitled to vote on the matter. Control shares are voting shares of stock which, if aggregated
with all other shares of stock owned by the acquirer or in respect of which the acquirer is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise voting power
in electing directors within one of the following ranges of voting power:
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one-tenth or more but less than one-third;
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one-third or more but less than a majority; or
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a majority or more of all voting power.
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The requisite stockholder approval must be obtained each time an acquirer crosses one of the thresholds of voting power set forth above.
Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A control share acquisition means the acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition may compel the board of directors of the corporation to call a
special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. The right to compel the calling of a special meeting is subject to the satisfaction of certain conditions, including an undertaking to
pay the expenses of the meeting. If no request for a meeting is made, the corporation may itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person statement as required by the
statute, then the corporation may redeem for fair value any or all of the control shares, except those for which voting rights have previously been approved. The right of the corporation to redeem control shares is subject to certain conditions and
limitations, including, as provided in our bylaws, compliance with the 1940 Act. Fair value is determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquirer or
of any meeting of stockholders at which the voting rights of the shares are considered and not approved. If voting rights for control shares are approved at a stockholders meeting and the acquirer becomes entitled to vote a majority of the shares
entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of appraisal rights may not be less than the highest price per share paid by the acquirer in the control share
acquisition.
The Control Share Act does not apply (a) to shares acquired in a merger, consolidation or share exchange if the
corporation is a party to the transaction or (b) to acquisitions approved or exempted by the charter or bylaws of the corporation. Our bylaws contain a provision exempting from the Control Share Act any and all acquisitions by any person of our
shares of stock. There can be no assurance that such provision will not be amended or eliminated at any time in the future. However, we will amend our bylaws to be subject to the Control Share Act only if the board of directors determines that it
would be in our best interests and if the SEC staff does not object to our determination that our being subject to the Control Share Act does not conflict with the 1940 Act.
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Business Combinations
Under Maryland law, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an
interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder, or the Business Combination Act. These business combinations include a merger, consolidation,
share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:
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any person who beneficially owns 10% or more of the voting power of the corporation’s outstanding voting
stock; or
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an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in
question, was the beneficial owner of 10% or more of the voting power of then outstanding voting stock of the corporation.
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A person is not an interested stockholder under this statute if the board of directors approved in advance the transaction by which the
stockholder otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions
determined by the board.
After the five-year prohibition, any business combination between the Maryland corporation and an interested
stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:
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80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and
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two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held
by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder.
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These super-majority vote requirements do not apply if the corporation’s common stockholders receive a minimum price, as defined under
Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares.
The statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors before
the time that the interested stockholder becomes an interested stockholder. Our board of directors has adopted a resolution that any business combination between us and any other person is exempted from the provisions of the Business Combination
Act, provided that the business combination is first approved by the board of directors, including a majority of the directors who are not interested persons as defined in the 1940 Act. This resolution may be altered or repealed in whole or in part
at any time; however, our board of directors will adopt resolutions so as to make us subject to the provisions of the Business Combination Act only if the board of directors determines that it would be in our best interests and if the SEC staff does
not object to our determination that our being subject to the Business Combination Act does not conflict with the 1940 Act. If this resolution is repealed, or the board of directors does not otherwise approve a business combination, the statute may
discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
Conflict with 1940
Act
Our bylaws provide that, if and to the extent that any provision of the Maryland General Corporation Law, including the
Control Share Act (if we amend our bylaws to be subject to such Act) and the Business Combination Act, or any provision of our charter or bylaws conflicts with any provision of the 1940 Act, the applicable provision of the 1940 Act will control.
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DESCRIPTION OF OUR PREFERRED STOCK
Our articles of incorporation authorize our board of directors to classify and reclassify any unissued shares of stock into other classes or
series of stock, including preferred stock. Prior to issuance of shares of each class or series, the board of directors is required by Maryland law and by our articles of incorporation to set the terms, preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series. Thus, the board of directors could authorize the issuance of shares of preferred stock
with terms and conditions which could have the effect of delaying, deferring or preventing a transaction or a change in control that might involve a premium price for holders of our securities or otherwise be in their best interest. You should note,
however, that any issuance of preferred stock must comply with the requirements of the 1940 Act. The 1940 Act requires, among other things, that (a) immediately after issuance and before any dividend or other distribution is made with respect
to our securities and before any purchase of securities is made, such preferred stock together with all other senior securities must not exceed an amount equal to 50.0% of our total assets after deducting the amount of such dividend, distribution or
purchase price, as the case may be, and (b) the holders of shares of preferred stock, if any are issued, must be entitled as a class to elect two directors at all times and to elect a majority of the directors if distributions on such preferred
stock are in arrears by two years or more. Certain matters under the 1940 Act require the separate vote of the holders of any issued and outstanding preferred stock. For example, holders of preferred stock would vote separately from the holders of
common stock on a proposal to cease operations as a business development company. Further, the 1940 Act requires that any distributions we make on preferred stock be cumulative. We believe that the availability for issuance of preferred stock will
provide us with increased flexibility in structuring future financings and acquisitions.
For any series of preferred stock that we may
issue, our board of directors will determine and the prospectus supplement relating to such series will describe:
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the designation and number of shares of such series;
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the rate and time at which, and the preferences and conditions under which, any dividends will be paid on shares
of such series, as well as whether such dividends are participating or non-participating;
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any provisions relating to convertibility or exchangeability of the shares of such series;
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the rights and preferences, if any, of holders of shares of such series upon our liquidation, dissolution or
winding up of our affairs;
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the voting powers, if any, of the holders of shares of such series;
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any provisions relating to the redemption of the shares of such series;
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any limitations on our ability to pay dividends or make distributions on, or acquire or redeem, other securities
while shares of such series are outstanding;
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any conditions or restrictions on our ability to issue additional shares of such series or other securities;
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if applicable, a discussion of certain U.S. federal income tax considerations; and
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any other relative power, preferences and participating, optional or special rights of shares of such series, and
the qualifications, limitations or restrictions thereof.
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All shares of preferred stock that we may issue will be
identical and of equal rank except as to the particular terms thereof that may be fixed by our board of directors, and all shares of each series of preferred stock will be identical and of equal rank except as to the dates from which cumulative
dividends, if any, thereon will be cumulative.
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DESCRIPTION OF OUR SUBSCRIPTION RIGHTS
We may issue subscription rights to purchase common stock. Subscription rights may be issued independently or together with any other offered
security and may or may not be transferable by the person purchasing or receiving the subscription rights. In connection with any subscription rights offering to our stockholders, we may enter into a standby underwriting or other arrangement with
one or more underwriters or other persons pursuant to which such underwriters or other persons would purchase any offered securities remaining unsubscribed for after such subscription rights offering. We will not offer transferable subscription
rights to our stockholders at a price equivalent to less than the then current net asset value per share of common stock, excluding underwriting commissions, unless we first file a post-effective amendment that is declared effective by the SEC with
respect to such issuance and the common stock to be purchased in connection with the rights represents no more than one-third of our outstanding common stock at the time such rights are issued. In connection with a subscription rights offering to
our stockholders, we would distribute certificates evidencing the subscription rights and a prospectus supplement to our stockholders on the record date that we set for receiving subscription rights in such subscription rights offering. Our common
stockholders will indirectly bear the expenses of such subscription rights offerings, regardless of whether our common stockholders exercise any subscription rights.
The applicable prospectus supplement would describe the following terms of subscription rights in respect of which this prospectus is being
delivered:
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the title of such subscription rights;
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the exercise price or a formula for the determination of the exercise price for such subscription rights;
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the number or a formula for the determination of the number of such subscription rights issued to each
stockholder;
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the extent to which such subscription rights are transferable;
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if applicable, a discussion of the material U.S. federal income tax considerations applicable to the issuance or
exercise of such subscription rights;
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the date on which the right to exercise such subscription rights would commence, and the date on which such
rights shall expire (subject to any extension);
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the extent to which such subscription rights include an over-subscription privilege with respect to unsubscribed
securities;
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if applicable, the material terms of any standby underwriting or other purchase arrangement that we may enter
into in connection with the subscription rights offering; and
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any other terms of such subscription rights, including terms, procedures and limitations relating to the exchange
and exercise of such subscription rights.
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Exercise of Subscription Rights
Each subscription right would entitle the holder of the subscription right to purchase for cash such amount of shares of common stock or other
securities at such exercise price as shall in each case be set forth in, or be determinable as set forth in, the prospectus supplement relating to the subscription rights offered thereby or another report filed with the SEC. Subscription rights may
be exercised at any time up to the close of business on the expiration date for such subscription rights set forth in the applicable prospectus supplement. After the close of business on the expiration date, all unexercised subscription rights would
become void. We have not previously completed such an offering of subscription rights.
Subscription rights may be exercised as set forth
in the prospectus supplement relating to the subscription rights offered thereby. Upon receipt of payment and the subscription rights certificate properly completed and
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duly executed at the corporate trust office of the subscription rights agent or any other office indicated in the prospectus supplement, we will forward, as soon as practicable, the shares of
common stock or other securities purchasable upon such exercise. We may determine to offer any unsubscribed offered securities directly to stockholders, persons other than stockholders, to or through agents, underwriters or dealers or through a
combination of such methods, including pursuant to standby underwriting or other arrangements, as set forth in the applicable prospectus supplement.
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DESCRIPTION OF OUR DEBT SECURITIES
We may issue debt securities in one or more series. The specific terms of each series of debt securities will be described in the particular
prospectus supplement relating to that series. The prospectus supplement may or may not modify the general terms found in this prospectus and will be filed with the SEC. For a complete description of the terms of a particular series of debt
securities, you should read both this prospectus and the prospectus supplement relating to that particular series.
As required by federal
law for all bonds and notes of companies that are publicly offered, the debt securities are governed by a document called an “indenture.” An indenture is a contract between us and the financial institution acting as trustee on your behalf,
and is subject to and governed by the Trust Indenture Act of 1939, as amended. The trustee has two main roles. First, the trustee can enforce your rights against us if we default. There are some limitations on the extent to which the trustee acts on
your behalf, described in the second paragraph under “—Events of Default—Remedies if an Event of Default Occurs.” Second, the trustee performs certain administrative duties for us with respect to our debt securities.
This section includes a description of the material provisions of the indenture. Because this section is a summary, however, it does not
describe every aspect of the debt securities and the indenture. We urge you to read the indenture because it, and not this description, defines your rights as a holder of debt securities. A copy of the form of indenture is attached as an exhibit to
the registration statement of which this prospectus is a part. We will file a supplemental indenture with the SEC in connection with any debt offering, at which time the supplemental indenture would be publicly available. See “Available
Information” for information on how to obtain a copy of the indenture.
The prospectus supplement, which will accompany this
prospectus, will describe the particular series of debt securities being offered by including:
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the designation or title of the series of debt securities;
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the total principal amount of the series of debt securities;
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the percentage of the principal amount at which the series of debt securities will be offered;
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the date or dates on which principal will be payable;
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the rate or rates (which may be either fixed or variable) and/or the method of determining such rate or rates of
interest, if any;
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the date or dates from which any interest will accrue, or the method of determining such date or dates, and the
date or dates on which any interest will be payable;
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whether any interest may be paid by issuing additional securities of the same series in lieu of cash (and the
terms upon which any such interest may be paid by issuing additional securities);
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the terms for redemption, extension or early repayment, if any;
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the currencies in which the series of debt securities are issued and payable;
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whether the amount of payments of principal, premium or interest, if any, on a series of debt securities will be
determined with reference to an index, formula or other method (which could be based on one or more currencies, commodities, equity indices or other indices) and how these amounts will be determined;
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the place or places, if any, other than or in addition to the Borough of Manhattan in the City of New York, of
payment, transfer, conversion and/or exchange of the debt securities;
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the denominations in which the offered debt securities will be issued (if other than $1,000 and any integral
multiple thereof);
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the provision for any sinking fund;
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any restrictive covenants;
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any Events of Default (as defined in “Events of Default” below);
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whether the series of debt securities are issuable in certificated form;
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any provisions for defeasance or covenant defeasance;
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any special federal income tax implications, including, if applicable, federal income tax considerations relating
to original issue discount;
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whether and under what circumstances we will pay additional amounts in respect of any tax, assessment or
governmental charge and, if so, whether we will have the option to redeem the debt securities rather than pay the additional amounts (and the terms of this option);
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any provisions for convertibility or exchangeability of the debt securities into or for any other securities;
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whether the debt securities are subject to subordination and the terms of such subordination;
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whether the debt securities are secured and the terms of any security interest;
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the listing, if any, on a securities exchange; and
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The debt securities may be secured or unsecured obligations. Unless the prospectus supplement states otherwise, principal (and premium, if
any) and interest, if any, will be paid by us in immediately available funds.
We are generally permitted, under specified conditions, to
issue multiple classes of indebtedness if our asset coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance after giving effect to any exemptive relief granted to us by the SEC. In accordance with recent
legislation, on May 2, 2018, our board of directors, including a “required majority” approved the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, our asset coverage requirements for senior
securities will change from 200% to 150%, effective May 2, 2019. For a discussion of the risks associated with leverage, see “Risk Factors—Risks Relating to Our Business and Structure—Regulations governing our operation as a BDC
affect our ability to, and the way in which we raise additional capital. As a BDC, the necessity of raising additional capital may expose us to risks, including the typical risks associated with leverage.” For a discussion of recent legislation
that may allow us to incur additional leverage, see “Risk Factors—Risks Related to Our Business and Structure—Recent legislation may allow us to incur additional leverage.”
General
The indenture provides that any
debt securities proposed to be sold under this prospectus and the accompanying prospectus supplement (“offered debt securities”) and any debt securities issuable upon the exercise of warrants or upon conversion or exchange of other offered
securities (“underlying debt securities”) may be issued under the indenture in one or more series.
For purposes of this
prospectus, any reference to the payment of principal of, or premium or interest, if any, on, debt securities will include additional amounts if required by the terms of the debt securities.
The indenture does not limit the amount of debt securities that may be issued thereunder from time to time. Debt securities issued under the
indenture, when a single trustee is acting for all debt securities issued under the indenture, are called the “indenture securities.” The indenture also provides that there may be more than one trustee thereunder, each with respect to one
or more different series of indenture securities. See “—Resignation of Trustee” below. At a time when two or more trustees are acting under the indenture, each with respect to only certain series, the term “indenture
securities” means the one or more series of debt securities with respect to which each respective trustee is acting. In the event that there is more than one trustee under the indenture, the
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powers and trust obligations of each trustee described in this prospectus will extend only to the one or more series of indenture securities for which it is trustee. If two or more trustees are
acting under the indenture, then the indenture securities for which each trustee is acting would be treated as if issued under separate indentures.
Except as described under “—Events of Default” and “—Merger or Consolidation” below, the indenture does not
contain any provisions that give you protection in the event we issue a large amount of debt or we are acquired by another entity.
We
refer you to the prospectus supplement for information with respect to any deletions from, modifications of or additions to the Events of Default or our covenants that are described below, including any addition of a covenant or other provision
providing event risk protection or similar protection.
We have the ability to issue indenture securities with terms different from those
of indenture securities previously issued and, without the consent of the holders thereof, to reopen a previous issue of a series of indenture securities and issue additional indenture securities of that series unless the reopening was restricted
when that series was created.
Conversion and Exchange
If any debt securities are convertible into or exchangeable for other securities, the prospectus supplement will explain the terms and
conditions of the conversion or exchange, including the conversion price or exchange ratio (or the calculation method), the conversion or exchange period (or how the period will be determined), if conversion or exchange will be mandatory or at the
option of the holder or us, provisions for adjusting the conversion price or the exchange ratio and provisions affecting conversion or exchange in the event of the redemption of the underlying debt securities. These terms may also include provisions
under which the number or amount of other securities to be received by the holders of the debt securities upon conversion or exchange would be calculated according to the market price of the other securities as of a time stated in the prospectus
supplement.
Issuance of Securities in Registered Form
We may issue the debt securities in registered form, in which case we may issue them either in book-entry form only or in
“certificated” form. Debt securities issued in book-entry form will be represented by global securities. We expect that we will usually issue debt securities in book-entry only form represented by global securities.
Book-Entry Holders
We
will issue registered debt securities in book-entry form only, unless we specify otherwise in the applicable prospectus supplement. This means debt securities will be represented by one or more global securities registered in the name of a
depositary that will hold them on behalf of financial institutions that participate in the depositary’s book-entry system. These participating institutions, in turn, hold beneficial interests in the debt securities held by the depositary or its
nominee. These institutions may hold these interests on behalf of themselves or customers.
Under the indenture, only the person in whose
name a debt security is registered is recognized as the holder of that debt security. Consequently, for debt securities issued in book-entry form, we will recognize only the depositary as the holder of the debt securities and we will make all
payments on the debt securities to the depositary. The depositary will then pass along the payments it receives to its participants, which in turn will pass the payments along to their customers who are the beneficial owners. The depositary and its
participants do so under agreements they have made with one another or with their customers; they are not obligated to do so under the terms of the debt securities.
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As a result, investors will not own debt securities directly. Instead, they will own beneficial
interests in a global security, through a bank, broker or other financial institution that participates in the depositary’s book-entry system or holds an interest through a participant. As long as the debt securities are represented by one or
more global securities, investors will be indirect holders, and not holders, of the debt securities.
Street Name Holders
In the future, we may issue debt securities in certificated form or terminate a global security. In these cases, investors may choose to hold
their debt securities in their own names or in “street name.” Debt securities held in street name are registered in the name of a bank, broker or other financial institution chosen by the investor, and the investor would hold a beneficial
interest in those debt securities through the account he or she maintains at that institution.
For debt securities held in street name,
we will recognize only the intermediary banks, brokers and other financial institutions in whose names the debt securities are registered as the holders of those debt securities, and we will make all payments on those debt securities to them. These
institutions will pass along the payments they receive to their customers who are the beneficial owners, but only because they agree to do so in their customer agreements or because they are legally required to do so. Investors who hold debt
securities in street name will be indirect holders, and not holders, of the debt securities.
Legal Holders
Our obligations, as well as the obligations of the applicable trustee and those of any third parties employed by us or the applicable trustee,
run only to the legal holders of the debt securities. We do not have obligations to investors who hold beneficial interests in global securities, in street name or by any other indirect means. This will be the case whether an investor chooses to be
an indirect holder of a debt security or has no choice because we are issuing the debt securities only in book-entry form.
For example,
once we make a payment or give a notice to the holder, we have no further responsibility for the payment or notice even if that holder is required, under agreements with depositary participants or customers or by law, to pass it along to the
indirect holders but does not do so. Similarly, if we want to obtain the approval of the holders for any purpose (for example, to amend an indenture or to relieve us of the consequences of a default or of our obligation to comply with a particular
provision of an indenture), we would seek the approval only from the holders, and not the indirect holders, of the debt securities. Whether and how the holders contact the indirect holders is up to the holders.
When we refer to you in this Description of Our Debt Securities, we mean those who invest in the debt securities being offered by this
prospectus, whether they are the holders or only indirect holders of those debt securities. When we refer to your debt securities, we mean the debt securities in which you hold a direct or indirect interest.
Special Considerations for Indirect Holders
If you hold debt securities through a bank, broker or other financial institution, either in book-entry form or in street name, we urge you to
check with that institution to find out:
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how it handles securities payments and notices;
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whether it imposes fees or charges;
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how it would handle a request for the holders’ consent, if ever required;
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whether and how you can instruct it to send you debt securities registered in your own name so you can be a
holder, if that is permitted in the future for a particular series of debt securities;
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how it would exercise rights under the debt securities if there were a default or other event triggering the need
for holders to act to protect their interests; and
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if the debt securities are in book-entry form, how the depositary’s rules and procedures will affect these
matters.
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Global Securities
As noted above, we usually will issue debt securities as registered securities in book-entry form only. A global security represents one or any
other number of individual debt securities. Generally, all debt securities represented by the same global securities will have the same terms.
Each debt security issued in book-entry form will be represented by a global security that we deposit with and register in the name of a
financial institution or its nominee that we select. The financial institution that we select for this purpose is called the depositary. Unless we specify otherwise in the applicable prospectus supplement, The Depository Trust Company, New York, New
York, known as DTC, will be the depositary for all debt securities issued in book-entry form.
A global security may not be transferred to
or registered in the name of anyone other than the depositary or its nominee, unless special termination situations arise. We describe those situations below under “—Termination of a Global Security.” As a result of these
arrangements, the depositary, or its nominee, will be the sole registered owner and holder of all debt securities represented by a global security, and investors will be permitted to own only beneficial interests in a global security. Beneficial
interests must be held by means of an account with a broker, bank or other financial institution that in turn has an account with the depositary or with another institution that has an account with the depositary. Thus, an investor whose security is
represented by a global security will not be a holder of the debt security, but only an indirect holder of a beneficial interest in the global security.
Special Considerations for Global Securities
As an indirect holder, an investor’s rights relating to a global security will be governed by the account rules of the investor’s
financial institution and of the depositary, as well as general laws relating to securities transfers. The depositary that holds the global security will be considered the holder of the debt securities represented by the global security.
If debt securities are issued only in the form of a global security, an investor should be aware of the following:
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an investor cannot cause the debt securities to be registered in his or her name and cannot obtain certificates
for his or her interest in the debt securities, except in the special situations we describe below;
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an investor will be an indirect holder and must look to his or her own bank or broker for payments on the debt
securities and protection of his or her legal rights relating to the debt securities, as we describe under “—Issuance of Securities in Registered Form” above;
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an investor may not be able to sell interests in the debt securities to some insurance companies and other
institutions that are required by law to own their securities in non-book-entry form;
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an investor may not be able to pledge his or her interest in a global security in circumstances where
certificates representing the debt securities must be delivered to the lender or other beneficiary of the pledge in order for the pledge to be effective;
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the depositary’s policies, which may change from time to time, will govern payments, transfers, exchanges
and other matters relating to an investor’s interest in a global security. We and the trustee have no responsibility for any aspect of the depositary’s actions or for its records of ownership interests in a global security. We and the
trustee also do not supervise the depositary in any way;
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if we redeem less than all the debt securities of a particular series being redeemed, DTC’s practice is to
determine by lot the amount to be redeemed from each of its participants holding that series;
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an investor is required to give notice of exercise of any option to elect repayment of its debt securities,
through its participant, to the applicable trustee and to deliver the related debt securities by causing its participant to transfer its interest in those debt securities, on DTC’s records, to the applicable trustee;
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DTC requires that those who purchase and sell interests in a global security deposited in its book-entry system
use immediately available funds, your broker or bank may also require you to use immediately available funds when purchasing or selling interests in a global security; and
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financial institutions that participate in the depositary’s book-entry system, and through which an investor
holds its interest in a global security, may also have their own policies affecting payments, notices and other matters relating to the debt securities; there may be more than one financial intermediary in the chain of ownership for an investor; we
do not monitor and are not responsible for the actions of any of those intermediaries.
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Termination of a Global
Security
If a global security is terminated for any reason, interests in it will be exchanged for certificates in non-book-entry form
(certificated securities). After that exchange, the choice of whether to hold the certificated debt securities directly or in street name will be up to the investor. Investors must consult their own banks or brokers to find out how to have their
interests in a global security transferred on termination to their own names, so that they will be holders. We have described the rights of legal holders and street name investors under “—Issuance of Securities in Registered Form”
above.
The prospectus supplement may list situations for terminating a global security that would apply only to the particular series of
debt securities covered by the prospectus supplement. If a global security is terminated, only the depositary, and not we or the applicable trustee, is responsible for deciding the investors in whose names the debt securities represented by the
global security will be registered and, therefore, who will be the holders of those debt securities.
Payment and Paying Agents
We will pay interest to the person listed in the applicable trustee’s records as the owner of the debt security at the close of business
on a particular day in advance of each due date for interest, even if that person no longer owns the debt security on the interest due date. That day, usually about two weeks in advance of the interest due date, is called the “record
date.” Because we will pay all the interest for an interest period to the holders on the record date, holders buying and selling debt securities must work out between themselves the appropriate purchase price. The most common manner is to
adjust the sales price of the debt securities to prorate interest fairly between buyer and seller based on their respective ownership periods within the particular interest period. This prorated interest amount is called “accrued
interest.”
Payments on Global Securities
We will make payments on a global security in accordance with the applicable policies of the depositary as in effect from time to time. Under
those policies, we will make payments directly to the depositary, or its nominee, and not to any indirect holders who own beneficial interests in the global security. An indirect holder’s right to those payments will be governed by the rules
and practices of the depositary and its participants, as described under “—Special Considerations for Global Securities.”
Payments on Certificated Securities
We will make payments on a certificated debt security as follows. We will pay interest that is due on an interest payment date to the holder of
debt securities as shown on the trustee’s records as of the close of business
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on the regular record date at our office and/or at other offices that may be specified in the prospectus supplement. We will make all payments of principal and premium, if any, by check at the
office of the applicable trustee and/or at other offices that may be specified in the prospectus supplement or in a notice to holders against surrender of the debt security.
Alternatively, at our option, we may pay any cash interest that becomes due on the debt security by mailing a check to the holder at his, her
or its address shown on the trustee’s records as of the close of business on the regular record date or by transfer to an account at a bank in the United States, in either case, on the due date.
Payment When Offices Are Closed
If any payment is due on a debt security on a day that is not a business day, we will make the payment on the next day that is a business day.
Payments made on the next business day in this situation will be treated under the indenture as if they were made on the original due date, except as otherwise indicated in the attached prospectus supplement. Such payment will not result in a
default under any debt security or the indenture, and no interest will accrue on the payment amount from the original due date to the next day that is a business day.
Book-entry and other indirect holders should consult their banks or brokers for information on how they will receive payments on their debt
securities.
Events of Default
You
will have rights if an Event of Default occurs in respect of the debt securities of your series and is not cured, as described later in this subsection.
The term “Event of Default” in respect of the debt securities of your series means any of the following:
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we do not pay the principal of, or any premium on, a debt security of the series within five days of its due
date;
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we do not pay interest on a debt security of the series within 30 days of its due date;
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we do not deposit any sinking fund payment in respect of debt securities of the series within five days of its
due date;
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we remain in breach of a covenant in respect of debt securities of the series for 60 days after we receive a
written notice of default stating we are in breach (the notice must be sent by either the trustee or holders of at least 25% of the principal amount of the outstanding debt securities of the series);
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we file for bankruptcy or certain other events of bankruptcy, insolvency or reorganization occur and remain
undischarged or unstayed for a period of 90 days;
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the series of debt securities has an asset coverage, as such term is defined in the 1940 Act, of less than 100
per centum on the last business day of each of twenty-four consecutive calendar months, giving effect to any exemptive relief granted to the Company by the SEC; or
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any other Event of Default in respect of debt securities of the series described in the prospectus supplement
occurs.
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An Event of Default for a particular series of debt securities does not necessarily constitute an Event of
Default for any other series of debt securities issued under the same or any other indenture. The trustee may withhold notice to the holders of debt securities of any default, except in the payment of principal, premium, interest, or sinking or
purchase fund installment, if it in good faith considers the withholding of notice to be in the interest of the holders.
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Remedies if an Event of Default Occurs
If an Event of Default has occurred and is continuing, the trustee or the holders of not less than 25% in principal amount of the outstanding
debt securities of the affected series may (and the trustee shall at the request of such holders) declare the entire principal amount of all the debt securities of that series to be due and immediately payable. This is called a declaration of
acceleration of maturity. A declaration of acceleration of maturity may be canceled by the holders of a majority in principal amount of the outstanding debt securities of the affected series if (1) we have deposited with the trustee all amounts
due and owing with respect to the securities (other than principal that has become due solely by reason of such acceleration) and certain other amounts, and (2) any other Events of Default have been cured or waived.
The trustee is not required to take any action under the indenture at the request of any holders unless the holders offer the trustee
protection from expenses and liability reasonably satisfactory to it (called an “indemnity”). If indemnity reasonably satisfactory to it is provided, the holders of a majority in principal amount of the outstanding debt securities of the
relevant series may direct the time, method and place of conducting any lawsuit or other formal legal action seeking any remedy available to the trustee. The trustee may refuse to follow those directions in certain circumstances. No delay or
omission in exercising any right or remedy will be treated as a waiver of that right, remedy or Event of Default.
Before you are allowed
to bypass your trustee and bring your own lawsuit or other formal legal action or take other steps to enforce your rights or protect your interests relating to the debt securities, the following must occur:
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you must give the trustee written notice that an Event of Default with respect to the relevant series of debt
securities has occurred and remains uncured;
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the holders of at least 25% in principal amount of all outstanding debt securities of the relevant series must
make a written request that the trustee take action because of the default and must offer the trustee indemnity, security or both reasonably satisfactory to it against the costs, expenses and other liabilities of taking that action;
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the trustee must not have taken action for 60 days after receipt of the above notice and offer of indemnity
and/or security; and
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the holders of a majority in principal amount of the outstanding debt securities of that series must not have
given the trustee a direction inconsistent with the above notice during that 60-day period.
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However, you are entitled
at any time to bring a lawsuit for the payment of money due on your debt securities on or after the due date.
Book-entry and other indirect holders
should consult their banks or brokers for information on how to give notice or direction to or make a request of the trustee and how to declare or cancel an acceleration of maturity.
Each year, we will furnish to each trustee a written statement of certain of our officers certifying that to their knowledge we are in
compliance with the indenture and the debt securities, or else specifying any default.
Waiver of Default
Holders of a majority in principal amount of the outstanding debt securities of the affected series may waive any past defaults other than
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the payment of principal, any premium or interest; or
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in respect of a covenant that cannot be modified or amended without the consent of each holder.
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Merger or Consolidation
Under the terms of the indenture, we are generally permitted to consolidate or merge with another entity. We are also permitted to sell all or
substantially all of our assets to another entity. However, we may not take any of these actions unless all the following conditions are met:
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where we merge out of existence or sell substantially all our assets, the resulting entity or transferee must
agree to be legally responsible for our obligations under the debt securities;
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the merger or sale of assets must not cause a default on the debt securities and we must not already be in
default (unless the merger or sale would cure the default). For purposes of this no-default test, a default would include an Event of Default that has occurred and has not been cured, as described under “Events of Default” above. A default
for this purpose would also include any event that would be an Event of Default if the requirements for giving us a notice of default or our default having to exist for a specific period of time were disregarded;
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we must deliver certain certificates and documents to the trustee; and
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we must satisfy any other requirements specified in the prospectus supplement relating to a particular series of
debt securities.
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Modification or Waiver
There are three types of changes we can make to the indenture and the debt securities issued thereunder.
Changes Requiring Your Approval
First, there are changes that we cannot make to your debt securities without your specific approval. The following is a list of those types of
changes:
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change the stated maturity of the principal of or interest on a debt security or the terms of any sinking fund
with respect to any security;
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reduce any amounts due on a debt security;
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reduce the amount of principal payable upon acceleration of the maturity of an original issue discount or indexed
security following a default or upon the redemption thereof or the amount thereof provable in a bankruptcy proceeding;
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adversely affect any right of repayment at the holder’s option;
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change the place or currency of payment on a debt security (except as otherwise described in the prospectus or
prospectus supplement);
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impair your right to sue for payment;
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adversely affect any right to convert or exchange a debt security in accordance with its terms;
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modify the subordination provisions in the indenture in a manner that is adverse to outstanding holders of the
debt securities;
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reduce the percentage of holders of debt securities whose consent is needed to modify or amend the indenture;
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reduce the percentage of holders of debt securities whose consent is needed to waive compliance with certain
provisions of the indenture or to waive certain defaults;
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modify any other aspect of the provisions of the indenture dealing with supplemental indentures with the consent
of holders, waiver of past defaults, changes to the quorum or voting requirements or the waiver of certain covenants; and
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change any obligation we have to pay additional amounts.
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Changes Not Requiring Approval
The second type of change does not require any vote by the holders of the debt securities. This type is limited to clarifications,
establishment of the form or terms of new securities of any series as permitted by the indenture and certain other changes that would not adversely affect holders of the outstanding debt securities in any material respect. We also do not need any
approval to make any change that affects only debt securities to be issued under the indenture after the change takes effect.
Changes
Requiring Majority Approval
Any other change to the indenture and the debt securities would require the following approval:
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if the change affects only one series of debt securities, it must be approved by the holders of a majority in
principal amount of that series; and
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if the change affects more than one series of debt securities issued under the same indenture, it must be
approved by the holders of a majority in principal amount of all of the series affected by the change, with all affected series voting together as one class for this purpose.
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In each case, the required approval must be given by written consent.
The holders of a majority in principal amount of a series of debt securities issued under the indenture, voting together as one class for this
purpose, may waive our compliance with some of our covenants applicable to that series of debt securities. However, we cannot obtain a waiver of a payment default or of any of the matters covered by the bullet points included above under
“—Changes Requiring Your Approval.”
Further Details Concerning Voting
When taking a vote, we will use the following rules to decide how much principal to attribute to a debt security:
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for original issue discount securities, we will use the principal amount that would be due and payable on the
voting date if the maturity of these debt securities were accelerated to that date because of a default;
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for debt securities whose principal amount is not known (for example, because it is based on an index), we will
use the principal face amount at original issuance or a special rule for that debt security described in the prospectus supplement; and
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for debt securities denominated in one or more foreign currencies, we will use the U.S. dollar equivalent.
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Debt securities will not be considered outstanding, and therefore not eligible to vote, if we have deposited or set
aside in trust money for their payment or redemption or if we, any other obligor, or any affiliate of us or any obligor own such debt securities. Debt securities will also not be eligible to vote if they have been fully defeased as described later
under “—Defeasance—Full Defeasance.”
We will generally be entitled to set any day as a record date for the purpose of
determining the holders of outstanding indenture securities that are entitled to vote or take other action under the indenture. However, the record date may not be more than 30 days before the date of the first solicitation of holders to vote on or
take such action. If we set a record date for a vote or other action to be taken by holders of one or more series, that vote or action may be taken only by persons who are holders of outstanding indenture securities of those series on the record
date and must be taken within eleven months following the record date.
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Book-entry and other indirect holders should consult their banks or brokers for information on how approval
may be granted or denied if we seek to change the indenture or the debt securities or request a waiver.
Defeasance
The following provisions will be applicable to each series of debt securities unless we state in the applicable prospectus supplement that the
provisions of covenant defeasance and full defeasance will not be applicable to that series.
Covenant Defeasance
Under current U.S. federal tax law and the indenture, we can make the deposit described below and be released from some of the restrictive
covenants in the indenture under which the particular series was issued. This is called “covenant defeasance.” In that event, you would lose the protection of those restrictive covenants but would gain the protection of having money and
government securities set aside in trust to repay your debt securities. If we achieved covenant defeasance and your debt securities were subordinated as described under “—Indenture Provisions—Subordination” below, such
subordination would not prevent the trustee under the indenture from applying the funds available to it from the deposit described in the first bullet below to the payment of amounts due in respect of such debt securities for the benefit of the
subordinated debt holders. In order to achieve covenant defeasance, the following must occur:
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we must deposit in trust for the benefit of all holders of a series of debt securities a combination of cash (in
such currency in which such securities are then specified as payable at stated maturity) or government obligations applicable to such securities (determined on the basis of the currency in which such securities are then specified as payable at
stated maturity) that will generate enough cash to make interest, principal and any other payments on the debt securities on their various due dates and any mandatory sinking fund payments or analogous payments;
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we must deliver to the trustee a legal opinion of our counsel confirming that, under current U.S. federal income
tax law, we may make the above deposit without causing you to be taxed on the debt securities any differently than if we did not make the deposit;
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we must deliver to the trustee a legal opinion of our counsel stating that the above deposit does not require
registration by us under the 1940 Act, as amended, and a legal opinion and officers’ certificate stating that all conditions precedent to covenant defeasance have been complied with;
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defeasance must not result in a breach or violation of, or result in a default under, the indenture or any of our
other material agreements or instruments;
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no default or event of default with respect to such debt securities shall have occurred and be continuing and no
defaults or events of default related to bankruptcy, insolvency or reorganization shall occur during the next 90 days; and
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satisfy the conditions for covenant defeasance contained in any supplemental indentures.
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If we accomplish covenant defeasance, you can still look to us for repayment of the debt securities if there were a shortfall in the trust
deposit or the trustee is prevented from making payment. For example, if one of the remaining Events of Default occurred (such as our bankruptcy) and the debt securities became immediately due and payable, there might be such a shortfall. However,
there is no assurance that we would have sufficient funds to make payment of the shortfall.
Full Defeasance
If there is a change in U.S. federal tax law or we obtain an IRS ruling, as described in the second bullet below, we can legally release
ourselves from all payment and other obligations on the debt securities of a
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particular series (called “full defeasance”) if we put in place the following other arrangements for you to be repaid:
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we must deposit in trust for the benefit of all holders of a series of debt securities a combination of cash (in
such currency in which such securities are then specified as payable at stated maturity) or government obligations applicable to such securities (determined on the basis of the currency in which such securities are then specified as payable at
stated maturity) that will generate enough cash to make interest, principal and any other payments on the debt securities on their various due dates and any mandatory sinking fund payments or analogous payments;
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we must deliver to the trustee a legal opinion confirming that there has been a change in current U.S. federal
tax law or an IRS ruling that allows us to make the above deposit without causing you to be taxed on the debt securities any differently than if we did not make the deposit. Under current U.S. federal tax law, the deposit and our legal release from
the debt securities would be treated as though we paid you your share of the cash and notes or bonds at the time the cash and notes or bonds were deposited in trust in exchange for your debt securities and you would recognize gain or loss on the
debt securities at the time of the deposit;
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we must deliver to the trustee a legal opinion of our counsel stating that the above deposit does not require
registration by us under the 1940 Act, as amended, and a legal opinion and officers’ certificate stating that all conditions precedent to defeasance have been complied with;
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defeasance must not result in a breach or violation of, or constitute a default under, the indenture or any of
our other material agreements or instruments;
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no default or event of default with respect to such debt securities shall have occurred and be continuing and no
defaults or events of default related to bankruptcy, insolvency or reorganization shall occur during the next 90 days; and
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satisfy the conditions for full defeasance contained in any supplemental indentures.
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If we ever did accomplish full defeasance, as described above, you would have to rely solely on the trust deposit for repayment of the debt
securities. You could not look to us for repayment in the unlikely event of any shortfall. Conversely, the trust deposit would most likely be protected from claims of our lenders and other creditors if we ever became bankrupt or insolvent. If your
debt securities were subordinated as described later under “—Indenture Provisions—Subordination”, such subordination would not prevent the trustee under the indenture from applying the funds available to it from the deposit
referred to in the first bullet of the preceding paragraph to the payment of amounts due in respect of such debt securities for the benefit of the subordinated debt holders.
Form, Exchange and Transfer of Certificated Registered Securities
If registered debt securities cease to be issued in book-entry form, they will be issued:
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only in fully registered certificated form;
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without interest coupons; and
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unless we indicate otherwise in the prospectus supplement, in denominations of $1,000 and amounts that are
multiples of $1,000.
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Holders may exchange their certificated securities for debt securities of smaller denominations or
combined into fewer debt securities of larger denominations, as long as the total principal amount is not changed and as long as the denomination is greater than the minimum denomination for such securities.
Holders may exchange or transfer their certificated securities at the office of the trustee. We have appointed the trustee to act as our agent
for registering debt securities in the names of holders transferring debt securities. We may appoint another entity to perform these functions or perform them ourselves.
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Holders will not be required to pay a service charge to transfer or exchange their certificated
securities, but they may be required to pay any tax or other governmental charge associated with the transfer or exchange. The transfer or exchange will be made only if our transfer agent is satisfied with the holder’s proof of legal ownership.
If we have designated additional transfer agents for your debt security, they will be named in the prospectus supplement. We may appoint
additional transfer agents or cancel the appointment of any particular transfer agent. We may also approve a change in the office through which any transfer agent acts.
If any certificated securities of a particular series are redeemable and we redeem less than all the debt securities of that series, we may
block the transfer or exchange of those debt securities during the period beginning 15 days before the day we mail the notice of redemption and ending on the day of that mailing, in order to freeze the list of holders to prepare the mailing. We may
also refuse to register transfers or exchanges of any certificated securities selected for redemption, except that we will continue to permit transfers and exchanges of the unredeemed portion of any debt security that will be partially redeemed.
If a registered debt security is issued in book-entry form, only the depositary will be entitled to transfer and exchange the debt
security as described in this subsection, since it will be the sole holder of the debt security.
Resignation of Trustee
Each trustee may resign or be removed with respect to one or more series of indenture securities provided that a successor trustee is appointed
to act with respect to these series and has accepted such appointment. In the event that two or more persons are acting as trustee with respect to different series of indenture securities under the indenture, each of the trustees will be a trustee
of a trust separate and apart from the trust administered by any other trustee.
Indenture Provisions—Subordination
Upon any distribution of our assets upon our dissolution, winding up, liquidation or reorganization, the payment of the principal of (and
premium, if any) and interest, if any, on any indenture securities denominated as subordinated debt securities is to be subordinated to the extent provided in the indenture in right of payment to the prior payment in full of all Senior Indebtedness
(as defined below), but our obligation to you to make payment of the principal of (and premium, if any) and interest, if any, on such subordinated debt securities will not otherwise be affected. In addition, no payment on account of principal (or
premium, if any), sinking fund or interest, if any, may be made on such subordinated debt securities at any time unless full payment of all amounts due in respect of the principal (and premium, if any), sinking fund and interest on Senior
Indebtedness has been made or duly provided for in money or money’s worth.
In the event that, notwithstanding the foregoing, any
payment by us is received by the trustee in respect of subordinated debt securities or by the holders of any of such subordinated debt securities, upon our dissolution, winding up, liquidation or reorganization before all Senior Indebtedness is paid
in full, the payment or distribution must be paid over to the holders of the Senior Indebtedness or on their behalf for application to the payment of all the Senior Indebtedness remaining unpaid until all the Senior Indebtedness has been paid in
full, after giving effect to any concurrent payment or distribution to the holders of the Senior Indebtedness. Subject to the payment in full of all Senior Indebtedness upon this distribution by us, the holders of such subordinated debt securities
will be subrogated to the rights of the holders of the Senior Indebtedness to the extent of payments made to the holders of the Senior Indebtedness out of the distributive share of such subordinated debt securities.
By reason of this subordination, in the event of a distribution of our assets upon our insolvency, certain of our senior creditors may recover
more, ratably, than holders of any subordinated debt securities or the holders of any indenture securities that are not Senior Indebtedness. The indenture provides that these subordination provisions will not apply to money and securities held in
trust under the defeasance provisions of the indenture.
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Senior Indebtedness is defined in the indenture as the principal of (and premium, if any) and
unpaid interest on:
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our indebtedness (including indebtedness of others guaranteed by us), whenever created, incurred, assumed or
guaranteed, for money borrowed, that we have designated as “Senior Indebtedness” for purposes of the indenture and in accordance with the terms of the indenture (including any indenture securities designated as Senior Indebtedness), and
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renewals, extensions, modifications and refinancings of any of this indebtedness.
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If this prospectus is being delivered in connection with the offering of a series of indenture securities denominated as subordinated debt
securities, the accompanying prospectus supplement will set forth the approximate amount of our Senior Indebtedness and of our other Indebtedness outstanding as of a recent date.
Secured Indebtedness and Ranking
Certain
of our indebtedness, including certain series of indenture securities, may be secured. The prospectus supplement for each series of indenture securities will describe the terms of any security interest for such series and will indicate the
approximate amount of our secured indebtedness as of a recent date. Any unsecured indenture securities will effectively rank junior to any secured indebtedness, including any secured indenture securities, that we incur in the future to the extent of
the value of the assets securing such future secured indebtedness. The debt securities, whether secured or unsecured, of the Company will rank structurally junior to all existing and future indebtedness (including trade payables) incurred by our
subsidiaries, financing vehicles or similar facilities.
In the event of our bankruptcy, liquidation, reorganization or other winding up,
any of our assets that secure secured debt will be available to pay obligations on unsecured debt securities only after all indebtedness under such secured debt has been repaid in full from such assets. We advise you that there may not be sufficient
assets remaining to pay amounts due on any or all unsecured debt securities then outstanding after fulfillment of this obligation. As a result, the holders of unsecured indenture securities may recover less, ratably, than holders of any of our
secured indebtedness.
The Trustee under the Indenture
We intend to use a nationally recognized financial institution to serve as the trustee under the indenture.
Certain Considerations Relating to Foreign Currencies
Debt securities denominated or payable in foreign currencies may entail significant risks. These risks include the possibility of significant
fluctuations in the foreign currency markets, the imposition or modification of foreign exchange controls and potential illiquidity in the secondary market. These risks will vary depending upon the currency or currencies involved and will be more
fully described in the applicable prospectus supplement.
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DESCRIPTION OF OUR WARRANTS
The following is a general description of the terms of the warrants we may issue from time to time. Particular terms of any warrants we offer
will be described in the prospectus supplement relating to such warrants.
We may issue warrants to purchase shares of our common stock,
shares of our preferred stock or debt securities. Such warrants may be issued independently or together with shares of common or preferred stock or a specified principal amount of debt securities and may be attached or separate from such securities.
We will issue each series of warrants under a separate warrant agreement to be entered into between us and a warrant agent. The warrant agent will act solely as our agent and will not assume any obligation or relationship of agency for or with
holders or beneficial owners of warrants.
A prospectus supplement will describe the particular terms of any series of warrants we may
issue, including the following:
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the title of such warrants;
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the aggregate number of such warrants;
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the price or prices at which such warrants will be issued;
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the currency or currencies, including composite currencies, in which the price of such warrants may be payable;
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if applicable, the designation and terms of the securities with which the warrants are issued and the number of
warrants issued with each such security or each principal amount of such security;
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in the case of warrants to purchase debt securities, the principal amount of debt securities purchasable upon
exercise of one warrant and the price at which and the currency or currencies, including composite currencies, in which this principal amount of debt securities may be purchased upon such exercise;
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in the case of warrants to purchase common stock or preferred stock, the number of shares of common stock or
preferred stock, as the case may be, purchasable upon exercise of one warrant and the price at which and the currency or currencies, including composite currencies, in which these shares may be purchased upon such exercise;
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the date on which the right to exercise such warrants shall commence and the date on which such right will
expire;
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whether such warrants will be issued in registered form or bearer form;
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if applicable, the minimum or maximum amount of such warrants which may be exercised at any one time;
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if applicable, the date on and after which such warrants and the related securities will be separately
transferable;
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information with respect to book-entry procedures, if any;
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the terms of the securities issuable upon exercise of the warrants;
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if applicable, a discussion of certain U.S. federal income tax considerations; and
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any other terms of such warrants, including terms, procedures and limitations relating to the exchange and
exercise of such warrants.
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We and the warrant agent may amend or supplement the warrant agreement for a series of
warrants without the consent of the holders of the warrants issued thereunder to effect changes that are not inconsistent with the provisions of the warrants and that do not materially and adversely affect the interests of the holders of the
warrants.
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Prior to exercising their warrants, holders of warrants will not have any of the rights of
holders of the securities purchasable upon such exercise, including, in the case of warrants to purchase debt securities, the right to receive principal, premium, if any, or interest payments, on the debt securities purchasable upon exercise or to
enforce covenants in the applicable indenture or, in the case of warrants to purchase common stock or preferred stock, the right to receive distributions, if any, or payments upon our liquidation, dissolution or winding up or to exercise any voting
rights.
Under the 1940 Act, we may generally only offer warrants provided that (1) the warrants expire by their terms within ten
years; (2) the exercise or conversion price is not less than the current market value at the date of issuance; (3) our stockholders authorize the proposal to issue such warrants, and our board of directors approves such issuance on the
basis that the issuance is in our best interests and our stockholders; and (4) if the warrants are accompanied by other securities, the warrants are not separately transferable unless no class of such warrants and the securities accompanying
them has been publicly distributed.
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REGULATION
We are a business development company under the 1940 Act that has elected to be treated as a RIC under the Code. The 1940 Act contains
prohibitions and restrictions relating to transactions between business development companies and their affiliates (including any investment advisers), principal underwriters and affiliates of those affiliates or underwriters and requires that a
majority of the directors be persons other than “interested persons,” as that term is defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our
election as, a business development company unless approved by a majority of our outstanding voting securities.
We may invest up to 100%
of our assets in securities acquired directly from issuers in privately negotiated transactions. With respect to such securities, we may, for the purpose of public resale, be deemed an “underwriter” as that term is defined in the
Securities Act. Our intention is to not write (sell) or buy put or call options to manage risks associated with the publicly traded securities of our portfolio companies, except that we may enter into hedging transactions to manage the risks
associated with interest rate fluctuations. However, we may purchase or otherwise receive warrants to purchase the common stock of our portfolio companies in connection with acquisition financing or other investments. Similarly, in connection with
an acquisition, we may acquire rights to require the issuers of acquired securities or their affiliates to repurchase them under certain circumstances. We also do not intend to acquire securities issued by any investment company that exceed the
limits imposed by the 1940 Act. Under these limits, we generally cannot acquire more than 3% of the voting stock of any registered investment company, invest more than 5% of the value of our total assets in the securities of one investment company
or invest more than 10% of the value of our total assets in the securities of more than one investment company. With regard to that portion of our portfolio invested in securities issued by investment companies, it should be noted that such
investments might subject our stockholders to additional expenses. None of these policies is fundamental and may be changed without stockholder approval upon 60 days’ prior written notice to stockholders.
Qualifying Assets
Under the 1940 Act, a
business development company may not acquire any asset other than assets of the type listed in section 55(a) of the 1940 Act, which are referred to as “qualifying assets,” unless, at the time the acquisition is made, qualifying assets
represent at least 70% of the company’s total assets. The principal categories of qualifying assets relevant to our proposed business are the following:
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Securities purchased in transactions not involving any public offering from the issuer of such securities,
which issuer (subject to certain limited exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject to
such rules as may be prescribed by the SEC. Under the 1940 Act and the rules thereunder, “eligible portfolio companies” include (1) private domestic operating companies, (2) public domestic operating companies whose securities are not
listed on a national securities exchange (e.g., the Nasdaq Global Select Market) or registered under the Exchange Act, and (3) public domestic operating companies having a market capitalization of less than $250 million. Public domestic operating
companies whose securities are quoted on the over-the-counter bulletin board or through Pink Sheets LLC are not listed on a national securities exchange and therefore are eligible portfolio companies.
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Securities of any eligible portfolio company which we control.
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Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an
affiliated person of the issuer, or in transactions incident to such a private transaction, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its securities, was unable to meet its
obligations as they came due without material assistance other than conventional lending or financing arrangements.
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Securities of an eligible portfolio company purchased from any person in a private transaction if there is no
ready market for such securities and we already own 60% of the outstanding equity of the eligible portfolio company.
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Securities received in exchange for or distributed on or with respect to securities described above, or
pursuant to the exercise of warrants or rights relating to such securities.
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Cash, cash equivalents, U.S. government securities or high-quality debt securities that mature in one year or
less from the date of investment.
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The regulations defining qualifying assets may change over time. We may adjust our
investment focus as needed to comply with and/or take advantage of any regulatory, legislative, administrative or judicial actions in this area.
Managerial Assistance to Portfolio Companies
Business development companies generally must offer to make available to the issuer of the securities significant managerial assistance, except
in circumstances where either (i) the business development company controls such issuer of securities or (ii) the business development company purchases such securities in conjunction with one or more other persons acting together and one
of the other persons in the group makes available such managerial assistance. Making available managerial assistance means any arrangement whereby the business development company, through its directors, officers, employees or agents, offers to
provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company. The Adviser will provide such managerial assistance on our behalf to
portfolio companies that request this assistance.
Temporary Investments
Pending investment in other types of qualifying assets, as described above, our investments may consist of cash, cash equivalents, U.S.
government securities, repurchase agreements and high-quality debt investments that mature in one year or less from the date of investment, which we refer to, collectively, as temporary investments, so that 70% of our assets are qualifying assets or
temporary investments. Typically, we will invest in U.S. Treasury bills or in repurchase agreements, so long as the agreements are fully collateralized by cash or securities issued by the U.S. government or its agencies. A repurchase agreement
involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price that is greater than the purchase price by an amount that reflects
an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, if more than 25% of our total assets constitute repurchase agreements from a single
counterparty, we would not meet the Diversification Tests in order to maintain our qualification as a RIC for U.S. federal income tax purposes. Accordingly, we do not intend to enter into repurchase agreements with a single counterparty in excess of
this limit. The Adviser will monitor the creditworthiness of the counterparties with which we enter into repurchase agreement transactions.
Senior
Securities
We are generally permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock
senior to our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. In addition, while any senior securities remain outstanding, we must make provisions to prohibit any
distribution to our stockholders or the repurchase of such securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. However, recent legislation has modified the 1940 Act by allowing a
BDC to increase the maximum amount of leverage it may incur from an asset coverage ratio of 200% to an asset coverage ratio of 150%, if certain requirements are met. We are permitted to increase our leverage capacity if shareholders representing at
least a majority of the votes
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cast, when quorum is met, approve a proposal to do so. If we receive such shareholder approval, we would be permitted to increase our leverage capacity on the first day after such approval.
Alternatively, the legislation allows the “required majority” of our independent directors, as defined in Section 57(o) of the 1940 Act, to approve such an increase in our leverage capacity, with such approval becoming effective after one
year. In either case, we would be required to make certain disclosures on our website and in SEC filings regarding, among other things, the receipt of approval to increase our leverage, our leverage capacity and usage, and risks related to leverage.
In accordance with recent legislation, on May 2, 2018, our board of directors, including a “required majority” approved the
modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, our asset coverage requirements for senior securities will change from 200% to 150%, effective as of May 2, 2019. For a discussion of recent
legislation that may allow us to incur additional leverage, see “Risk Factors—Risks Related to Our Business and Structure—Recent legislation may allow us to incur additional leverage.” We may also borrow amounts up to 5% of the
value of our total assets for temporary or emergency purposes without regard to asset coverage. For a discussion of the risks associated with leverage, see “Risk Factors—Risks Relating to our Business and Structure—Regulations
governing our operation as a business development company will affect our ability to, and the way in which we, raise additional capital. As a business development company, the necessity of raising additional capital may expose us to risks, including
the typical risks associated with leverage.”
Common Stock
We are not generally able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock
at a price below the current net asset value of the common stock if our board of directors determines that such sale is in our best interests and that of our stockholders, and our stockholders approve such sale. In any such case, the price at which
our securities are to be issued and sold may not be less than a price which, in the determination of our board of directors, closely approximates the market value of such securities (less any distributing commission or discount). A proposal,
approved by our stockholders at our 2018 Annual Meeting of Stockholders, authorizes us to sell shares of our common stock below the then current net asset value per share of our common stock in one or more offerings for the period ending on the
earlier of the one year anniversary of the date of our 2018 Annual Meeting of Stockholders and the date of our 2019 Annual Meeting of Stockholders, which we expect to be held in November 2019. We would need similar future approval from our
stockholders to issue shares below the then current net asset value per share any time after the expiration of the current approval. We may also make rights offerings to our stockholders at prices per share less than the net asset value per share,
subject to applicable requirements of the 1940 Act. See “Risk Factors—Risks Relating to this Offering—Existing stockholders may incur dilution if, in the future, we sell shares of our common stock in one or more offerings at prices
below the then current net asset value per share of our common stock.”
Codes of Ethics
We and the Adviser have each adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act that establishes procedures for personal
investments and restricts certain personal securities transactions. Personnel subject to each such code may invest in securities for their personal investment accounts, including securities that may be purchased or held by us, so long as such
investments are made in accordance with such code’s requirements. You may read and copy our code of ethics at the SEC’s Public Reference Room in Washington, D.C. You may obtain information on the operation of the Public Reference Room by
calling the SEC at (202) 551-8090. In addition, each code of ethics is available on the EDGAR Database on the SEC’s website at www.sec.gov. You may also obtain copies of each code of ethics, after paying a duplicating fee, by
electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549.
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Proxy Voting Policies and Procedures
We have delegated our proxy voting responsibility to the Adviser. The Proxy Voting Policies and Procedures of the Adviser are set out below.
The guidelines will be reviewed periodically by the Adviser and our directors who are not “interested persons,” and, accordingly, are subject to change.
Introduction
As an investment adviser
registered under the Advisers Act, the Adviser has a fiduciary duty to act solely in our best interests. As part of this duty, the Adviser recognizes that it must vote our securities in a timely manner free of conflicts of interest and in our best
interests.
The Adviser’s policies and procedures for voting proxies for its investment advisory clients are intended to comply with
Section 206 of, and Rule 206(4)-6 under, the Advisers Act.
Proxy Policies
The Adviser votes proxies relating to our portfolio securities in what it perceives to be the best interest of our stockholders. The Adviser
reviews on a case-by-case basis each proposal submitted to a stockholder vote to determine its effect on the portfolio securities we hold. In most cases the Adviser will vote in favor of proposals that the Adviser believes are likely to increase the
value of the portfolio securities we hold. Although the Adviser will generally vote against proposals that may have a negative effect on our portfolio securities, the Adviser may vote for such a proposal if there exist compelling long-term reasons
to do so.
The Adviser has established a proxy voting committee and adopted proxy voting guidelines and related procedures. The proxy
voting committee establishes proxy voting guidelines and procedures, oversees the internal proxy voting process, and reviews proxy voting issues. To ensure that the Adviser’s vote is not the product of a conflict of interest, the Adviser
requires that (1) anyone involved in the decision-making process disclose to our Chief Compliance Officer any potential conflict that he or she is aware of and any contact that he or she has had with any interested party regarding a proxy vote;
and (2) employees involved in the decision-making process or vote administration are prohibited from revealing how the Adviser intends to vote on a proposal in order to reduce any attempted influence from interested parties. Where conflicts of
interest may be present, the Adviser will disclose such conflicts to us, including our independent directors and may request guidance from us on how to vote such proxies.
Proxy Voting Records
You may obtain
information about how the Adviser voted proxies by making a written request for proxy voting information to: CM Finance Inc, Attention: Investor Relations, 65 East 55th Street, 15th Floor, New York, NY 10022, or by calling us collect at (212) 257-5199. The SEC also maintains a website at www.sec.gov that contains this information.
Privacy Principles
We are committed to
maintaining the privacy of our stockholders and to safeguarding their nonpublic personal information. The following information is provided to help you understand what personal information we collect, how we protect that information and why, in
certain cases, we may share information with select other parties.
Generally, we do not receive any nonpublic personal information
relating to our stockholders, although certain nonpublic personal information of our stockholders may become available to us. We do not disclose any nonpublic personal information about our stockholders or former stockholders to anyone, except as
permitted by law or as is necessary in order to service stockholder accounts (for example, to a transfer agent or third-party administrator).
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We restrict access to nonpublic personal information about our stockholders to employees of the
Adviser and its affiliates with a legitimate business need for the information. We intend to maintain physical, electronic and procedural safeguards designed to protect the nonpublic personal information of our stockholders.
Other
We are required to provide and
maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as a business development company, we are prohibited from protecting any director or officer against any liability to us or
our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office.
We and the Adviser are each required to adopt and implement written policies and procedures reasonably designed to prevent violation of
relevant federal securities laws, review these policies and procedures annually for their adequacy and the effectiveness of their implementation, and designate a chief compliance officer to be responsible for administering the policies and
procedures.
We may also be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without
the prior approval of our board of directors who are not interested persons and, in some cases, prior approval by the SEC. The SEC has interpreted the business development company prohibition on transactions with affiliates to prohibit all
“joint transactions” between entities that share a common investment adviser. The staff of the SEC has granted no-action relief permitting purchases of a single class of privately placed securities provided that the adviser negotiates no
term other than price and certain other conditions are met. As a result, we only expect to co-invest on a concurrent basis with investment funds, accounts or investment vehicles managed by the Adviser when each of us and such investment fund,
account or investment vehicle will own the same securities of the issuer and when no term is negotiated other than price. Any such investment would be made, subject to compliance with existing regulatory guidance, applicable regulations and our
allocation procedures. If opportunities arise that would otherwise be appropriate for us and for an investment fund, account or investment vehicle managed by the Adviser to invest in different securities of the same issuer, the Adviser will need to
decide which fund will proceed with the investment. Moreover, except in certain circumstances, we will be unable to invest in any issuer in which an investment fund, account or investment vehicle managed by the Adviser has previously invested.
Sarbanes-Oxley Act of 2002
The
Sarbanes-Oxley Act of 2002 imposes a wide variety of regulatory requirements on publicly held companies and their insiders. Many of these requirements affect us. For example:
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pursuant to Rule 13a-14 under the Exchange Act, our principal executive officer and principal financial officer
must certify the accuracy of the financial statements contained in our periodic reports;
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pursuant to Item 307 under Regulation S-K, our periodic reports must disclose our conclusions about the
effectiveness of our disclosure controls and procedures;
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pursuant to Rule 13a-15 under the Exchange Act, our management must prepare an annual report regarding its
assessment of our internal control over financial reporting; and
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pursuant to Item 308 of Regulation S-K and Rule 13a-15 under the Exchange Act, our periodic reports must
disclose whether there were significant changes in our internal controls over financial reporting or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
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PLAN OF DISTRIBUTION
We may offer, from time to time, in one or more offerings or series, up to $500,000,000 of our common stock, preferred stock, debt securities,
subscription rights or warrants to purchase common stock, preferred stock or debt securities, in one or more underwritten public offerings, at-the-market offerings, negotiated transactions, block trades, best efforts offerings or a combination of
these methods. We may sell the securities through underwriters or dealers, directly to one or more purchasers through agents or through a combination of any such methods of sale. Any underwriter or agent involved in the offer and sale of the
securities will be named in the applicable prospectus supplement. In addition, this prospectus relates to 6,000,004 shares of our common stock (the “Selling Stockholder Shares”) that may be sold by the selling stockholder identified under
“Selling Stockholders.”
The distribution of our securities may be effected from time to time in one or more transactions at a
fixed price or prices, which may be changed, at prevailing market prices at the time of sale, at prices related to such prevailing market prices, or at negotiated prices, provided, however, that the offering price per share of our securities less
any underwriting commissions or discounts must equal or exceed the net asset value per share of our securities except that we may sell shares of our securities at a price below net asset value per share if holders of a majority of the number of
shares of our stock have approved such a sale or if the following conditions are met: (i) holders of a majority of our stock and a majority of our stock not held by affiliated persons have approved issuance at less than net asset value per
share during the one year period prior to such sale; (ii) a majority of our directors who have no financial interest in the sale and a majority of such directors who are not interested persons of us have determined that such sale would be in
our best interest and in the best interests of our stockholders; and (iii) a majority of our directors who have no financial interest in the sale and a majority of such directors who are not interested persons of us, in consultation with the
underwriter or underwriters of the offering if it is to be underwritten, have determined in good faith, and as of a time immediately prior to the first solicitation by or on behalf of us of firm commitments to purchase such securities or immediately
prior to the issuance of such securities, that the price at which such securities are to be sold is not less than a price which closely approximates the market value of those securities, less any distributing commission or discount.
At a meeting initially convened on November 6, 2018 and reconvened on December 18, 2018, our stockholders voted to allow us to issue
common stock at a price below net asset value per share for the period ending on the earlier of the one year anniversary of the date of our 2018 Annual Meeting of Stockholders and the date of our 2019 Annual Meeting of Stockholders, which we expect
to be held in November 2019. Our stockholders did not specify a maximum discount below net asset value at which we are able to issue our common stock, although the number of shares sold in each offering may not exceed 25% of our outstanding common
stock immediately prior to such sale. In addition, we cannot issue shares of our common stock below net asset value unless our board of directors determines that it would be in our and our stockholders’ best interests to do so.
In connection with the sale of our securities and the Selling Stockholder Shares, underwriters or agents may receive compensation from us
and/or the selling stockholders or from purchasers of our securities, for whom they may act as agents, in the form of discounts, concessions or commissions. Our common stockholders will bear, directly or indirectly, such expenses, as well as any
other fees and the expenses incurred by us in connection with any offering of our securities, including debt securities. Underwriters may sell our securities and the Selling Stockholder Shares to or through dealers and such dealers may receive
compensation in the form of discounts, concessions or commissions from the underwriters and/or commissions from the purchasers for whom they may act as agents. Underwriters, dealers and agents that participate in the distribution of our securities
and the Selling Stockholder Shares may be deemed to be underwriters under the Securities Act, and any discounts and commissions they receive from us and/or the selling stockholders and any profit realized by them on the resale of our securities may
be deemed to be underwriting discounts and commissions under the Securities Act. Any such underwriter or agent will be identified and any such compensation received from us and/or the selling stockholders will be described in the applicable
prospectus supplement.
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We may enter into derivative transactions with third parties, or sell securities not covered by
this prospectus to third parties in privately negotiated transactions. If the applicable prospectus supplement indicates, in connection with those derivatives, the third parties may sell securities covered by this prospectus and the applicable
prospectus supplement, including in short sale transactions. If so, the third party may use securities pledged by us or borrowed from us or others to settle those sales or to close out any related open borrowings of stock, and may use securities
received from us in settlement of those derivatives to close out any related open borrowings of stock. The third parties in such sale transactions will be underwriters and, if not identified in this prospectus, will be identified in the applicable
prospectus supplement (or a post-effective amendment).
Any of our common stock or the Selling Stockholder Shares sold pursuant to a
prospectus supplement will be listed on the Nasdaq Global Select Market, or another exchange on which our common stock is traded.
Under
agreements into which we or the selling stockholders may enter, underwriters, dealers and agents who participate in the distribution of our securities and/or the Selling Stockholder Shares may be entitled to indemnification by us or the selling
stockholders against certain liabilities, including liabilities under the Securities Act. Underwriters, dealers and agents may engage in transactions with, or perform services for, us in the ordinary course of business.
If so indicated in the applicable prospectus supplement, we and/or the selling stockholders will authorize underwriters or other persons
acting as our and/or the selling stockholders’ agents to solicit offers by certain institutions to purchase our securities from us or the Selling Stockholder Shares from the selling stockholders pursuant to contracts providing for payment and
delivery on a future date. Institutions with which such contracts may be made include commercial and savings banks, insurance companies, pension funds, investment companies, educational and charitable institutions and others, but in all cases such
institutions must be approved by us and/or the selling stockholders. The obligations of any purchaser under any such contract will be subject to the condition that the purchase of our securities and/or the Selling Stockholder Shares shall not at the
time of delivery be prohibited under the laws of the jurisdiction to which such purchaser is subject. The underwriters and such other agents will not have any responsibility in respect of the validity or performance of such contracts. Such contracts
will be subject only to those conditions set forth in the prospectus supplement, and the prospectus supplement will set forth the commission payable for solicitation of such contracts.
In order to comply with the securities laws of certain states, if applicable, our securities and the Selling Stockholder Shares offered hereby
will be sold in such jurisdictions only through registered or licensed brokers or dealers. In addition, in certain states, our securities and/or the Selling Stockholder Shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification requirement is available and is complied with.
The maximum
commission or discount to be received by any member of the Financial Industry Regulatory Authority, Inc. will not be greater than 10.0% for the sale of any securities being registered.
We will pay customary costs and expenses of the registration of the shares of common stock pursuant to the registration rights agreement,
including SEC filing fees and expenses of compliance with state securities or “blue sky” laws. However, the selling stockholder will pay all underwriting discounts and selling commissions, if any, attributable to sales of Selling
Stockholder Shares. We will indemnify the selling stockholders against liabilities, including some liabilities under the Securities Act, or the selling stockholder will be entitled to contribution.
We may be indemnified by the selling stockholders against civil liabilities, including liabilities under the Securities Act, that may arise
from any written information furnished to us by the selling stockholders specifically for use in this prospectus, or we may be entitled to contribution.
There can be no assurance that any selling stockholders will sell any or all of the Selling Stockholder Shares registered pursuant to the
registration statement, of which this prospectus forms a part. Once sold under the registration statement, of which this prospectus forms a part, the Selling Stockholder Shares will be freely tradable in the hands of persons other than our
affiliates.
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CUSTODIAN, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR
Our securities are held by U.S. Bank National Association pursuant to a custody agreement. The principal business address of U.S. Bank
National Association is One Federal Street, Boston, Massachusetts 02110. American Stock Transfer and Trust Company, LLC serves as our transfer agent, distribution paying agent and registrar. The principal business address of American Stock Transfer
and Trust Company, LLC is 6201 15th Avenue, Brooklyn, New York 11219.
BROKERAGE ALLOCATION AND OTHER
PRACTICES
Since we will acquire and dispose of many of our investments in privately negotiated transactions, many of the transactions
that we engage in will not require the use of brokers or the payment of brokerage commissions. Subject to policies established by our board of directors, the Adviser will be primarily responsible for selecting brokers and dealers to execute
transactions with respect to the publicly traded securities portion of our portfolio transactions and the allocation of brokerage commissions. The Adviser does not expect to execute transactions through any particular broker or dealer but will seek
to obtain the best net results for us under the circumstances, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution and operational facilities of the firm
and the firm’s risk and skill in positioning blocks of securities. The Adviser generally will seek reasonably competitive trade execution costs but will not necessarily pay the lowest spread or commission available. Subject to applicable legal
requirements and consistent with Section 28(e) of the Exchange Act, the Adviser may select a broker based upon brokerage or research services provided to the Adviser and us and any other clients. In return for such services, we may pay a higher
commission than other brokers would charge if the Adviser determines in good faith that such commission is reasonable in relation to the services provided.
LEGAL MATTERS
Certain legal matters regarding the securities offered by this prospectus will be passed upon for us by Eversheds Sutherland (US) LLP,
Washington, DC 20001. Certain legal matters will be passed upon for the underwriters, if any, by the counsel named in the prospectus supplement, if any.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
RSM US LLP, our independent registered public accounting firm, has audited our consolidated financial statements as of June 30, 2018, and for
the year ended June 30, 2018, as set forth in their report. RSM US LLP’s principal business address is 4 Times Square, 151 West 42nd Street, 19th Floor, New York, NY 10036.
Ernst & Young LLP, our former independent registered public accounting firm, has audited our consolidated financial statements as of
June 30, 2017, and for the years ended June 30, 2017, and 2016, as set forth in their report. We have included our consolidated financial statements and our senior securities table in this prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP’s report, given on their authority as experts in accounting and auditing. Ernst & Young LLP’s principal business address is 5 Times Square, New York, New York 10036.
CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
On August 24, 2017, we informed Ernst & Young LLP of its dismissal as our independent registered public accounting firm, effective upon
completion of the audit of our financial statements as of and for the year ending June 30, 2017. The decision was approved by the Audit Committee of the Board. Our Annual Report on Form 10-K for the fiscal year ended June 30, 2017 was filed on
September 6, 2017 with the Securities and Exchange Commission and, therefore, the effective date of Ernst & Young LLP’s dismissal was September 6, 2017.
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Ernst & Young LLP’s reports on our financial statements for the fiscal years ended June
30, 2017 and 2016 contained no adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles.
During the Company’s two most recent fiscal years and the subsequent period preceding September 6, 2017, there were no (a) disagreements
with Ernst & Young LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Ernst & Young LLP, would have caused it to
make reference to the subject matter of such disagreements in its reports on the financial statements for such years or (b) reportable events, as described under Item 304(a)(1)(v) of Regulation S-K.
On August 24, 2017, the Audit Committee of the Board appointed RSM US LLP as the Company’s independent registered public accounting firm
for the fiscal year ending June 30, 2018. RSM US LLP’s principal business address is 4 Times Square, 151 West 42nd Street, 19th Floor, New York, NY 10036.
AVAILABLE INFORMATION
We have filed with the SEC a registration statement on Form N-2, together with all amendments and related exhibits, under the Securities Act,
with respect to our shares of common stock offered by this prospectus. The registration statement contains additional information about us and our shares of common stock being offered by this prospectus.
We also file with or submit to the SEC annual, quarterly and current reports, proxy statements and other information meeting the informational
requirements of the Exchange Act. You may inspect and copy these reports, proxy statements and other information, as well as the registration statement and related exhibits and schedules, at the SEC’s Public Reference Room at 100 F Street, NE,
Washington, D.C. 20549-0102. You may obtain information on the operation of the Public Reference Room by calling the SEC at (202) 551-8090.
We maintain a website at http://cmfn-inc.com and make all of our annual, quarterly and current reports, proxy statements and other
publicly filed information available, free of charge, on or through our website. Information contained on our website is not incorporated into this prospectus, and you should not consider information on our website to be part of this prospectus. You
may also obtain such information by contacting us in writing at 65 East 55th Street, 15th Floor, New York, NY 10022, Attention: Investor
Relations. The SEC maintains a website that contains reports, proxy and information statements and other information we file with the SEC at www.sec.gov. Copies of these reports, proxy and information statements and other information may also
be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549-0102.
INCORPORATION BY REFERENCE
This prospectus is part of a registration statement that we have filed with the SEC. In accordance with the Small Business Credit Availability
Act, we are allowed to “incorporate by reference” the information that we file with the SEC, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is
considered to comprise a part of this prospectus from the date we file that document. Any reports filed by us with the SEC subsequent to the date of this filing and before the date that any offering of any securities by means of this prospectus and
any accompanying prospectus supplement is terminated will automatically update and, where applicable, supersede any information contained in this prospectus or incorporated by reference in this prospectus.
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We incorporate by reference into this prospectus our documents listed below and any future
filings made by us with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act until all of the securities offered by this prospectus and any accompanying prospectus supplement have been sold or we otherwise terminate the offering of
these securities; provided, however, that information “furnished” under Item 2.02 or Item 7.01 of Form 8-K or other information “furnished” to the SEC that is not deemed filed is not incorporated by reference in this prospectus
and any accompanying prospectus supplement. Information that we file with the SEC subsequent to the date of this filing will automatically update and may supersede information in this prospectus, any accompanying prospectus supplement and
information previously filed with the SEC.
This prospectus and any accompanying prospectus supplement incorporate by reference the
documents set forth below that have previously been filed with the SEC:
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Annual Report on Form 10-K for the fiscal year ended June 30, 2018;
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Current Report on Form 8-K filed on November 7, 2018;
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Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2018;
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Current Report on Form 8-K/A filed on December 19, 2018;
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Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2018;
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Quarterly Report on Form 10-Q/A for the fiscal quarter ended December 31, 2018; and
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The description of our common stock contained in our Form 8-A filed on February 5, 2014.
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All reports and other documents we subsequently file pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the
termination of this offering but excluding any information furnished to, rather than filed with, the SEC, will also be incorporated by reference into this prospectus and deemed to be part of this prospectus from the date of the filing of such
reports and documents.
To obtain copies of these filings, see “Available Information.”
You should rely only on the information incorporated by reference or provided in this prospectus or any prospectus supplement. We have not
authorized anyone to provide you with different or additional information, and you should not rely on such information if you receive it. We are not making an offer of or soliciting an offer to buy, any securities in any state or other jurisdiction
where such offer or sale is not permitted. You should not assume that the information in this prospectus or in the documents incorporated by reference is accurate as of any date other than the date on the front of this prospectus or those documents.
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INDEX TO
FINANCIAL STATEMENTS
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Consolidated Statements of Assets and Liabilities as of December 31, 2018 (unaudited)
and June 30, 2018
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F-2
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Consolidated Statements of Operations for the three and six months ended December
31, 2018 (unaudited) and December 31, 2017 (unaudited)
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F-3
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Consolidated Statements of Changes in Net Assets for the six months ended December
31, 2018 (unaudited) and December 31, 2017 (unaudited)
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F-4
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Consolidated Statements of Cash Flows for the six months ended December 31, 2018
(unaudited) and December 31, 2017 (unaudited)
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F-5
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Consolidated Schedule of Investments as of December 31, 2018 (unaudited) and June
30, 2018
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F-6
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Notes to Unaudited Consolidated Financial Statements
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F-12
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Reports of Independent Registered Public Accounting Firm
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F-43
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Consolidated Statements of Assets and Liabilities as of June
30, 2018 and June 30, 2017
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F-45
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Consolidated Statements of Operations for the twelve months ended June
30, 2018, June 30, 2017, and June 30, 2016
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F-46
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Consolidated Statements of Changes in Net Assets for the twelve months ended
June 30, 2018, June 30, 2017, and June 30, 2016
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F-47
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Consolidated Statements of Cash Flows for the twelve months ended June 30,
2018, June 30, 2017, and June 30, 2018
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F-48
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Consolidated Schedule of Investments as of June 30, 2018
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F-49
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Consolidated Schedule of Investments as of June 30, 2017
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F-52
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Consolidated Notes to Financial Statements
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F-54
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F-1
CM Finance Inc and Subsidiaries
Consolidated Statements of Assets and Liabilities
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December 31, 2018
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June 30, 2018
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Assets
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Non-controlled,
non-affiliated investments, at fair value (amortized cost of $307,290,045 and $ 302,647,282, respectively)
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$
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283,335,302
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$
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293,592,013
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Derivatives, at fair value (cost of $0 and $0, respectively)
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94,380
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229,918
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Cash
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6,197,259
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5,620,441
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Cash, restricted
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5,981,651
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2,706,273
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Receivable for investments sold
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397,146
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7,751,875
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Interest receivable
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3,282,163
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4,011,450
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Deferred offering costs
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121,922
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|
|
|
121,922
|
|
|
Other receivables
|
|
|
2,515,625
|
|
|
|
245,550
|
|
|
Prepaid expenses and other assets
|
|
|
58,954
|
|
|
|
255,139
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
301,984,402
|
|
|
$
|
314,534,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Notes payable:
|
|
|
|
|
|
|
|
|
|
Term loan
|
|
$
|
102,000,000
|
|
|
$
|
102,000,000
|
|
|
Revolving credit facility
|
|
|
—
|
|
|
|
17,823,000
|
|
|
2023 Notes payable
|
|
|
34,500,000
|
|
|
|
—
|
|
|
Deferred debt issuance costs
|
|
|
(2,494,517
|
)
|
|
|
(1,953,771
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable, net
|
|
|
134,005,483
|
|
|
|
117,869,229
|
|
|
Payable for investments purchased
|
|
|
2,985,000
|
|
|
|
12,569,450
|
|
|
Dividend payable
|
|
|
3,410,713
|
|
|
|
3,417,848
|
|
|
Deferred financing costs payable
|
|
|
1,037,000
|
|
|
|
2,071,167
|
|
|
Income-based incentive fees payable
|
|
|
1,566,513
|
|
|
|
2,294,678
|
|
|
Base management fees payable
|
|
|
1,405,297
|
|
|
|
1,319,853
|
|
|
Accrued provision for taxes
|
|
|
—
|
|
|
|
2,579,337
|
|
|
Derivatives, at fair value (cost $0 and $0, respectively)
|
|
|
94,380
|
|
|
|
229,918
|
|
|
Interest payable
|
|
|
845,566
|
|
|
|
303,153
|
|
|
Directors’ fees payable
|
|
|
93,448
|
|
|
|
99,296
|
|
|
Accrued expenses and other liabilities
|
|
|
104,694
|
|
|
|
257,986
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
145,548,094
|
|
|
|
143,011,915
|
|
|
|
|
|
|
Commitments and Contingencies (Note 6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets
|
|
|
|
|
|
|
|
|
|
Common stock, par value $0.001 per share (100,000,000 shares authorized, 13,613,116 and 13,649,504
shares issued and outstanding, respectively)
|
|
|
13,613
|
|
|
|
13,649
|
|
|
Additional paid-in capital
|
|
|
198,392,175
|
|
|
|
198,700,999
|
|
|
Accumulated net realized loss
|
|
|
(21,270,472
|
)
|
|
|
(21,087,280
|
)
|
|
Undistributed net investment income
|
|
|
3,255,732
|
|
|
|
2,950,567
|
|
|
Net unrealized depreciation on investments
|
|
|
(23,954,740
|
)
|
|
|
(9,055,269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Assets
|
|
|
156,436,308
|
|
|
|
171,522,666
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Net Assets
|
|
$
|
301,984,402
|
|
|
$
|
314,534,581
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Asset Value Per Share
|
|
$
|
11.49
|
|
|
$
|
12.57
|
|
See notes to unaudited consolidated financial statements.
F-2
CM Finance Inc and Subsidiaries
Consolidated Statements of Operations (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
December 31,
|
|
|
For the six months ended
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Investment Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
8,481,251
|
|
|
$
|
7,538,152
|
|
|
$
|
16,136,091
|
|
|
$
|
13,964,204
|
|
|
Payment in-kind interest income
|
|
|
540,308
|
|
|
|
722,039
|
|
|
|
953,928
|
|
|
|
1,014,517
|
|
|
Dividend income
|
|
|
—
|
|
|
|
—
|
|
|
|
31,275
|
|
|
|
—
|
|
|
Payment in-kind dividend income
|
|
|
—
|
|
|
|
189,583
|
|
|
|
—
|
|
|
|
189,583
|
|
|
Other fee income
|
|
|
277,365
|
|
|
|
—
|
|
|
|
432,520
|
|
|
|
9,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
9,298,924
|
|
|
|
8,449,774
|
|
|
|
17,553,814
|
|
|
|
15,178,183
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
2,156,537
|
|
|
|
1,601,261
|
|
|
|
4,421,394
|
|
|
|
3,039,090
|
|
|
Base management fees
|
|
|
1,405,297
|
|
|
|
1,161,353
|
|
|
|
2,757,152
|
|
|
|
2,315,233
|
|
|
Income-based incentive fees
|
|
|
753,721
|
|
|
|
921,782
|
|
|
|
874,042
|
|
|
|
906,758
|
|
|
Provision for tax expense
|
|
|
12,946
|
|
|
|
—
|
|
|
|
12,946
|
|
|
|
—
|
|
|
Professional fees
|
|
|
233,528
|
|
|
|
236,024
|
|
|
|
466,328
|
|
|
|
445,064
|
|
|
Allocation of administrative costs from advisor
|
|
|
341,633
|
|
|
|
184,561
|
|
|
|
679,696
|
|
|
|
311,790
|
|
|
Amortization of deferred debt issuance costs
|
|
|
195,377
|
|
|
|
179,514
|
|
|
|
390,754
|
|
|
|
304,716
|
|
|
Insurance expense
|
|
|
84,440
|
|
|
|
85,225
|
|
|
|
168,880
|
|
|
|
205,439
|
|
|
Directors’ fees
|
|
|
101,250
|
|
|
|
99,000
|
|
|
|
202,500
|
|
|
|
198,667
|
|
|
Custodian and administrator fees
|
|
|
7,500
|
|
|
|
113,443
|
|
|
|
15,000
|
|
|
|
170,451
|
|
|
Offering expense
|
|
|
51,750
|
|
|
|
—
|
|
|
|
103,500
|
|
|
|
186,513
|
|
|
Other expenses
|
|
|
236,033
|
|
|
|
180,482
|
|
|
|
355,214
|
|
|
|
391,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
5,580,012
|
|
|
|
4,762,645
|
|
|
|
10,447,406
|
|
|
|
8,474,879
|
|
|
Waiver of income-based incentive fees
|
|
|
—
|
|
|
|
—
|
|
|
|
(22,000
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net expenses
|
|
|
5,580,012
|
|
|
|
4,762,645
|
|
|
|
10,425,406
|
|
|
|
8,474,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
3,718,912
|
|
|
|
3,687,129
|
|
|
|
7,128,408
|
|
|
|
6,703,304
|
|
|
|
|
|
|
|
|
Net realized and unrealized gain/(loss) on investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gain (loss) from investments
|
|
|
75,000
|
|
|
|
—
|
|
|
|
(183,192
|
)
|
|
|
(7,380,690
|
)
|
|
Net change in unrealized appreciation (depreciation) in value of investments
|
|
|
(13,176,208
|
)
|
|
|
1,172,018
|
|
|
|
(14,899,471
|
)
|
|
|
8,672,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total realized and unrealized gain (loss) on investments
|
|
|
(13,101,208
|
)
|
|
|
1,172,018
|
|
|
|
(15,082,663
|
)
|
|
|
1,291,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations
|
|
$
|
(9,382,296
|
)
|
|
$
|
4,859,147
|
|
|
$
|
(7,954,255
|
)
|
|
$
|
7,994,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income per share
|
|
$
|
0.27
|
|
|
$
|
0.27
|
|
|
$
|
0.52
|
|
|
$
|
0.49
|
|
|
Earnings per share
|
|
$
|
(0.69
|
)
|
|
$
|
0.35
|
|
|
$
|
(0.58
|
)
|
|
$
|
0.58
|
|
|
Weighted average shares of common stock outstanding
|
|
|
13,638,869
|
|
|
|
13,690,480
|
|
|
|
13,644,483
|
|
|
|
13,690,182
|
|
|
|
|
|
|
|
|
Distributions paid per common share
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
|
$
|
0.50
|
|
|
$
|
0.50
|
|
See notes to unaudited consolidated financial statements.
F-3
CM Finance Inc and Subsidiaries
Consolidated Statements of Changes in Net Assets (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Net assets at beginning of year
|
|
$
|
171,522,666
|
|
|
$
|
169,948,112
|
|
|
|
|
|
|
Increase (decrease) in net assets resulting from operations:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
7,128,408
|
|
|
|
6,703,304
|
|
|
Net realized loss on investments
|
|
|
(183,192
|
)
|
|
|
(7,380,690
|
)
|
|
Net change in unrealized appreciation (depreciation) on investments
|
|
|
(14,899,471
|
)
|
|
|
8,672,249
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations
|
|
|
(7,954,255
|
)
|
|
|
7,994,863
|
|
|
|
|
|
|
Stockholder distributions:
|
|
|
|
|
|
|
|
|
|
Distributions from net investment income
|
|
|
(6,823,243
|
)
|
|
|
(6,845,051
|
)
|
|
Net decrease in net assets resulting from stockholder distributions
|
|
|
(6,823,243
|
)
|
|
|
(6,845,051
|
)
|
|
|
|
|
|
Capital transactions:
|
|
|
|
|
|
|
|
|
|
Reinvestments of stockholder distributions
|
|
|
49,713
|
|
|
|
11,813
|
|
|
Repurchase of common stock
|
|
|
(358,573
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from capital transactions
|
|
|
(308,860
|
)
|
|
|
11,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets
|
|
|
(15,086,358
|
)
|
|
|
1,161,625
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets at end of period (including undistributed (distributions in excess of) net
investment income of $3,255,732, and $(2,481,050), respectively)
|
|
$
|
156,436,308
|
|
|
$
|
171,109,737
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited consolidated financial statements.
F-4
CM Finance Inc and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations
|
|
$
|
(7,954,255
|
)
|
|
$
|
7,994,863
|
|
|
|
|
|
|
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net
cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
Origination and purchase of investments
|
|
|
(104,067,555
|
)
|
|
|
(81,850,777
|
)
|
|
Payment in-kind interest
|
|
|
(953,928
|
)
|
|
|
(1,014,517
|
)
|
|
Payment in-kind dividends
|
|
|
—
|
|
|
|
(189,583
|
)
|
|
Sales and repayments of investments
|
|
|
101,767,898
|
|
|
|
54,842,377
|
|
|
Net realized loss on investments
|
|
|
183,192
|
|
|
|
7,380,690
|
|
|
Net change in unrealized (appreciation) depreciation on investments
|
|
|
14,899,471
|
|
|
|
(8,672,249
|
)
|
|
Amortization of discount/premium on investments
|
|
|
(1,572,367
|
)
|
|
|
(2,119,937
|
)
|
|
Amortization of deferred debt issuance costs
|
|
|
390,754
|
|
|
|
304,716
|
|
|
Net (increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
|
Interest receivable
|
|
|
729,287
|
|
|
|
(2,713,068
|
)
|
|
Dividends receivable
|
|
|
—
|
|
|
|
(189,583
|
)
|
|
Receivable for investments sold
|
|
|
7,354,729
|
|
|
|
—
|
|
|
Other receivables
|
|
|
(2,270,075
|
)
|
|
|
(179,819
|
)
|
|
Prepaid expenses and other assets
|
|
|
196,185
|
|
|
|
170,451
|
|
|
Net increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
|
Payable for investments purchased
|
|
|
(9,584,450
|
)
|
|
|
(12,490,000
|
)
|
|
Interest payable
|
|
|
542,413
|
|
|
|
78,340
|
|
|
Accrued provision for income taxes
|
|
|
(2,579,337
|
)
|
|
|
—
|
|
|
Directors fees payable
|
|
|
(5,848
|
)
|
|
|
(3,254
|
)
|
|
Accrued expenses and other liabilities
|
|
|
(153,292
|
)
|
|
|
(66,375
|
)
|
|
Base management fees payable
|
|
|
85,444
|
|
|
|
1,182,842
|
|
|
Income-based incentive fees payable
|
|
|
(728,165
|
)
|
|
|
888,247
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(3,719,899
|
)
|
|
|
(36,646,636
|
)
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
Payment for deferred financing costs
|
|
|
(1,965,667
|
)
|
|
|
(620,500
|
)
|
|
Deferred offering costs
|
|
|
—
|
|
|
|
128,169
|
|
|
Distributions to stockholders
|
|
|
(6,780,665
|
)
|
|
|
(6,832,923
|
)
|
|
Repurchase of common stock
|
|
|
(358,573
|
)
|
|
|
—
|
|
|
Proceeds from 2023 Notes
|
|
|
34,500,000
|
|
|
|
—
|
|
|
Proceeds from borrowing on revolving credit facility
|
|
|
19,105,470
|
|
|
|
45,090,000
|
|
|
Repayments of borrowing on revolving credit facility
|
|
|
(36,928,470
|
)
|
|
|
(27,260,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
7,572,095
|
|
|
|
10,504,746
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
3,852,196
|
|
|
|
(26,141,890
|
)
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
|
|
Cash and restricted cash at beginning of period
|
|
|
8,326,714
|
|
|
|
33,262,874
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and restricted cash at end of period
|
|
$
|
12,178,910
|
|
|
$
|
7,120,984
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental and non-cash financing cash flow
information:
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
3,878,981
|
|
|
$
|
2,960,751
|
|
|
Cash paid for taxes
|
|
$
|
2,592,283
|
|
|
$
|
—
|
|
|
Issuance of shares pursuant to Dividend Reinvestment Plan
|
|
|
49,713
|
|
|
|
11,813
|
|
|
Non-cash purchase of investments
|
|
$
|
|
|
|
$
|
—
|
|
|
Non-cash sale of investments
|
|
$
|
|
|
|
$
|
—
|
|
See notes to unaudited consolidated financial statements.
F-5
CM Finance Inc and Subsidiaries
Consolidated Schedule of Investments
(Unaudited)
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments(1)(2)
|
|
Industry
|
|
Interest
Rate
|
|
Initial
Acquisition
Date
|
|
|
Maturity
Date
|
|
|
Principal
Amount/
Shares(3)
|
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
|
% of
Net
Assets
|
|
|
Non-Controlled/Non-Affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured First Lien Debt Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1888 Industrial Services, LLC - Term
A(4)(14)
|
|
Energy Equipment & Services
|
|
3M L+5.00% (1.00% Floor)
|
|
|
9/30/2016
|
|
|
|
9/30/2021
|
|
|
$
|
4,950,495
|
|
|
$
|
4,950,495
|
|
|
$
|
4,950,495
|
|
|
|
3.16
|
%
|
|
1888 Industrial Services, LLC - Term
B(3)(4)(14)
|
|
Energy Equipment & Services
|
|
3M L+8.00% PIK (1.00% Floor)
|
|
|
9/30/2016
|
|
|
|
9/30/2021
|
|
|
|
12,304,681
|
|
|
|
6,530,574
|
|
|
|
9,228,511
|
|
|
|
5.90
|
%
|
|
1888 Industrial Services, LLC -
Revolver(4)(5)(14)
|
|
Energy Equipment & Services
|
|
3M L+5.00% (1.00% Floor)
|
|
|
10/11/2016
|
|
|
|
9/30/2021
|
|
|
|
2,376,238
|
|
|
|
1,485,149
|
|
|
|
1,485,149
|
|
|
|
0.95
|
%
|
|
4L Technologies Inc(6)
|
|
Technology Hardware, Storage & Peripherals
|
|
3M L+4.50% (1.00% Floor)
|
|
|
8/21/2018
|
|
|
|
5/8/2020
|
|
|
|
8,959,162
|
|
|
|
8,836,110
|
|
|
|
8,815,815
|
|
|
|
5.64
|
%
|
|
Bioplan USA, Inc.
|
|
Containers & Packaging
|
|
3M L+4.75% (1.00% Floor)
|
|
|
8/9/2018
|
|
|
|
9/23/2021
|
|
|
|
7,352,731
|
|
|
|
7,080,193
|
|
|
|
6,985,095
|
|
|
|
4.47
|
%
|
|
CareerBuilder, LLC(6)(7)
|
|
Professional Services
|
|
3M L+6.75% (1.00% Floor)
|
|
|
7/27/2017
|
|
|
|
7/27/2023
|
|
|
|
13,537,179
|
|
|
|
13,268,520
|
|
|
|
13,537,179
|
|
|
|
8.65
|
%
|
|
Cook & Boardman Group
LLC(6)
|
|
Distributors
|
|
2M L+5.75% (1.00% Floor)
|
|
|
10/12/2018
|
|
|
|
10/17/2025
|
|
|
|
10,000,000
|
|
|
|
9,901,920
|
|
|
|
9,900,000
|
|
|
|
6.33
|
%
|
|
Deluxe Toronto Ltd.(6)
|
|
Media
|
|
3M L+5.50% (1.00% Floor)
|
|
|
6/29/2018
|
|
|
|
12/7/2020
|
|
|
|
4,974,874
|
|
|
|
4,931,329
|
|
|
|
4,974,874
|
|
|
|
3.18
|
%
|
|
Exela Intermedia LLC
|
|
IT Services
|
|
3M L+6.50% (1.00% Floor)
|
|
|
6/5/2018
|
|
|
|
7/12/2023
|
|
|
|
5,429,936
|
|
|
|
5,483,082
|
|
|
|
5,429,936
|
|
|
|
3.47
|
%
|
|
Exela Intermedia LLC
|
|
IT Services
|
|
Fixed 10.00%
|
|
|
6/19/2018
|
|
|
|
7/15/2023
|
|
|
|
5,500,000
|
|
|
|
5,663,681
|
|
|
|
5,500,000
|
|
|
|
3.52
|
%
|
|
Fusion Connect Inc.
|
|
Internet Software & Services
|
|
3M L+7.50% (1.00% Floor)
|
|
|
7/11/2018
|
|
|
|
5/4/2023
|
|
|
|
11,517,092
|
|
|
|
11,124,874
|
|
|
|
10,941,238
|
|
|
|
6.99
|
%
|
|
GEE Group, Inc.(6)(8)
|
|
Professional Services
|
|
2M L+18.00% (1.00% Floor)
|
|
|
3/26/2018
|
|
|
|
3/31/2021
|
|
|
|
11,612,863
|
|
|
|
11,612,863
|
|
|
|
11,612,863
|
|
|
|
7.42
|
%
|
|
Infrastructure & Energy Alternatives,
Inc.(6)
|
|
Construction & Engineering
|
|
3M L+6.25%
|
|
|
11/14/2018
|
|
|
|
11/4/2024
|
|
|
|
12,500,000
|
|
|
|
12,067,552
|
|
|
|
12,062,500
|
|
|
|
7.71
|
%
|
|
Immucor, Inc.(6)
|
|
Health Care Equipment & Supplies
|
|
3M L+5.00% (1.00% Floor)
|
|
|
6/27/2017
|
|
|
|
6/15/2021
|
|
|
|
7,387,500
|
|
|
|
7,338,613
|
|
|
|
7,461,375
|
|
|
|
4.77
|
%
|
|
Liberty Oilfield Services
LLC(6)(9)
|
|
Energy Equipment & Services
|
|
1M L+7.625% (1.00% Floor)
|
|
|
9/19/2017
|
|
|
|
9/19/2022
|
|
|
|
6,383,750
|
|
|
|
6,285,315
|
|
|
|
6,383,750
|
|
|
|
4.08
|
%
|
|
Montreign Operating Company,
LLC(6)
|
|
Hotels, Restaurants & Leisure
|
|
1M L+8.25% (1.00% Floor)
|
|
|
12/16/2016
|
|
|
|
1/24/2023
|
|
|
|
13,133,574
|
|
|
|
13,211,906
|
|
|
|
12,214,224
|
|
|
|
7.81
|
%
|
|
PR Wireless LLC(5)
|
|
Wireless Telecommunication Services
|
|
3M L+5.25% (1.00% Floor)
|
|
|
11/15/2017
|
|
|
|
6/27/2020
|
|
|
|
2,305,453
|
|
|
|
1,012,919
|
|
|
|
1,012,919
|
|
|
|
0.65
|
%
|
|
Premiere Global Services,
Inc.(6)(9)
|
|
Diversified Telecommunication Services
|
|
3M L+6.50% (1.00% Floor)
|
|
|
5/6/2016
|
|
|
|
12/8/2021
|
|
|
|
10,444,897
|
|
|
|
9,820,433
|
|
|
|
9,191,509
|
|
|
|
5.88
|
%
|
|
ProFrac Services, LLC(6)
|
|
Energy Equipment & Services
|
|
3M L+5.75% (1.00% Floor)
|
|
|
9/7/2018
|
|
|
|
9/7/2023
|
|
|
|
7,481,250
|
|
|
|
7,411,970
|
|
|
|
7,406,438
|
|
|
|
4.73
|
%
|
|
Qualtek USA LLC(6)
|
|
Construction & Engineering
|
|
3M L+5.75% (1.00% Floor)
|
|
|
7/15/2018
|
|
|
|
7/18/2018
|
|
|
|
9,975,000
|
|
|
|
9,802,189
|
|
|
|
9,825,375
|
|
|
|
6.28
|
%
|
|
RPX Corporation(6)
|
|
Professional Services
|
|
3M L+6.00%
|
|
|
6/8/2018
|
|
|
|
6/7/2024
|
|
|
|
9,625,000
|
|
|
|
9,532,223
|
|
|
|
9,528,750
|
|
|
|
6.09
|
%
|
|
Techniplas LLC
|
|
Auto Components
|
|
Fixed 10.00%
|
|
|
6/10/2018
|
|
|
|
5/1/2020
|
|
|
|
9,500,000
|
|
|
|
9,040,285
|
|
|
|
9,072,500
|
|
|
|
5.80
|
%
|
|
Specialty Building Products Holdings LLC
|
|
Construction Materials
|
|
3M L+5.75%
|
|
|
9/25/2018
|
|
|
|
9/21/2025
|
|
|
|
10,000,000
|
|
|
|
9,853,681
|
|
|
|
9,850,000
|
|
|
|
6.30
|
%
|
|
Zinc Acquisition Holdings, LP(6)
|
|
Chemicals
|
|
3M L+10.00% (1.00% Floor)
|
|
|
10/9/2017
|
|
|
|
9/30/2024
|
|
|
|
4,709,302
|
|
|
|
4,668,075
|
|
|
|
4,709,302
|
|
|
|
3.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Senior Secured First Lien Debt Investments
|
|
|
|
201,960,977
|
|
|
|
190,913,951
|
|
|
|
192,079,797
|
|
|
|
122.79
|
%
|
See notes to unaudited consolidated financial
statements.
F-6
CM Finance Inc and Subsidiaries
Consolidated Schedule of Investments (continued)
(Unaudited)
December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments(1)(2)
|
|
Industry
|
|
Interest
Rate
|
|
Initial
Acquisition
Date
|
|
|
Maturity
Date
|
|
|
Principal
Amount/
Shares(3)
|
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
|
% of
Net
Assets
|
|
|
Senior Secured Second Lien Debt Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AP NMT Acquisition BV(6)(9)(10)
|
|
Media
|
|
3M L+9.00% (1.00% Floor)
|
|
|
8/12/2014
|
|
|
|
8/22/2022
|
|
|
$
|
20,000,000
|
|
|
$
|
19,248,493
|
|
|
$
|
19,200,000
|
|
|
|
12.28
|
%
|
|
Caelus Energy Alaska 03, LLC(6)
|
|
Oil, Gas & Consumable Fuels
|
|
3M L+7.50% (1.25% Floor)
|
|
|
4/17/2014
|
|
|
|
4/15/2020
|
|
|
|
24,266,667
|
|
|
|
23,525,773
|
|
|
|
24,024,000
|
|
|
|
15.36
|
%
|
|
Lionbridge Technologies,
Inc.(3)(6)
|
|
Commercial Services & Supplies
|
|
3M L+9.75% (1.00% Floor)
|
|
|
2/6/2017
|
|
|
|
2/28/2025
|
|
|
|
12,000,000
|
|
|
|
11,800,627
|
|
|
|
12,000,000
|
|
|
|
7.67
|
%
|
|
Premiere Global Services, Inc.(6)
|
|
Diversified Telecommunication Services
|
|
3M L+5.00% (1.00% Floor)
|
|
|
11/30/2016
|
|
|
|
6/6/2022
|
|
|
|
15,000,000
|
|
|
|
14,665,954
|
|
|
|
12,750,000
|
|
|
|
8.15
|
%
|
|
Sears Holding Company Delayed
Draw(5)
|
|
Retail
|
|
1M L+10.00%
|
|
|
6/9/2018
|
|
|
|
7/15/2019
|
|
|
|
10,000,000
|
|
|
|
2,083,721
|
|
|
|
2,078,571
|
|
|
|
1.33
|
%
|
|
TouchTunes Interactive Networks,
Inc.(6)
|
|
Media
|
|
1M L+8.25% (1.00% Floor)
|
|
|
5/4/2017
|
|
|
|
5/27/2022
|
|
|
|
12,000,000
|
|
|
|
11,986,143
|
|
|
|
12,000,000
|
|
|
|
7.67
|
%
|
|
Trident USA Health Services, LLC -
Tranche A(3)
|
|
Health Care Providers &
Services
|
|
3M L+10.00% PIK (1.25% Floor)
|
|
|
11/29/2017
|
|
|
|
7/31/2020
|
|
|
|
2,673,422
|
|
|
|
2,494,097
|
|
|
|
—
|
|
|
|
0.00
|
%
|
|
Trident USA Health Services, LLC -
Tranche B(3)
|
|
Health Care Providers &
Services
|
|
3M L+10.00% PIK (1.25% Floor)
|
|
|
11/29/2017
|
|
|
|
7/31/2020
|
|
|
|
21,443,958
|
|
|
|
20,021,280
|
|
|
|
—
|
|
|
|
0.00
|
%
|
|
ZeroChaos Parent, LLC(6)
|
|
Professional
Services
|
|
3M L+8.25% (1.00% Floor)
|
|
|
11/21/2017
|
|
|
|
10/31/2023
|
|
|
|
8,000,000
|
|
|
|
7,880,872
|
|
|
|
7,860,000
|
|
|
|
5.02
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Senior Secured Second Lien Debt Investments
|
|
|
|
117,526,904
|
|
|
|
113,706,960
|
|
|
|
89,912,571
|
|
|
|
57.48
|
%
|
|
Unsecured Debt Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trident USA Health Services, LLC - Holdco A Note
|
|
Health Care Providers & Services
|
|
|
|
|
|
|
|
|
7/31/2020
|
|
|
|
2,426,201
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Unsecured Debt Investments
|
|
|
|
2,426,201
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.00
|
%
|
|
Equity, Warrants and Other Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1888 Industrial Services, LLC (Equity
Interest)(4)(11)(14)
|
|
Energy
Equipment & Services
|
|
|
|
|
|
|
|
|
|
|
|
|
11,880
|
|
|
|
—
|
|
|
|
119
|
|
|
|
0.00
|
%
|
|
PR Wireless, Inc., $0.01 strike
(Warrants)(11)
|
|
Wireless Telecommunication Services
|
|
|
|
|
|
|
|
|
6/27/2024
|
|
|
|
201
|
|
|
|
1,374,009
|
|
|
|
—
|
|
|
|
0.00
|
%
|
|
U.S. Well Services, LLC (Equity Interest)
|
|
Energy
Equipment & Services
|
|
|
|
|
|
|
|
|
|
|
|
|
77,212
|
|
|
|
772,125
|
|
|
|
501,878
|
|
|
|
0.32
|
%
|
|
Zinc Acquisition Holdings, LP (Common
Stock)(12)
|
|
Chemicals
|
|
|
|
|
|
|
|
|
|
|
|
|
523
|
|
|
|
523,000
|
|
|
|
840,937
|
|
|
|
0.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity, Warrants and Other Investments
|
|
|
|
89,816
|
|
|
|
2,669,134
|
|
|
|
1,342,934
|
|
|
|
0.86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Non-Controlled/Non-Affiliates
|
|
|
$
|
329,861,041
|
|
|
$
|
307,290,045
|
|
|
$
|
283,335,302
|
|
|
|
181.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities in excess other assets
|
|
|
|
(126,898,994
|
)
|
|
|
-81.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets
|
|
|
$
|
156,436,308
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited consolidated financial statements.
F-7
CM Finance Inc and Subsidiaries
Consolidated Schedule of Investments (continued)
(Unaudited)
December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industry
|
|
|
Interest
Rate
|
|
|
Maturity
Date
|
|
|
Notional
Amount
|
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
|
% of
Net Assets
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivative - Notes
payable(11)(13)
|
|
|
Diversified Financial Services
|
|
|
|
|
|
|
|
12/5/2020
|
|
|
$
|
102,000,000
|
|
|
$
|
—
|
|
|
$
|
(170,584
|
)
|
|
|
-0.11
|
%
|
|
Embedded derivative - Notes
payable(11)(13)
|
|
|
Diversified Financial Services
|
|
|
|
|
|
|
|
12/5/2019
|
|
|
|
50,000,000
|
|
|
|
—
|
|
|
|
76,204
|
|
|
|
0.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
152,000,000
|
|
|
|
—
|
|
|
|
(94,380
|
)
|
|
|
-0.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return Swap(11)(13)
|
|
|
Diversified Financial Services
|
|
|
|
1M L+2.75
|
%
|
|
|
12/5/2020
|
|
|
|
102,000,000
|
|
|
|
—
|
|
|
|
170,584
|
|
|
|
0.11
|
%
|
|
Embedded derivative - Notes
payable(11)(13)
|
|
|
Diversified Financial Services
|
|
|
|
|
|
|
|
12/5/2019
|
|
|
|
50,000,000
|
|
|
|
—
|
|
|
|
(76,204
|
)
|
|
|
-0.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
|
152,000,000
|
|
|
|
—
|
|
|
|
94,380
|
|
|
|
0.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives
|
|
|
$
|
304,000,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The Company’s investments are generally acquired in private transactions exempt from registration under
the Securities Act of 1933, as amended (the “Securities Act”) and, therefore, are generally subject to limitations on resale, and may be deemed to be “restricted securities’’ under the Securities Act of 1933.
|
|
(2)
|
All investments are non-controlled and
non-affiliated issuers unless otherwise noted. All investments are valued in good faith by the board of directors.
|
|
(3)
|
Principal amount includes capitalized PIK interest.
|
|
(4)
|
Effective 10/1/17, AAR Intermediate Holdings, LLC changed its name to 1888 Industrial Services, LLC.
|
|
(5)
|
Refer to Note 6 for more detail on the unfunded commitments.
|
|
(6)
|
A portion or all is held by the Company indirectly through CM Finance SPV Ltd. and pledged as collateral for
the Total Return Swaps and pledged as collateral for the revolving credit facility held through UBS AG, London Branch.
|
|
(7)
|
Security, or a portion thereof, unsettled as of December 31, 2018.
|
|
(8)
|
First Lien Unitranche Last Out Investment, which accounts for 4.10% of our investment portfolio at fair value.
|
|
(9)
|
The investment is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940, as
amended (the “1940 Act”). The Company may not acquire any non-qualifying asset unless, at the time of acquisition, qualifying assets represent at least 70% of the Company’s total assets. Non-qualifying assets represent 10.31% of total assets.
|
|
(10)
|
A portfolio company domiciled in the Netherlands. The jurisdiction of the security issuer may be a different
country than the domicile of the portfolio company.
|
|
(11)
|
Securities are non-income producing.
|
|
(12)
|
CM Finance Inc’s investments in Zinc Acquisition Holdings, LP are held through its wholly owned
subsidiary, Zinc Borrower Blocker, LLC.
|
|
(13)
|
Refer to Note 5 for more detail on the Total Return Swaps and the Embedded derivatives — Notes Payable.
|
|
(14)
|
As defined in the 1940 Act, the Company is deemed to be an “Affiliated Person” of this portfolio
company because it owns 5% or more of the portfolio company’s outstanding voting securities.
|
1M L – 1 month LIBOR (2.52% as of December 31, 2018)
2M L – 2 month LIBOR (2.62% as of December 31, 2018)
3M L – 3 month LIBOR (2.80% as of December 31, 2018)
PIK –
Payment-In-Kind
See notes to unaudited consolidated financial statements.
F-8
CM Finance Inc and subsidiaries
Consolidated Schedule of Investments
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments(1)(2)
|
|
Industry
|
|
Interest Rate
|
|
Initial
Acquisition
Date
|
|
|
Maturity
Date
|
|
|
Principal
Amount/
Shares(3)
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
% of
Net
Assets
|
|
|
Non-Controlled/Non-Affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured First Lien Debt Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1888 Industrial Services, LLC –
Revolver(4)(5)
|
|
Energy Equipment & Services
|
|
3M L+5.00% (1.00% Floor)
|
|
|
10/11/2016
|
|
|
|
09/30/2021
|
|
|
$
|
2,376,238
|
|
|
$
|
1,683,168
|
|
|
$
|
1,683,168
|
|
|
|
0.98
|
%
|
|
1888 Industrial Services, LLC – Term
A(4)
|
|
Energy Equipment & Services
|
|
3M L+5.00% (1.00% Floor)
|
|
|
9/30/2016
|
|
|
|
09/30/2021
|
|
|
|
4,950,495
|
|
|
|
4,950,495
|
|
|
|
4,950,495
|
|
|
|
2.89
|
%
|
|
1888 Industrial Services, LLC – Term
B(3)(4)
|
|
Energy Equipment & Services
|
|
3M L+8.00% PIK (1.00% Floor)
|
|
|
9/30/2016
|
|
|
|
09/30/2021
|
|
|
|
11,687,047
|
|
|
|
5,912,941
|
|
|
|
8,765,286
|
|
|
|
5.11
|
%
|
|
American Gaming Systems Inc.(6)
|
|
Hotel, Restaurants & Leisure
|
|
3M L+4.25% (1.00% Floor)
|
|
|
2/9/2018
|
|
|
|
02/15/2024
|
|
|
|
20,400,451
|
|
|
|
20,400,451
|
|
|
|
20,400,451
|
|
|
|
11.89
|
%
|
|
CareerBuilder, LLC(6)
|
|
Professional Services
|
|
3M L+6.75% (1.00% Floor)
|
|
|
7/27/2017
|
|
|
|
07/27/2023
|
|
|
|
10,994,114
|
|
|
|
10,705,928
|
|
|
|
10,994,114
|
|
|
|
6.41
|
%
|
|
Deluxe Toronto Ltd.(6)
|
|
Media
|
|
3M L+5.50% (1.00% Floor)
|
|
|
6/29/2018
|
|
|
|
12/07/2020
|
|
|
|
5,000,000
|
|
|
|
4,950,000
|
|
|
|
4,950,000
|
|
|
|
2.89
|
%
|
|
Exela Intermedia LLC(7)
|
|
IT Services
|
|
3M L+6.50% (1.00% Floor)
|
|
|
6/5/2018
|
|
|
|
07/12/2023
|
|
|
|
5,468,354
|
|
|
|
5,524,248
|
|
|
|
5,524,678
|
|
|
|
3.22
|
%
|
|
Exela Intermedia LLC(7)
|
|
IT Services
|
|
Fixed 10.00%
|
|
|
6/19/2018
|
|
|
|
07/15/2023
|
|
|
|
5,500,000
|
|
|
|
5,685,426
|
|
|
|
5,685,900
|
|
|
|
3.32
|
%
|
|
FPC Holdings, Inc.(6)
|
|
Distributors
|
|
3M L+4.50% (1.25% Floor)
|
|
|
3/28/2018
|
|
|
|
11/18/2022
|
|
|
|
12,468,750
|
|
|
|
12,104,452
|
|
|
|
12,468,750
|
|
|
|
7.27
|
%
|
|
GEE Group, Inc.(6)(8)
|
|
Professional Services
|
|
2M L+13.75% (1.00% Floor)
|
|
|
3/26/2018
|
|
|
|
03/31/2021
|
|
|
|
12,286,453
|
|
|
|
12,286,453
|
|
|
|
12,286,453
|
|
|
|
7.16
|
%
|
|
Hostway Corp(6)
|
|
IT Services
|
|
3M L+5.75%
|
|
|
4/19/2018
|
|
|
|
12/13/2019
|
|
|
|
12,060,739
|
|
|
|
11,817,448
|
|
|
|
11,799,021
|
|
|
|
6.88
|
%
|
|
Immucor, Inc.(6)
|
|
Healthcare Equipment & Services
|
|
3M L+5.00% (1.00% Floor)
|
|
|
6/27/2017
|
|
|
|
06/15/2021
|
|
|
|
7,425,000
|
|
|
|
7,366,701
|
|
|
|
7,499,250
|
|
|
|
4.37
|
%
|
|
Liberty Oilfield Services LLC(6)(9)
|
|
Energy Equipment & Services
|
|
1M L+7.625% (1.00% Floor)
|
|
|
9/19/2017
|
|
|
|
09/19/2022
|
|
|
|
6,458,750
|
|
|
|
6,347,581
|
|
|
|
6,458,750
|
|
|
|
3.77
|
%
|
|
Montreign Operating Company, LLC(6)
|
|
Hotel, Restaurants & Leisure
|
|
1M L+8.25% (1.00% Floor)
|
|
|
12/16/2016
|
|
|
|
01/24/2023
|
|
|
|
13,199,738
|
|
|
|
13,246,185
|
|
|
|
12,935,744
|
|
|
|
7.54
|
%
|
|
Premiere Global Services,
Inc.(6)(9)
|
|
Diversified Telecommunication Services
|
|
3M L+6.50% (1.00% Floor)
|
|
|
5/6/2016
|
|
|
|
12/08/2021
|
|
|
|
10,748,527
|
|
|
|
10,225,894
|
|
|
|
10,533,557
|
|
|
|
6.14
|
%
|
|
PR Wireless LLC(5)
|
|
Wireless Telecommunication Services
|
|
3M L+5.25% (1.00% Floor)
|
|
|
11/15/2017
|
|
|
|
06/27/2020
|
|
|
|
2,308,097
|
|
|
|
461,619
|
|
|
|
461,619
|
|
|
|
0.27
|
%
|
|
RPX Corporation
|
|
Professional Services
|
|
3M L+6.00%
|
|
|
6/8/2018
|
|
|
|
6/8/2024
|
|
|
|
10,000,000
|
|
|
|
9,900,190
|
|
|
|
9,900,000
|
|
|
|
5.77
|
%
|
|
U.S. Well Services, LLC(3)(7)(9)
|
|
Energy Equipment & Services
|
|
1M L+9.00% (1.00% Floor)
|
|
|
2/1/2017
|
|
|
|
02/02/2022
|
|
|
|
9,633,228
|
|
|
|
9,684,648
|
|
|
|
9,633,228
|
|
|
|
5.62
|
%
|
|
U.S. Well Services, LLC –
Revolver(5)
|
|
Energy Equipment & Services
|
|
2M L+6.00% (1.00% Floor)
|
|
|
2/1/2017
|
|
|
|
02/02/2022
|
|
|
|
920,856
|
|
|
|
705,852
|
|
|
|
705,852
|
|
|
|
0.41
|
%
|
|
Zinc Acquisition Holdings, LP(6)
|
|
Chemicals
|
|
3M L+10.00% (1.00% Floor)
|
|
|
10/9/2017
|
|
|
|
09/29/2024
|
|
|
|
7,500,000
|
|
|
|
7,430,251
|
|
|
|
7,500,000
|
|
|
|
4.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Senior Secured First Lien Debt Investments
|
|
|
|
171,386,837
|
|
|
|
161,389,931
|
|
|
|
165,136,316
|
|
|
|
96.28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-9
See notes to consolidated financial statements.
CM Finance Inc and subsidiaries
Consolidated Schedule of Investments – (continued)
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments(1)(2)
|
|
Industry
|
|
Interest Rate
|
|
Initial
Acquisition
Date
|
|
|
Maturity
Date
|
|
|
Principal
Amount/
Shares(3)
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
% of
Net
Assets
|
|
|
Senior Secured Second Lien Debt Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AP NMT Acquisition BV(6)(9)(10)
|
|
Media
|
|
3M L+9.00% (1.00% Floor)
|
|
|
8/12/2014
|
|
|
|
08/13/2022
|
|
|
$
|
20,000,000
|
|
|
$
|
19,166,531
|
|
|
$
|
20,000,000
|
|
|
|
11.66
|
%
|
|
Caelus Energy Alaska 03, LLC(6)
|
|
Oil, Gas & Consumable Fuels
|
|
3M L+7.50% (1.25% Floor)
|
|
|
4/17/2014
|
|
|
|
04/15/2020
|
|
|
|
26,000,000
|
|
|
|
24,848,113
|
|
|
|
24,180,000
|
|
|
|
14.10
|
%
|
|
Intermedia Holdings, Inc.(6)
|
|
IT Services
|
|
3M L+9.50% (1.00% Floor)
|
|
|
1/3/2017
|
|
|
|
02/01/2025
|
|
|
|
5,000,000
|
|
|
|
4,911,867
|
|
|
|
5,000,000
|
|
|
|
2.91
|
%
|
|
International Wire Group, Inc.
|
|
Electronic Equipment
|
|
Fixed 10.75%
|
|
|
4/27/2017
|
|
|
|
08/01/2021
|
|
|
|
7,000,000
|
|
|
|
6,915,565
|
|
|
|
6,580,000
|
|
|
|
3.84
|
%
|
|
Lionbridge Technologies, Inc.(3)
|
|
Commercial Services & Supplies
|
|
1M L+9.75% (1.00% Floor)
|
|
|
2/6/2017
|
|
|
|
02/28/2025
|
|
|
|
12,000,000
|
|
|
|
11,789,661
|
|
|
|
12,000,000
|
|
|
|
7.00
|
%
|
|
Montrose Environmental Group, Inc.
|
|
Commercial Services & Supplies
|
|
3M L+9.50%
|
|
|
9/29/2017
|
|
|
|
09/30/2020
|
|
|
|
20,000,000
|
|
|
|
19,688,421
|
|
|
|
19,600,000
|
|
|
|
11.43
|
%
|
|
Premiere Global Services, Inc.(6)
|
|
Diversified Telecommunication Services
|
|
3M L+9.50% (1.00% Floor)
|
|
|
11/30/2016
|
|
|
|
06/06/2022
|
|
|
|
15,000,000
|
|
|
|
14,679,729
|
|
|
|
14,400,000
|
|
|
|
8.39
|
%
|
|
TouchTunes Interactive Networks,
Inc.(6)
|
|
Media
|
|
1M L+8.25% (1.00% Floor)
|
|
|
5/4/2017
|
|
|
|
05/27/2022
|
|
|
|
7,000,000
|
|
|
|
6,977,435
|
|
|
|
7,000,000
|
|
|
|
4.08
|
%
|
|
Trident USA Health Services, LLC – Tranche A(3)
|
|
Healthcare Providers & Services
|
|
3M L+10.00% PIK (1.25% Floor)
|
|
|
11/29/2017
|
|
|
|
07/31/2020
|
|
|
|
2,612,643
|
|
|
|
2,493,712
|
|
|
|
377,266
|
|
|
|
0.22
|
%
|
|
Trident USA Health Services, LLC – Tranche B(3)
|
|
Healthcare Providers & Services
|
|
3M L+10.00% PIK (1.25% Floor)
|
|
|
11/29/2017
|
|
|
|
07/31/2020
|
|
|
|
20,956,435
|
|
|
|
20,018,194
|
|
|
|
10,203,688
|
|
|
|
5.95
|
%
|
|
ZeroChaos Parent, LLC(6)
|
|
Professional Services
|
|
3M L+8.25% (1.00% Floor)
|
|
|
11/21/2017
|
|
|
|
10/31/2023
|
|
|
|
8,000,000
|
|
|
|
7,871,114
|
|
|
|
7,860,000
|
|
|
|
4.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Senior Secured Second Lien Debt Investments
|
|
|
|
143,569,078
|
|
|
|
139,360,342
|
|
|
|
127,200,954
|
|
|
|
74.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured Debt Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trident USA Health Services, LLC – Holdco A Note
|
|
Healthcare Providers & Services
|
|
—
|
|
|
|
|
|
|
07/31/2020
|
|
|
|
2,426,201
|
|
|
|
—
|
|
|
|
731,742
|
|
|
|
0.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Unsecured Debt Investments
|
|
|
|
2,426,201
|
|
|
|
—
|
|
|
|
731,742
|
|
|
|
0.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity, Warrants and Other Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1888 Industrial Services, LLC (Equity
Interest)(4)(11)(12)
|
|
Energy Equipment & Services
|
|
|
|
|
|
|
|
|
|
|
|
|
11,880
|
|
|
|
—
|
|
|
|
1
|
|
|
|
0.00
|
%
|
|
PR Wireless, Inc., $0.01 strike
(Warrants)(11)
|
|
Telecommunication Services
|
|
|
|
|
|
|
|
|
6/27/2027
|
|
|
|
201
|
|
|
|
1,374,009
|
|
|
|
—
|
|
|
|
0.00
|
%
|
|
Zinc Acquisition Holdings, LP (Common
Stock)(13)
|
|
Chemicals
|
|
—
|
|
|
|
|
|
|
|
|
|
|
523
|
|
|
|
523,000
|
|
|
|
523,000
|
|
|
|
0.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity, Warrants and Other Investments
|
|
|
|
12,604
|
|
|
|
1,897,009
|
|
|
|
523,001
|
|
|
|
0.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Controlled/Non-Affiliates
|
|
|
$
|
317,394,720
|
|
|
$
|
302,647,282
|
|
|
$
|
293,592,013
|
|
|
|
171.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities in excess other assets
|
|
|
|
(122,069,347
|
)
|
|
|
(71.17
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets
|
|
|
$
|
171,522,666
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-10
See notes to consolidated financial statements.
CM Finance Inc and subsidiaries
Consolidated Schedule of Investments – (continued)
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industry
|
|
|
Interest
Rate
|
|
|
Maturity
Date
|
|
|
Notional
Amount
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
% of
Net
Assets
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivative – Notes
payable(11)(14)
|
|
|
Diversified Financial Services
|
|
|
|
|
|
|
|
12/5/2020
|
|
|
$
|
102,000,000
|
|
|
$
|
—
|
|
|
$
|
157,223
|
|
|
|
0.09
|
%
|
|
Embedded derivative – Notes
payable(11)(14)
|
|
|
Diversified Financial Services
|
|
|
|
|
|
|
|
12/5/2019
|
|
|
|
50,000,000
|
|
|
|
—
|
|
|
|
72,695
|
|
|
|
0.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152,000,000
|
|
|
|
—
|
|
|
|
229,918
|
|
|
|
0.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return Swap(11)(14)
|
|
|
Diversified Financial Services
|
|
|
|
1M
L+2.75%
|
|
|
|
12/5/2020
|
|
|
|
102,000,000
|
|
|
|
—
|
|
|
|
(157,223
|
)
|
|
|
(0.09
|
%)
|
|
Embedded derivative – Notes
payable(11)(14)
|
|
|
Diversified Financial Services
|
|
|
|
|
|
|
|
12/5/2019
|
|
|
|
50,000,000
|
|
|
|
—
|
|
|
|
(72,695
|
)
|
|
|
(0.04
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
|
152,000,000
|
|
|
|
—
|
|
|
|
(229,918
|
)
|
|
|
(0.13
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives
|
|
|
$
|
304,000,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The Company’s investments are generally acquired in private transactions exempt from registration under the
Securities Act of 1933, as amended (the “Securities Act”) and, therefore, are generally subject to limitations on resale, and may be deemed to be “restricted securities’’ under the Securities Act of 1933.
|
|
(2)
|
All investments are non-controlled and non-affiliated issuers. All investments are valued in good faith by the
board of directors.
|
|
(3)
|
Principal amount includes capitalized PIK interest.
|
|
(4)
|
Effective 10/1/17, AAR Intermediate Holdings, LLC changed its name to 1888 Industrial Services, LLC.
|
|
(5)
|
Refer to Note 6 for more detail on the unfunded commitments.
|
|
(6)
|
A portion or all is held by the Company indirectly through CM Finance SPV Ltd. and pledged as collateral for the
Total Return Swaps and pledged as collateral for the revolving credit facility held through UBS AG, London Branch .
|
|
(7)
|
Security, or a portion thereof, unsettled as of June 30, 2018.
|
|
(8)
|
First Lien Unitranche Last Out Investment, which accounts for 4.18% of our investment portfolio at fair value.
|
|
(9)
|
The investment is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940. The
Company may not acquire any non-qualifying asset unless, at the time of acquisition, qualifying assets represent at least 70% of the Company’s total assets. Non-qualifying assets represent 15.88% of total assets.
|
|
(10)
|
A portfolio company domiciled in the Netherlands. The jurisdiction of the security issuer may be a different
country than the domicile of the portfolio company.
|
|
(11)
|
Securities are non-income producing.
|
|
(12)
|
CM Finance Inc’s investment in 1888 Industrial Services, LLC (Equity Interest) is held through its wholly
owned subsidiary, CM Portfolio Companies LLC.
|
|
(13)
|
CM Finance Inc’s investments in Zinc Acquisition Holdings, LP are held through its wholly owned subsidiary,
Zinc Borrower Blocker, LLC.
|
|
(14)
|
Refer to Note 5 for more detail on the Total Return Swaps and the Embedded derivatives—Notes Payable.
|
|
|
|
1M L — 1 month LIBOR (2.09% as of June 30, 2018)
|
|
3M L — 3 month LIBOR (2.34% as of June 30, 2018)
|
|
PIK — Payment-In-Kind
|
F-11
See notes to consolidated financial statements.
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 1.
Organization
CM Finance Inc (“CMFN” or the “Company”), a Maryland corporation formed in May 2013, is a closed-end, externally managed, non-diversified management investment company that has elected to be regulated as a business development company (“BDC”) under the
Investment Company Act of 1940, as amended (the “1940 Act”), and has elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code (the “Code”) for U.S. federal income
tax purposes. The Company is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”)
Topic 946 Financial Services – Investment Companies.
On February 11, 2014, the Company completed its initial public offering (the
“Offering”), selling 7,666,666 shares of its common stock, par value $0.001, including the underwriters’ over-allotment, at a price of $15.00 per share with net proceeds of approximately $111.5 million.
CM Finance LLC, a Maryland limited liability company, commenced operations in March 2012. Immediately prior to the Offering, CM Finance LLC was merged with
and into the Company (the “Merger”). In connection with the Merger, the Company issued 6,000,000 shares of common stock and $39.8 million in debt to the pre-existing CM Finance LLC investors,
consisting of funds managed by Cyrus Capital Partners, L.P. (the “Original Investors” or the “Cyrus Funds”). The Company had no assets or operations prior to completion of the Merger and, as a result, the books and records of CM
Finance LLC became the books and records of the Company, as the surviving entity. Immediately after the Merger, the Company issued 2,181,818 shares of its common stock to Stifel Venture Corp. (“Stifel”) in exchange for $32.7 million
in cash. The Company used all of the proceeds of the sale of shares to Stifel to repurchase 2,181,818 shares of common stock from the Original Investors. Immediately after the completion of the Offering, the Company had 13,666,666 shares
outstanding. The Company used a portion of the net proceeds of the Offering to repay 100% of the debt issued to the Original Investors in connection with the Merger.
Upon its election to be regulated as a BDC on February 5, 2014, the Company entered into an investment advisory agreement (the “Advisory
Agreement”) and an administration agreement with CM Investment Partners LLC (the “Adviser”) as its investment adviser and administrator, respectively.
The Company’s primary investment objective is to maximize total return to stockholders in the form of current income and capital appreciation by
investing directly in debt and related equity of privately held middle-market companies to help these companies fund acquisitions, growth or refinancing. The Company invests primarily in middle-market companies in the form of unitranche loans,
standalone first and second lien and mezzanine loans. The Company may also invest in unsecured debt, bonds and in the equity of portfolio companies through warrants and other instruments.
As a BDC, the Company is required to comply with certain regulatory requirements. For instance, as a BDC, the Company must not acquire any assets other than
“qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of total assets are qualifying assets. Qualifying assets include investments in “eligible portfolio companies.” Under the
relevant Securities and Exchange Commission (“SEC”) rules, the term “eligible portfolio company” includes all private operating companies, operating companies whose securities are not listed on a national securities exchange, and
certain public operating companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million, in each case organized and with their principal of business in the United States.
F-12
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 1. Organization – (continued)
From time-to-time, the Company may form taxable subsidiaries which are taxed as corporations for federal income tax purposes (the “Taxable
Subsidiaries”). At December 31, 2018, the Company had one Taxable Subsidiary: Zinc Borrower Blocker, LLC; at June 30, 2018, the Company had four Taxable Subsidiaries: CM Portfolio Companies LLC, U.S. Well Services Blocker, LLC, Bird
Electric Blocker, LLC, and Zinc Borrower Blocker, LLC. The Taxable Subsidiaries allow the Company to hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements applicable to a RIC
under the Code.
Note 2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Company.
a. Basis of Presentation
The accompanying consolidated
financial statements are prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and all values are stated in U.S. dollars, unless noted otherwise. The financial statements reflect all adjustments that are,
in the opinion of management, necessary for a fair presentation of the results for the periods included herein as required by U.S. GAAP. These adjustments are normal and recurring in nature.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the fair
value of investments and other amounts reported in the consolidated financial statements and accompanying notes. Management believes that the estimates utilized in preparing the Company’s consolidated financial statements are reasonable and
prudent. Actual results could differ materially from these estimates. All material inter-company balances and transactions have been eliminated.
As
permitted under Regulation S-X and ASC Topic 946, the Company will generally not consolidate its investment in a portfolio company other than an investment company subsidiary or a controlled operating company
whose business consists of providing services to the Company. Accordingly, the Company consolidated the results of the Company’s wholly-owned subsidiaries, CM Finance SPV Ltd. (“SPV”) and CM Finance SPV LLC (“LLC”), which
are special purpose vehicles used to finance certain investments, and Zinc Borrower Blocker, LLC in its consolidated financial statements. All intercompany balances and transactions have been eliminated.
b. Revenue Recognition, Security Transactions, and Realized/Unrealized Gains or Losses
Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Origination, closing, commitment, and
amendment fees, purchase and original issue discounts associated with loans to portfolio companies are accreted into interest income over the respective terms of the applicable loans. Accretion of discounts or premiums is calculated by the effective
interest or straight-line method, as applicable, as of the purchase date and adjusted only for material amendments or prepayments. Upon the prepayment of a loan or debt security, any prepayment penalties are included in other fee income and
unamortized fees and discounts are recorded as interest income and are non-recurring in nature.
F-13
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 2. Significant Accounting Policies – (continued)
Loans are placed on non-accrual status when principal or interest payments are past due 90 days or more or when there
is reasonable doubt that principal or interest will be collected. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment about ultimate collectability of principal. Non-accrual loans
are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current.
Dividend
income is recorded on the ex-dividend date.
Origination, closing, commitment, and amendment fees, purchase and
original issue discounts associated with loans to portfolio companies are accreted into interest income over the respective terms of the applicable loans. Accretion of discounts or premiums is calculated by the effective interest or straight-line
method, as applicable, as of the purchase date and adjusted only for material amendments or prepayments. Upon the prepayment of a loan or debt security, any prepayment penalties are included in other fee income and unamortized fees and discounts are
recorded as interest income and are non-recurring in nature. During the three and six months ended December 31, 2018, $877,376 and $1,015,923 of prepayment penalties and unamortized discounts upon
prepayment were recorded as interest income, respectively. During the three and six months ended December 31, 2017, $1,218,231 and $1,240,123 of prepayment penalties and unamortized discounts upon prepayment were recorded as interest income,
respectively.
Investment transactions are accounted for on a trade-date basis. Realized gains or losses on investments are determined by calculating the
difference between the net proceeds from the disposition and the amortized cost basis of the investments, without regard to unrealized gains or losses previously recognized. Realized gains or losses on the sale of investments are calculated using
the specific identification method. The Company reports changes in fair value of investments as a component of the net change in unrealized appreciation (depreciation) on investments in the Unaudited Consolidated Statements of Operations.
Management reviews all loans that become 90 days or more past due on principal or interest or when there is reasonable doubt that principal or interest will
be collected for possible placement on non-accrual status. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received
on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability. Non-accrual loans are
restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current, although management may make exceptions to this general rule if the loan has sufficient collateral value and is
in the process of collection.
The Company may hold debt investments in its portfolio that contain a payment-in-kind (“PIK”) interest provision. PIK interest, which represents contractually deferred interest added to the investment balance that is generally due at maturity, is recorded on an
accrual basis to the extent that such amounts are expected to be collected. PIK interest is not accrued if the Company does not expect the issuer to be able to pay all principal and interest when due. The Company earned PIK interest of $540,308 and
$953,928 during the three and six months ended December 31, 2018, respectively. The Company earned PIK interest of $722,039 and $1,014,517 during the three and six months ended December 31, 2017, respectively.
The Company may hold equity investments in its portfolio that contain a PIK dividend provision. PIK dividends, which represents contractual dividend payments
added to the investment balance, is recorded on an accrual basis to the extent that such amounts are expected to be collected. The Company earned no PIK dividends during the
F-14
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 2. Significant Accounting Policies – (continued)
three and six months ended December 31, 2018. The Company earned PIK dividends of $189,583 and $189,583 during the three and six months ended
December 31, 2017, respectively.
c. Paid In Capital
The Company records the proceeds from the sale of its common stock to common stock and additional paid-in capital, net
of commissions and marketing support fees.
d. Net Increase in Net Assets Resulting from Operations per Share
The net increase in net assets resulting from operations per share is calculated based upon the weighted average number of shares of common stock outstanding
during the reporting period.
e. Distributions
Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount to be paid out as a
dividend or distribution is determined by the Company’s board of directors each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are generally distributed annually, although the
Company may decide to retain such capital gains for investment.
The Company has adopted a dividend reinvestment plan that provides for reinvestment of
any distributions the Company pays in cash on behalf of the Company’s stockholders, unless a stockholders elects to receive cash. As a result, if the Company’s board of directors declares, and the Company pays, a cash distribution, then
the Company’s stockholders who have not “opted out” of the Company’s dividend reinvestment plan will have their cash distributions automatically reinvested in additional shares of the Company’s common stock, rather than
receiving the cash distribution.
f. Cash and Restricted Cash
Cash and restricted cash consist of bank demand deposits. The Company deposits its cash in financial institutions and, at times, such balance may be in excess
of the Federal Deposit Insurance Corporation insurance limits. All of the Company’s cash deposits are held at large established high credit quality financial institutions and management believes that the risk of loss associated with any
uninsured balances is remote. The Company has restrictions on the uses of the cash held by SPV and LLC based on the terms of the Notes Payable. For more information on the Notes Payable, see Note 5.
g. Deferred Offering Costs
Deferred offering costs
consist of fees and expenses incurred in connection with the offer and sale of the Company’s common stock and bonds, including legal, accounting, printing fees, and other related expenses, as well as costs incurred in connection with the filing
of a shelf registration statement. These costs are capitalized when incurred and recognized as a reduction of offering proceeds when the offering is completed.
h. Investment Transactions and Expenses
Purchases of
loans, including revolving credit agreements, are recorded on a fully committed basis until the funded and unfunded portions are known or estimable, which in many cases may not be until settlement.
F-15
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 2. Significant Accounting Policies – (continued)
Expenses are accrued as incurred.
Deferred debt issuance costs,
incurred in connection with the Company’s Notes Payable, are amortized using the straight line method over the life of the notes.
Offering costs
were charged to paid-in capital upon the sale of shares in the Offering.
i. Investment Valuation
The Company applies fair value accounting to all of its financial instruments in accordance with the 1940 Act and ASC Topic 820 – Fair Value Measurements
and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework used to measure fair value and requires disclosures for fair value measurements. In accordance with ASC 820, the Company has categorized its investments and
financial instruments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy as discussed in Note 4. Fair value is a market-based measure considered from the perspective of the market
participant who holds the financial instrument rather than an entity specific measure. Therefore, when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that management believes market
participants would use in pricing the financial instrument at the measurement date.
Fair value is defined as the price that would be received upon a sale
of an asset in an orderly transaction between market participants at the measurement date. Market participants are buyers and sellers in the principal (or most advantageous) market for the asset that (a) are independent of us, (b) are
knowledgeable, having a reasonable understanding about the asset based on all available information (including information that might be obtained through due diligence efforts that are usual and customary), (c) are able to transact for the
asset, and (d) are willing to transact for the asset or liability (that is, they are motivated but not forced or otherwise compelled to do so).
Securities that are traded on securities exchanges (including such securities traded in the after hour’s market) are valued on the basis of the closing
price on the valuation date (if such prices are available). Securities that are traded on more than one securities exchange are valued at the closing price on the primary securities exchange on which such securities are traded on the valuation date
(or if reported on the consolidated tape, then their last sales price on the consolidated tape). Listed options for which the last sales price falls between the last “bid” and “ask” prices for such options are valued at their
last sales price on the date of the valuation on the primary securities exchange on which such options are traded. Options for which the last sales price on the valuation date does not fall between the last “bid” and “ask” prices
are valued at the average of the last “bid” and “ask” prices for such options on that date. To the extent these securities are actively traded, and valuation adjustments are not applied, they are categorized in Level 1 of
the fair value hierarchy. The Company held one Level 1 investment as of December 31, 2018 and held no Level 1 investments as of June 30, 2018.
Investments that are not traded on securities exchanges but are traded on the
over-the-counter (“OTC”) markets (such as term loans, notes and warrants) are valued using various techniques, which may consider recently executed
transactions in securities of the issuer or comparable issuers, market price quotations (when observable) and fundamental data relating to the issuer. These investments are categorized in Level 2 of the fair value hierarchy, or in instances
when lower relative weight is placed on transaction prices, quotations, or similar observable inputs, they are categorized in Level 3.
F-16
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 2. Significant Accounting Policies – (continued)
The embedded derivative in the Term Notes and the 2017 Revolving Notes (as defined in Note 5) payable from SPV to UBS AG, London Branch (together with its
affiliates, “UBS”) and total return swaps referencing the terms of the Term Notes payable and the total return of the 2017 Revolving Notes referencing the 2017 Revolving Notes (together, the “TRS”) are valued based on the change
in fair value and the underlying accrued interest of the portfolio of assets held in SPV less the accrued interest payable on the financing due to the TRS counterparty, UBS. Consideration has been given to counterparty risk. The Company has assessed
the unsecured risk of the counterparty, UBS, in the form of credit ratings and the trading levels of that risk and has determined that the counterparty risk is minimal. The Company also notes that counterparty risk is further mitigated by the
monthly settlement of both the interest portion of the embedded derivative referencing the Term Notes and the 2017 Revolving Notes payable and the TRS. If the Company were to determine that counterparty risk were material, an adjustment to the fair
value of the TRS would be made. The embedded derivative in the Term Notes and the 2017 Revolving Notes payable and the TRS have been categorized in Level 3 of the fair value hierarchy. See Note 4 and Note 5 for more detail.
Investments for which market quotations are not readily available or may be considered unreliable are fair valued, in good faith, using a method determined to
be appropriate in the given circumstances. The valuation methods used include the Cost Approach, the Market Approach and the Income Approach. Inputs used in these approaches may include, but are not limited to, interest rate yield curves, credit
spreads, recovery rates, comparable company transactions, trading multiples, and volatilities. The valuation method of the Company may change as changes in the underlying company dictates, such as moving from the Cost Approach to Market Approach
when underlying conditions change at the company. Because of the inherent uncertainty of valuation in these circumstances, the fair values for the aforementioned investments may differ significantly from values that would have been used had a ready
and liquid market for such investments existed or from the amounts that might ultimately be realized, and such differences could be material.
The
Company’s valuation policies and procedures are developed by the Adviser, which is also responsible for ensuring that the valuation policies and procedures are consistently applied across all investments of the Company, and approved by the
Company’s board of directors. The valuations are continuously monitored and the valuation process for Level 3 investments is completed on a quarterly basis and is designed to subject the valuation of Level 3 investments to an
appropriate level of consistency, oversight and review. The valuation process begins with each portfolio company or investment being initially valued by the investment professionals of the Adviser responsible for the portfolio investment. These
investment professionals prepare the preliminary valuations based on their evaluation of financial and operating data, company specific developments, market valuations of comparable securities from the same company or that of comparable companies as
well as any other relevant factors including recent purchases and sales that may have occurred preceding month-end.
Valuation models are typically calibrated upon initial funding, and are re-calibrated as necessary upon subsequent
material events (including, but not limited to additional financing activity, changes in comparable companies, and recent trades). The preliminary valuation conclusions are then documented and discussed with senior management of the Adviser. On a
periodic basis and at least once annually, independent valuation firm(s) engaged by the Company conduct independent appraisals and review the Adviser’s preliminary valuations and make their own independent assessment. The Valuation Committee of
the Company’s board of directors then reviews the preliminary valuations of the Adviser and that of the independent valuation firm(s). The Valuation Committee discusses the valuations and makes a recommendation to the Company’s board of
directors regarding the fair value of each investment in good faith based on the input of the Adviser and the independent valuation
F-17
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 2. Significant Accounting Policies – (continued)
firm(s). Upon recommendation by the Valuation Committee and a review of the valuation materials of the Adviser and the third party independent valuation
firm(s), the board of directors of the Company determines, in good faith, the fair value of each investment.
For more information on the classification
of the Company’s investments by major categories, see Note 4.
The fair value of the Company’s assets and liabilities that qualify as financial
instruments under U.S. GAAP approximates the carrying amounts presented in the Unaudited Consolidated Statements of Assets and Liabilities.
j. Income
Taxes
The Company has elected to be treated, for U.S. federal income tax purposes, as a RIC under Subchapter M of the Code. To qualify, and maintain
qualification, as a RIC, the Company must, among other things, meet certain source of income and asset diversification requirements and distribute to stockholders, for each taxable year, at least 90% of the Company’s “investment company
taxable income,” which is generally the Company’s net ordinary income plus the excess, if any, of realized net short-term capital gains over realized net long-term capital losses. If the Company continues to qualify as a RIC and continues
to satisfy the annual distribution requirement, the Company will not have to pay corporate level federal income taxes on any income that the Company distributes to its stockholders. The Company intends to make distributions in an amount sufficient
to maintain its RIC status each year and to avoid paying any federal income taxes on income. The Company will also be subject to nondeductible federal excise taxes if the Company does not distribute to its stockholders at least 98% of net ordinary
income, 98.2% of capital gains, if any, and any recognized and undistributed income from prior years for which it paid no federal income taxes. Additionally, certain of the Company’s consolidated subsidiaries are subject to U.S. federal and
state income taxes. The Company did not record a provision for taxes for the three and six months ended December 31, 2018 and for the three and six months ended December 31, 2017 for U.S. federal and state income taxes related to the
Taxable Subsidiaries.
Book and tax basis differences that are permanent differences are reclassified among the Company’s capital accounts, as
appropriate at year-end. Additionally, the tax character of distributions is determined in accordance with the Code, which differs from U.S. GAAP. During the three and six months ended December 31, 2018,
the Company recorded distributions of $3.4 million and $6.8, respectively. During the three and six months ended December 31, 2017, the Company recorded distributions of $3.4 million and $6.8 million, respectively. The tax
character of a portion of these distributions may be return of capital.
U.S. GAAP requires the evaluation of tax positions taken or expected to be taken
in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not
deemed to meet a more-likely-than-not threshold would be recorded as a tax expense in the current year. The Company’s policy is to recognize accrued interest and penalties associated with uncertain tax
positions as part of the tax provision.
The Company has analyzed such tax positions and has concluded that no unrecognized tax benefits should be
recorded for uncertain tax positions for any tax year since inception. Each of the tax years since inception remains subject to examination by taxing authorities. This conclusion may be subject to review and adjustment at a later date based on
factors, including but not limited to, ongoing analysis and changes to laws, regulations, and interpretations thereof.
F-18
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 2. Significant Accounting Policies – (continued)
Permanent differences between investment company taxable income and net investment income for financial reporting purposes are reclassified among capital
accounts in the financial statements to reflect their tax character. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. During the year ended June 30, 2018, the Company
reclassified for book purposes amounts arising from permanent book/tax differences related to the different tax treatment of paydown gains and losses, and income/(loss) from wholly owned subsidiaries as follows:
|
|
|
|
|
|
|
|
|
As of
June 30, 2018
|
|
|
Additional paid-in capital
|
|
$
|
—
|
|
|
Distributions in excess of net investment income
|
|
|
—
|
|
|
Accumulated net realized gain (loss)
|
|
|
—
|
|
The tax character of all distributions paid by the Company during the year ended June 30, 2018 was ordinary income.
At June 30, 2018, the components of distributable earnings on a tax basis detailed below differ from the amounts reflected in the
Company’s Consolidated Statement of Assets and Liabilities by temporary and other book/tax differences, primarily relating to the tax treatment of dividends payable and non-deductible incentive fee income
unvested, as follows:
|
|
|
|
|
|
|
|
|
As of
June 30, 2018
|
|
|
Undistributed net investment income
|
|
$
|
7,140,649
|
|
|
Accumulated capital gains (losses) and other
|
|
|
(2,474,763
|
)
|
|
Capital loss carryover
|
|
|
(18,612,517
|
)
|
|
Unrealized appreciation (depreciation)
|
|
|
(9,055,269
|
)
|
|
Distributions payable
|
|
|
(3,417,848
|
)
|
|
|
|
|
|
|
|
Components of tax distributable earnings at year end
|
|
$
|
(26,419,748
|
)
|
|
|
|
|
|
|
For tax purposes, net realized capital losses may be carried over to offset future capital gains, if any. These capital losses
can be carried forward for an indefinite period, and will retain their character as either short-term or long-term capital losses. As of June 30, 2018, the Company had a net short-term capital loss carryforward of $1,068,849 and a net long-term
capital loss carryforward of $17,543,668 available to be carried forward for an indefinite period.
A RIC may elect to defer any capital losses incurred
after October 31, 2017 (“post-October”) to the beginning of the following fiscal year. As of June 30, 2018, the Company had a post-October short-term capital loss deferral of $202,160 and a post-October long-term capital loss
deferral of $2,272,603. These losses are deemed to arise on July 1, 2018.
In addition, as of June 30, 2018, the wholly-owned taxable subsidiary
recorded a deferred tax asset and a corresponding valuation allowance of approximately $172,769.
F-19
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 2. Significant Accounting Policies – (continued)
k. Capital Gains Incentive Fee
Under U.S. GAAP, the
Company calculates the capital gains incentive fee payable to the Adviser as if the Company had realized all investments at their fair values as of the reporting date. Accordingly, the Company accrues a provisional capital gains incentive fee taking
into account any unrealized gains or losses. As the provisional capital gains incentive fee is subject to the performance of investments until there is a realization event, the amount of provisional capital gains incentive fee accrued at a reporting
date may vary from the incentive fee that is ultimately realized and the differences could be material.
The cost basis used to compute gains and losses
for the purpose of determining incentive fees is the fair value of the Company’s investments on February 5, 2014, at the time the Company priced the Offering.
As of December 31, 2018 and June 30, 2018, there was no capital gains incentive fee payable to the Adviser under the Advisory Agreement.
l. Share Repurchase Program
On May 2, 2018, the
Company’s board of directors authorized a discretionary repurchase program of up to $5.0 million shares of the Company’s common stock, until the earlier of (i) May 1, 2019 or (ii) the repurchase of $5.0 million in
aggregate amount of the common stock. Under the discretionary repurchase program, the Company may, but is not obligated to, repurchase the outstanding common stock from time to time in the open market provided that the Company complies with the
prohibitions under its insider trading policies and procedures and the applicable provisions the Securities Exchange Act of 1934, as amended. In addition, any repurchases will be conducted in accordance with the 1940 Act. The timing and number of
shares to be repurchased will depend on a number of factors, including market conditions and alternative investment opportunities and no assurances can be given that any common stock, or any particular amount, will be purchased. The Company will
retire immediately all shares of common stock that are purchased in connection with the share repurchase program. During the three and six months ended December 31, 2018, the Company repurchased 30,999 and 42,214 shares of common stock on the
open market for $257,336 and $358,573, respectively (including commissions). Refer to Note 11 for additional information concerning share repurchases.
Note 3. Recent Accounting Pronouncements
From time to
time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by the Company as of the specified effective date. The Company believes that the impact of recently issued standards that are not yet
effective will not have a material impact on its financial statements upon adoption.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement
(Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 will modify the disclosure requirements for fair value measurements by removing, modifying, or adding
certain disclosures. ASU 2018-13 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period, with early adoption permitted. The Company is currently evaluating the impact ASU
2018-13 will have on the Company’s consolidated financial statements and disclosures.
Certain items in the December 31, 2017 consolidated financial
statements has been reclassified to conform to the December 31, 2018 presentation with no effect on net income.
F-20
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 4. Investments
The Company’s investments, at any time, may include securities and other financial instruments, including, without limitation, corporate and government
bonds, convertible securities, collateralized loan obligations, term loans, trade claims, equity securities, privately negotiated securities, direct placements, working interests, warrants and investment derivatives (such as credit default swaps,
recovery swaps, total return swaps, options, forward contracts, and futures) (all of the foregoing collectively referred to in these financial statements as “investments”).
a. Certain Risk Factors
In the ordinary course of
business, the Company manages a variety of risks including market risk, liquidity risk and credit risk. The Company identifies, measures and monitors risk through various control mechanisms, including trading limits and diversifying exposures and
activities across a variety of instruments, markets and counterparties.
Market risk is the risk of potential adverse changes to the value of financial
instruments because of changes in market conditions, including as a result of changes in the credit quality of a particular issuer, credit spreads, interest rates, and other movements and volatility in security prices or commodities. In particular,
the Company may invest in issuers that are experiencing or have experienced financial or business difficulties (including difficulties resulting from the initiation or prospect of significant litigation or bankruptcy proceedings), which involves
significant risks. The Company manages its exposure to market risk through the use of risk management strategies and various analytical monitoring techniques.
The Company’s assets may, at any time, include securities and other financial instruments or obligations that are illiquid or thinly traded, making
purchase or sale of such securities and financial instruments at desired prices or in desired quantities difficult. Furthermore, the sale of any such investments may be possible only at substantial discounts, and it may be extremely difficult to
value any such investments accurately.
Credit risk is the potential loss the Company may incur from a failure of an issuer to make payments according to
the terms of a contract. The Company is subject to credit risk because of its strategy of investing in the debt of leveraged companies and its involvement in derivative instruments. The Company’s exposure to credit risk on its investments is
limited to the fair value of the investments. The Company’s TRS contracts are executed pursuant to an International Swaps and Derivatives Association (“ISDA”) master agreement (the “ISDA Agreement”) that the Company
currently has in place with UBS. At December 31, 2018 and June 30, 2018, the Company had all of its counterparty credit risk associated with non-performance for swaps with UBS. With regard to
derivatives, the Company attempts to limit its credit risk by considering its counterparty’s (or its guarantor’s) credit rating. The Company’s policy is to not hold counterparty collateral on ISDA Agreements, but would do so if the
exposure were material.
b. Investments
Investment
purchases, sales and principal payments/paydowns are summarized below for the three and six months ended December 31, 2018 and December 31, 2017, respectively. These purchase and sale amounts exclude derivative instruments.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
December 31,
|
|
|
Six months ended
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Investment purchases, at cost (including PIK interest)
|
|
$
|
50,655,913
|
|
|
$
|
35,996,034
|
|
|
$
|
105,021,483
|
|
|
$
|
83,054,878
|
|
|
Investment sales and repayments
|
|
|
86,223,802
|
|
|
|
23,997,051
|
|
|
|
101,767,898
|
|
|
|
54,842,377
|
|
F-21
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 4. Investments – (continued)
The composition of the Company’s investments as of December 31, 2018, as a percentage of the total portfolio, at amortized cost and fair value, are
as follows:
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
Investment at
Amortized Cost
|
|
|
Percentage
|
|
|
Investments at
Fair Value
|
|
|
Percentage
|
|
|
Senior Secured First Lien Debt Investments
|
|
$
|
179,301,088
|
|
|
|
58.35
|
%
|
|
$
|
180,466,937
|
|
|
|
63.69
|
%
|
|
Unitranche First Lien Debt Investment
|
|
|
11,612,863
|
|
|
|
3.78
|
|
|
|
11,612,860
|
|
|
|
4.10
|
|
|
Senior Secured Second Lien Debt Investment
|
|
|
113,706,960
|
|
|
|
37.00
|
|
|
|
89,912,571
|
|
|
|
31.74
|
|
|
Unsecured Debt Investments
|
|
|
—
|
|
|
|
0.0
|
|
|
|
—
|
|
|
|
—
—
|
|
|
Equity, Warrants and Other Investments
|
|
|
2,669,134
|
|
|
|
0.87
|
|
|
|
1,342,934
|
|
|
|
0.47
|
|
|
Embedded Derivative — Notes Payable
|
|
|
—
|
|
|
|
—
|
|
|
|
(94,380
|
)
|
|
|
(0.03
|
)
|
|
Total Return Swap
|
|
|
—
|
|
|
|
—
|
|
|
|
94,380
|
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
307,290,045
|
|
|
|
100.00
|
%
|
|
$
|
283,335,302
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The composition of the Company’s investments as of June 30, 2018, as a percentage of the total portfolio, at
amortized cost and fair value, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment at
Amortized Cost
|
|
|
Percentage
|
|
|
Investments at
Fair Value
|
|
|
Percentage
|
|
|
Senior Secured First Lien Debt Investments
|
|
$
|
161,389,931
|
|
|
|
53.40
|
%
|
|
$
|
165,136,316
|
|
|
|
56.30
|
%
|
|
Senior Secured Second Lien Debt Investments
|
|
|
139,360,342
|
|
|
|
46.00
|
|
|
|
127,200,954
|
|
|
|
43.30
|
|
|
Unsecured Debt Investments
|
|
|
—
|
|
|
|
—
|
|
|
|
731,742
|
|
|
|
0.20
|
|
|
Equity, Warrants and Other Investments
|
|
|
1,897,009
|
|
|
|
0.60
|
|
|
|
523,001
|
|
|
|
0.20
|
|
|
Embedded Derivative—Notes Payable
|
|
|
—
|
|
|
|
—
|
|
|
|
229,918
|
|
|
|
0.08
|
|
|
Total Return Swap
|
|
|
—
|
|
|
|
—
|
|
|
|
(229,918
|
)
|
|
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
302,647,282
|
|
|
|
100.00
|
%
|
|
$
|
293,592,013
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company uses Global Industry Classification Standard (“GICS”) codes to identify the industry groupings in its
portfolio. The following table shows the portfolio composition by industry grouping at fair value at December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
Industry Classification
|
|
Investments at
Fair Value
|
|
|
Percentage of
Total Portfolio
|
|
|
Professional Services
|
|
$
|
42,538,788
|
|
|
|
15.01
|
%
|
|
Media
|
|
|
36,174,874
|
|
|
|
12.77
|
%
|
|
Energy Equipment & Services
|
|
|
29,956,343
|
|
|
|
10.57
|
%
|
|
Oil, Gas & Consumable Fuels
|
|
|
24,024,000
|
|
|
|
8.48
|
%
|
|
Diversified Telecommunication Services
|
|
|
21,941,509
|
|
|
|
7.74
|
%
|
|
Construction and Engineering
|
|
|
21,887,875
|
|
|
|
7.73
|
%
|
|
Hotels, Restaurants & Leisure
|
|
|
12,214,224
|
|
|
|
4.31
|
%
|
|
Commercial Services & Supplies
|
|
|
12,000,000
|
|
|
|
4.24
|
%
|
|
Internet Software & Services
|
|
|
10,941,238
|
|
|
|
3.86
|
%
|
F-22
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 4. Investments – (continued)
|
|
|
|
|
|
|
|
|
|
|
Industry Classification
|
|
Investments at
Fair Value
|
|
|
Percentage of
Total Portfolio
|
|
|
IT Services
|
|
$
|
10,929,936
|
|
|
|
3.86
|
%
|
|
Distributors
|
|
|
9,900,000
|
|
|
|
3.49
|
%
|
|
Construction Materials
|
|
|
9,850,000
|
|
|
|
3.48
|
%
|
|
Auto Components
|
|
|
9,072,500
|
|
|
|
3.20
|
%
|
|
Technology Hardware, Storage and Peripherals
|
|
|
8,815,816
|
|
|
|
3.11
|
%
|
|
Health Care Equipment & Supplies
|
|
|
7,461,375
|
|
|
|
2.63
|
%
|
|
Containers & Packaging
|
|
|
6,985,095
|
|
|
|
2.47
|
%
|
|
Chemicals
|
|
|
5,550,239
|
|
|
|
1.96
|
%
|
|
Retail
|
|
|
2,078,571
|
|
|
|
0.73
|
%
|
|
Wireless Telecommunication Services
|
|
|
1,012,919
|
|
|
|
0.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
283,335,302
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
The following table shows the portfolio composition by industry grouping at fair value at June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
Industry Classification
|
|
Investments at
Fair Value
|
|
|
Percentage of
Total Portfolio
|
|
|
Professional Services
|
|
$
|
41,040,567
|
|
|
|
13.98
|
%
|
|
Hotels, Restaurants & Leisure
|
|
|
33,336,195
|
|
|
|
11.36
|
|
|
Energy Equipment & Services
|
|
|
32,196,779
|
|
|
|
10.97
|
|
|
Media
|
|
|
31,950,000
|
|
|
|
10.88
|
|
|
Commercial Services & Supplies
|
|
|
31,600,000
|
|
|
|
10.76
|
|
|
IT Services
|
|
|
28,009,599
|
|
|
|
9.54
|
|
|
Diversified Telecommunication Services
|
|
|
24,933,557
|
|
|
|
8.49
|
|
|
Oil, Gas & Consumable Fuels
|
|
|
24,180,000
|
|
|
|
8.24
|
|
|
Distributors
|
|
|
12,468,750
|
|
|
|
4.25
|
|
|
Healthcare Providers & Services
|
|
|
11,312,696
|
|
|
|
3.85
|
|
|
Chemicals
|
|
|
8,023,000
|
|
|
|
2.73
|
|
|
Healthcare Equipment & Supplies
|
|
|
7,499,250
|
|
|
|
2.55
|
|
|
Electronic Equipment
|
|
|
6,580,000
|
|
|
|
2.24
|
|
|
Wireless Telecommunication Services
|
|
|
461,620
|
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
293,592,013
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
The following table shows the portfolio composition by geographic grouping at fair value at December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Percentage of
Total Portfolio
|
|
|
U.S. Northeast
|
|
$
|
82,755,868
|
|
|
|
29.21
|
%
|
|
U.S. Southeast
|
|
|
57,428,903
|
|
|
|
20.27
|
%
|
|
U.S. Midwest
|
|
|
51,950,315
|
|
|
|
18.34
|
%
|
|
U.S. West
|
|
|
49,217,026
|
|
|
|
17.37
|
%
|
|
International
|
|
|
24,174,874
|
|
|
|
8.53
|
%
|
|
U.S. Mid-Atlantic
|
|
|
9,900,000
|
|
|
|
3.49
|
%
|
|
U.S. Southwest
|
|
|
7,908,316
|
|
|
|
2.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
283,335,302
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
F-23
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 4. Investments – (continued)
The following table shows the portfolio composition by geographic grouping at fair value at June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Percentage of
Total Portfolio
|
|
|
U.S. West
|
|
$
|
74,078,950
|
|
|
|
25.23
|
%
|
|
U.S. Northeast
|
|
|
57,586,322
|
|
|
|
19.62
|
|
|
U.S. Southeast
|
|
|
53,203,880
|
|
|
|
18.12
|
|
|
U.S. Southwest
|
|
|
43,208,281
|
|
|
|
14.72
|
|
|
U.S. Midwest
|
|
|
29,251,885
|
|
|
|
9.96
|
|
|
International
|
|
|
24,950,000
|
|
|
|
8.50
|
|
|
U.S. Mid-Atlantic
|
|
|
11,312,695
|
|
|
|
3.85
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
293,592,013
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
The Company’s primary investment objective is to maximize total return to stockholders in the form of current income and
capital appreciation by investing directly in debt and related equity of privately held middle-market companies to help these companies fund acquisitions, growth or refinancing. During the six months ended December 31, 2018, the Company made
investments in four new portfolio companies of approximately $33.1 million to which it was not previously contractually committed to provide financial support. During the six months ended December 31, 2018, the Company made investments of
$17.1 million in companies to which it was previously committed to provide financial support through the terms of the revolvers. The details of the Company’s investments have been disclosed on the Unaudited Consolidated Schedule of
Investments.
c. Derivatives
Derivative contracts
include total return swaps and embedded derivatives in Notes Payable. The Company may enter into derivative contracts as part of its investment strategies.
The Company and UBS entered into two TRS transactions whereby the Company will receive the total return of the Term Notes and the Revolving Notes (as defined
in Note 5) purchased by UBS and pay the Financing Rate and the Revolver Financing Rate (both as defined in Note 5). Therefore, amounts required for the future satisfaction of the swaps may be greater or less than the amount recorded. Realized and
change in unrealized gains and losses on total return swaps, if any, are included in the net realized gain or loss on derivative, and net change in unrealized appreciation (depreciation) on derivative in the Consolidated Statements of Operations.
In connection with the TRS transactions, the Company entered into an ISDA Agreement with UBS. The ISDA Agreement includes provisions for general
obligations, representations, collateral and events of default or termination. Under an ISDA Agreement, the Company typically may offset with the counterparty certain derivative payable and/or receivable with collateral held and/or posted and create
one single net payment (close-out netting) in the event of default or termination.
The Company’s ISDA
Agreement may contain provisions for early termination of over-the-counter derivative transactions in the event the net assets of the Company decline below specific
levels (“net asset contingent features”). If these levels are triggered, the Company’s counterparty has the right to terminate such transaction and require the Company to pay or receive a settlement amount in connection with the
terminated transaction.
F-24
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 4. Investments – (continued)
The Company has determined that the Term Notes payable from SPV to UBS related to the Term Financing (discussed further in Note 5) contains an embedded
derivative. SPV is obligated to pay UBS the net appreciation (depreciation) of the SPV Assets, as defined below, as well as pay any income generated by the SPV Assets until maturity. Therefore, amounts required for the future satisfaction of the
note may be greater or less than the amount recorded. Realized and change in unrealized gains and losses on the embedded derivative is included in the net realized gain or loss on derivatives, and net change in unrealized appreciation (depreciation)
on derivative in the Unaudited Consolidated Statements of Operations.
The following table reflects the fair value and notional amount or number of
contracts of the Company’s derivative contracts, none of which were designated as hedging instruments under U.S. GAAP, which are presented on a gross basis, at December 31, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Notional
|
|
|
Contracts
|
|
|
Credit Risk:
|
|
|
Total Return Swaps
|
|
$
|
—
|
|
|
$
|
(94,380)
|
|
|
$
|
152,000,000
|
|
|
|
2
|
|
|
Embedded Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes Payable
|
|
|
(94,380
|
)
|
|
|
—
|
|
|
|
152,000,000
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross fair value of derivative contracts
|
|
|
(94,380
|
)
|
|
|
(94,380
|
)
|
|
|
|
|
|
|
|
|
|
Counterparty netting
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net fair value of derivative contracts
|
|
|
(94,380
|
)
|
|
|
(94,380
|
)
|
|
|
|
|
|
|
|
|
|
Collateral not offset
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount
|
|
$
|
(94,380
|
)
|
|
$
|
(94,380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table reflects the fair value and notional amount or number of contracts of the Company’s derivative
contracts, none of which were designated as hedging instruments under U.S. GAAP, which are presented on a gross basis, at June 30, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Notional
|
|
|
Contracts
|
|
|
Credit Risk:
|
|
|
Total Return Swaps
|
|
$
|
—
|
|
|
$
|
229,918
|
|
|
$
|
152,000,000
|
|
|
|
2
|
|
|
Embedded Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes Payable
|
|
|
229,918
|
|
|
|
—
|
|
|
|
152,000,000
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross fair value of derivative contracts
|
|
|
229,918
|
|
|
|
229,918
|
|
|
|
|
|
|
|
|
|
|
Counterparty netting
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net fair value of derivative contracts
|
|
|
229,918
|
|
|
|
229,918
|
|
|
|
|
|
|
|
|
|
|
Collateral not offset
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount
|
|
$
|
229,918
|
|
|
$
|
229,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 4. Investments – (continued)
The following table reflects the amount of gains (losses) on derivatives included in the Unaudited Consolidated Statements of Operations for the three and six
months ended December 31, 2018 and December 31, 2017, respectively. None of the derivatives were designated as hedging instruments under U.S. GAAP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net change in unrealized appreciation
(depreciation) on investments and derivatives
|
|
|
|
|
For the three months ended
December 31,
|
|
|
For the six months ended
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Total Return Swaps
|
|
$
|
(972,380
|
)
|
|
$
|
5,934,561
|
|
|
$
|
(324,298
|
)
|
|
$
|
5,214,614
|
|
|
Embedded Derivatives - Notes Payable
|
|
|
972,380
|
|
|
|
(5,934,561
|
)
|
|
|
324,298
|
|
|
|
(5,214,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
d. Fair Value Measurements
ASC 820 defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market
participants at the measurement date. ASC 820 also establishes a framework for measuring fair value and a valuation hierarchy that prioritizes the inputs used in the valuation of an asset or liability based upon their transparency. The valuation
hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Classification within the hierarchy is based upon the lowest
level of input that is significant to the fair value measurement. The Company’s assets and liabilities measured at fair value have been classified in the following three categories:
Level 1 – valuation is based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to
access at the measurement date.
Level 2 – valuation is based on inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or indirectly, such as (a) quoted prices for similar assets or liabilities in active markets; (b) quoted prices for identical or similar assets or liabilities in markets that are not
active, that is, markets in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly;
(c) inputs other than quoted prices that are observable for the asset or liability; or (d) inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 – valuation is based on unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent
that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. However, the fair value measurement objective remains the same, that is,
an exit price from the perspective of a market participant that holds the asset or owes the liability. Therefore, unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the
asset or liability, including assumptions about risk. Unobservable inputs are developed based on the best information available under the circumstances, which might include the Company’s own data. The Company’s own data used to develop
unobservable inputs is adjusted if information is reasonably available without undue cost and effort that indicates that market participants would use different assumptions.
F-26
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 4. Investments – (continued)
The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of
security, whether the security is new and not yet established in the marketplace, the liquidity of the market and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or
unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
Estimates of fair value for cash and restricted cash are measured using observable, quoted market prices, or Level 1 inputs. All other fair value
significant estimates are measured using unobservable inputs, or Level 3 inputs.
The following table summarizes the classifications within the fair
value hierarchy of the Company’s assets and liabilities measured at fair value as of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured First Lien Debt Investments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
192,079,797
|
|
|
$
|
192,079,797
|
|
|
Senior Secured Second Lien Debt Investments
|
|
|
—
|
|
|
|
—
|
|
|
|
89,912,571
|
|
|
|
89,912,571
|
|
|
Unsecured Debt Investment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Equity, Warrants and Other Investments
|
|
|
501,878
|
|
|
|
—
|
|
|
|
841,056
|
|
|
|
1,342,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
|
501,878
|
|
|
|
—
|
|
|
$
|
282,833,424
|
|
|
$
|
283,335,302
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded Derivatives - Notes Payable
|
|
|
—
|
|
|
|
—
|
|
|
|
94,380
|
|
|
|
94,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives
|
|
|
|
|
|
|
|
|
|
|
94,380
|
|
|
|
94,380
|
|
|
Total Assets
|
|
$
|
501,878
|
|
|
$
|
—
|
|
|
$
|
282,927,804
|
|
|
$
|
283,429,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return Swaps
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(94,380
|
)
|
|
$
|
(94,380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
(94,380
|
)
|
|
|
(94,380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(94,380
|
)
|
|
$
|
(94,380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-27
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 4. Investments – (continued)
The following table summarizes the classifications within the fair value hierarchy of the Company’s assets and liabilities measured at fair value as of
June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured First Lien Debt Investments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
165,136,316
|
|
|
$
|
165,136,316
|
|
|
Senior Secured Second Lien Debt Investments
|
|
|
—
|
|
|
|
—
|
|
|
|
127,200,954
|
|
|
|
127,200,954
|
|
|
Unsecured Debt Investment
|
|
|
—
|
|
|
|
—
|
|
|
|
523,001
|
|
|
|
523,001
|
|
|
Equity, Warrants and Other Investments
|
|
|
—
|
|
|
|
—
|
|
|
|
731,742
|
|
|
|
731,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
|
—
|
|
|
|
—
|
|
|
|
293,592,013
|
|
|
|
293,592,013
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded Derivatives - Notes Payable
|
|
|
—
|
|
|
|
—
|
|
|
|
229,918
|
|
|
|
229,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
229,918
|
|
|
|
229,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
293,821,931
|
|
|
$
|
293,821,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return Swaps
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(229,918
|
)
|
|
$
|
(229,918
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
(229,918
|
)
|
|
|
(229,918
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(229,918
|
)
|
|
$
|
(229,918
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3
inputs for the six months ended December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured
First Lien
Debt Investments
|
|
|
Senior Secured
Second Lien
Debt Investments
|
|
|
Unsecured
Debt
Investment
|
|
|
Equity, Warrants
and Other
Investments
|
|
|
Total
Investments
|
|
|
Balance as of June 30, 2018
|
|
$
|
165,136,316
|
|
|
$
|
127,200,954
|
|
|
$
|
731,742
|
|
|
$
|
523,001
|
|
|
$
|
293,592,013
|
|
|
Purchases (including PIK interest)
|
|
|
97,164,542
|
|
|
|
7,084,821
|
|
|
|
—
|
|
|
|
—
|
|
|
|
104,249,363
|
|
|
Sales
|
|
|
(68,419,564
|
)
|
|
|
(33,348,333
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(101,767,898
|
)
|
|
Amortization
|
|
|
685,295
|
|
|
|
887,902
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,572,366
|
|
|
Net realized gains (losses)
|
|
|
93,750
|
|
|
|
(276,942
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(183,192
|
)
|
|
Transfers in
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Transfers out
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Net change in unrealized (depreciation) appreciation
|
|
|
(2,580,542
|
)
|
|
|
(11,635,000
|
)
|
|
|
(731,742
|
)
|
|
|
318,055
|
|
|
|
(14,623,772
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2018
|
|
$
|
192,079,797
|
|
|
$
|
89,912,571
|
|
|
$
|
—
|
|
|
$
|
841,056
|
|
|
$
|
282,833,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) relating to assets and liabilities still held as of
December 31, 2018
|
|
$
|
(2,286,087
|
)
|
|
$
|
(11,970,853
|
)
|
|
$
|
(731,742
|
)
|
|
$
|
47,813
|
|
|
$
|
(14,940,869
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-28
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 4. Investments – (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Return
Swaps
|
|
|
Embedded
Derivatives -
Notes
Payable
|
|
|
Total
Derivatives
|
|
|
Balance as of June 30, 2018
|
|
$
|
(229,918
|
)
|
|
$
|
229,918
|
|
|
$
|
—
|
|
|
Net change in unrealized (depreciation) appreciation
|
|
|
324,298
|
|
|
|
(324,298
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2018
|
|
$
|
94,380
|
|
|
$
|
(94,380
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) relating to assets and liabilities still held as of
December 31, 2018
|
|
$
|
5,924,881
|
|
|
$
|
(5,924,881
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3
inputs for the six months ended December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured
First Lien
Debt Investments
|
|
|
Senior Secured
Second Lien
Debt Investments
|
|
|
Unsecured
Debt
Investments
|
|
|
Equity, Warrants
and Other
Investments
|
|
|
Total
Investments
|
|
|
Balance as of June 30, 2017
|
|
$
|
127,103,981
|
|
|
$
|
126,593,792
|
|
|
$
|
—
|
|
|
$
|
1,209,398
|
|
|
$
|
254,907,171
|
|
|
Purchases (including PIK interest)
|
|
|
55,071,877
|
|
|
|
27,460,000
|
|
|
|
—
|
|
|
|
523,000
|
|
|
|
83,054,877
|
|
|
Sales
|
|
|
(39,749,453
|
)
|
|
|
(15,092,924
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(54,842,377
|
)
|
|
Amortization
|
|
|
1,520,813
|
|
|
|
599,125
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,119,938
|
|
|
Net realized gains (losses)
|
|
|
(69,579
|
)
|
|
|
(7,311,110
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,380,690
|
)
|
|
Transfers in
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,518,750
|
|
|
|
7,518,750
|
|
|
Transfers out
|
|
|
—
|
|
|
|
(7,518,750
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,518,750
|
)
|
|
Net change in unrealized (depreciation) appreciation
|
|
|
(295,722
|
)
|
|
|
3,851,876
|
|
|
|
823,695
|
|
|
|
4,292,400
|
|
|
|
8,672,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2017
|
|
$
|
143,581,917
|
|
|
$
|
128,582,008
|
|
|
$
|
823,695
|
|
|
$
|
13,543,548
|
|
|
$
|
286,531,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) relating to assets and liabilities still held as of
December 31, 2017
|
|
$
|
(99,761
|
)
|
|
$
|
(8,230,453
|
)
|
|
$
|
823,695
|
|
|
$
|
4,292,399
|
|
|
$
|
(3,214,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Return
Swaps
|
|
|
Embedded
Derivatives -
Notes
Payable
|
|
|
Total
Derivatives
|
|
|
Balance as of June 30, 2017
|
|
$
|
(5,830,501
|
)
|
|
$
|
5,830,501
|
|
|
$
|
—
|
|
|
Net change in unrealized (depreciation) appreciation
|
|
|
5,214,614
|
|
|
|
(5,214,614
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2017
|
|
$
|
(615,887
|
)
|
|
$
|
615,887
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) relating to assets and liabilities still held as of
December 31, 2017
|
|
$
|
5,214,614
|
|
|
$
|
5,214,614
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-29
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 4. Investments – (continued)
Transfers into Level 3 during or at the end of the reporting period are reported under Level 1 or Level 2 as of the beginning of the period.
Transfers out of Level 3 during or at the end of the reporting period are reported under Level 3 as of the beginning of the period. Changes in unrealized gains (losses) relating to Level 3 instruments are included in net change in
unrealized (depreciation) appreciation on investments and derivatives on the Unaudited Consolidated Statements of Operations.
During the three and six
months ended December 31, 2018 and December 31, 2017, the Company did not transfer any investments among Levels 1, 2 and 3.
The following
tables present the ranges of significant unobservable inputs used to value the Company’s Level 3 investments as of December 31, 2018 and June 30, 2018. These ranges represent the significant unobservable inputs that were used in
the valuation of each type of investment. These inputs are not representative of the inputs that could have been used in the valuation of any one investment. For example, the highest market yield presented in the table for senior secured notes is
appropriate for valuing a specific investment but may not be appropriate for valuing any other investment. Accordingly, the ranges of inputs presented below do not represent uncertainty in, or possible ranges of, fair value measurements of the
Company’s Level 3 investments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of
December 31, 2018
|
|
|
Valuation
Methodology
|
|
Unobservable
Input(s)
|
|
Weighted
Average
|
|
Range
|
|
Senior Secured First Lien Debt Investments
|
|
$
|
109,814,636
|
|
|
Yield Analysis
|
|
Market Yields
|
|
9.9%
|
|
6.2% - 20.4%
|
|
Unitranche First Lien Debt Investments
|
|
|
11,612,863
|
|
|
Discounted
Cash Flow
|
|
Discount Rate
|
|
14.4%
|
|
11.9% - 16.9%
|
|
Senior Secured First Lien Debt Investments
|
|
|
12,843,773
|
|
|
Discounted
Cash Flow
|
|
Discount Rate
|
|
8.4%
|
|
7.4% - 20.4%
|
|
Senior Secured First Lien Debt Investments
|
|
|
12,214,224
|
|
|
Broker Quoted
|
|
Market Comparable
|
|
94.3%
|
|
93.5% - 95.1%
|
|
Senior Secured First Lien Debt Investments
|
|
|
40,885,000
|
|
|
Recent Purchase
|
|
Recent Purchase
|
|
N/A
|
|
N/A
|
|
Senior Secured First Lien Debt Investments
|
|
|
4,709,302
|
|
|
Repayment
Price
|
|
Repayment Price
|
|
N/A
|
|
N/A
|
|
Senior Secured Second Lien Debt Investments
|
|
|
67,974,000
|
|
|
Yield Analysis
|
|
Market Yield
|
|
12.3%
|
|
9.7% - 85.8%
|
|
Senior Secure Second Lien Debt Investments
|
|
|
19,860,000
|
|
|
Discounted
Cash Flow
|
|
Discount Rate
|
|
11.9%
|
|
9.4% - 85.8%
|
|
Senior Secure Second Lien Debt Investments
|
|
|
2,078,571
|
|
|
Recent Purchase
|
|
Recent Purchase
|
|
N/A
|
|
N/A
|
|
Equity, Warrants, and Other Investments
|
|
|
841,056
|
|
|
EV Multiple
|
|
EBITDA Multiple
|
|
0.0x
|
|
0.0x - 0.0x
|
|
Equity, Warrants, and Other Investments
|
|
|
501,878
|
|
|
Market Price
|
|
Market Price
|
|
0.00x
|
|
0.00x - 0.00x
|
|
Total Return Swaps
|
|
|
94,380
|
|
|
Intrinsic Value
|
|
Intrinsic Value
|
|
N/A
|
|
N/A
|
|
Embedded Derivatives - Notes Payable
|
|
|
94,380
|
|
|
Intrinsic Value
|
|
Intrinsic Value
|
|
N/A
|
|
N/A
|
F-30
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 4. Investments – (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of
June 30, 2018
|
|
|
Valuation
Methodology
|
|
Unobservable
Input(s)
|
|
Weighted
Average
|
|
|
Range
|
|
Senior Secured First Lien Debt Investments
|
|
$
|
40,599,649
|
|
|
Yield Analysis
|
|
Market Yields
|
|
|
10.3%
|
|
|
6.7% - 16.4%
|
|
Unitranche First Lien Debt Investments
|
|
|
12,286,453
|
|
|
Discounted Cash
Flow
|
|
Discount Rate
|
|
|
17.2%
|
|
|
15.7% - 18.7%
|
|
Senior Secured First Lien Debt Investments
|
|
|
65,321,315
|
|
|
Discounted Cash
Flow
|
|
Discount Rate
|
|
|
8.2%
|
|
|
5.7% - 11.7%
|
|
Senior Secured First Lien Debt Investments
|
|
|
12,935,744
|
|
|
Broker Quoted
|
|
Market Comparable
|
|
|
98.0%
|
|
|
97.0% - 99.0%
|
|
Senior Secured First Lien Debt Investments
|
|
|
37,859,599
|
|
|
Recent Purchase
|
|
Recent Purchase
|
|
|
N/A
|
|
|
N/A
|
|
Senior Secured Second Lien Debt Investments
|
|
|
53,340,953
|
|
|
Yield Analysis
|
|
Market Yields
|
|
|
18.8%
|
|
|
10.7% - 43.5%
|
|
Senior Secured Second Lien Debt Investments
|
|
|
69,993,557
|
|
|
Discounted Cash
Flow
|
|
Discount Rate
|
|
|
11.6%
|
|
|
7.6% - 16.2%
|
|
Equity, Warrants, and Other Investments
|
|
|
1,254,743
|
|
|
EV Multiple
|
|
EBITDA Multiple
|
|
|
0.0x
|
|
|
0.0x - 0.0x
|
|
Total Return Swaps
|
|
|
(229,918
|
)
|
|
Intrinsic Value
|
|
Intrinsic Value
|
|
|
N/A
|
|
|
N/A
|
|
Embedded Derivatives - Notes Payable
|
|
|
229,918
|
|
|
Intrinsic Value
|
|
Intrinsic Value
|
|
|
N/A
|
|
|
N/A
|
Fair value measurements categorized within Level 3 are sensitive to changes in the assumptions or methodology used to
determine fair value and such changes could result in a significant increase or decrease in the fair value. Significant increases in illiquidity discounts, PIK discounts and market yields would result in significantly lower fair value measurements.
Note 5. Notes Payable
On May 23, 2013, as
amended on June 6, 2013, December 4, 2013, September 26, 2014, July 20, 2015, August 14, 2015, February 28, 2017 and November 20, 2017, the Company, through SPV, entered into a
$102.0 million financing transaction (the “Term Financing”) due December 5, 2020 with UBS. The Term Financing is collateralized by the portion of the Company’s assets held by SPV (the “SPV Assets”) and pledged as
collateral as noted in the Consolidated Schedule of Investments. Borrowings under the Term Financing bear interest (i) at a rate per annum equal to one-month London Interbank Offered Rate
(“LIBOR”) plus 2.75% through December 4, 2018, and (ii) at a rate per annum equal to one-month LIBOR plus 2.55% from December 5, 2018 through December 5, 2020 (the “Term
Financing Rate”). The Company also incurs an annual fee of approximately 1% of the outstanding borrowings under the Term Financing. As of December 31, 2018 and June 30, 2018, there were $102.0 million and $102.0 million
borrowings outstanding under the Term Financing, respectively.
On December 4, 2013, as amended on September 26, 2014 and July 17, 2015,
the Company, through SPV, entered into a $50.0 million revolving financing (the “2013 UBS Revolving Financing”), which expired in accordance with its terms on December 5, 2016. As of December 31, 2018 and June 30, 2018,
there were no borrowings outstanding under the 2013 UBS Revolving Financing. From December 4, 2013 through September 24, 2014, the 2013 UBS Revolving Financing bore interest at a fixed rate of 2.10% per annum on
F-31
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 5. Notes Payable – (continued)
drawn amounts and 0.50% per annum on any undrawn portion. From September 26, 2014 through December 5, 2016, the 2013 UBS Revolving Financing
bore interest at a fixed rate of 2.00% on drawn amounts and 0.50% per annum on any undrawn portion.
The initial financing transaction with UBS
executed in four steps:
First, the Company organized SPV, a consolidated wholly owned bankruptcy remote special purpose vehicle in the Cayman Islands to
purchase the SPV Assets through (i) the issuance and sale of notes secured by the SPV Assets (the “Term Notes”) to UBS and the Company and (ii) the transfer of cash to the Company. UBS purchased Term Notes with a face value of
$76.5 million, which represent 51% of the Term Notes issued and outstanding, for $76.5 million in cash. The Company purchased Term Notes with a face value of $73.5 million (which are eliminated in consolidation), which represent 49%
of the Term Notes issued and outstanding. Under the terms of the indenture under which the Term Notes were issued (the “Indenture”), the holders of the Term Notes are entitled to (i) periodic interest payments equal to their pro rata
portion of the interest collected on the assets held by SPV and (ii) their pro-rata portion of the net appreciation (depreciation) on the SPV Assets at maturity (the “Total Return of the Term
Notes”). This represents the embedded derivative in the Term Notes payable from SPV to UBS. On September 26, 2014, the Company increased the size of the Term Facility to $102.0 million. In connection with the upsize, UBS purchased
additional Term Notes with a face value of $25.5 million for $25.5 million in cash. The Company also purchased additional Term Notes with a face value of $24.5 million.
Second, the Company and UBS entered into a TRS transaction whereby the Company would receive the Total Return of the Term Notes purchased by UBS and pay the
Financing Rate.
Third, SPV issued and sold an additional $50.0 million notes (the “2013 Revolving Notes”) secured by the SPV Assets to
UBS. Cash was only exchanged when the 2013 Revolving Notes were drawn. Under the terms of the Indenture under which the 2013 Revolving Notes were issued (the “2013 Revolver Indenture”), the holders of the 2013 Revolving Notes were entitled
to (i) periodic interest payments equal to their pro rata portion of the interest collected on the SPV Assets and (ii) their pro-rata portion of the net appreciation (depreciation) on the SPV Assets
at maturity (the “Total Return of the 2013 Revolving Notes”).
Fourth, the Company and UBS entered into another TRS transaction whereby the
Company would receive the Total Return of the Revolving Notes purchased by UBS and pay the revolver financing rate. On December 5, 2016, the 2013 Revolving Notes matured and the corresponding TRS transaction associated with the 2013 Revolving
Notes unwound in unison. On November 20, 2017, the Company and UBS entered into another TRS transaction whereby the Company will receive the total return of the $50 million notes (the “2017 Revolving Notes) purchased by UBS and pay
the Revolver Financing Rate (defined below).
On November 20, 2017, the Company entered into a $50 million revolving financing facility (the
“2017 UBS Revolving Financing”) with UBS. Borrowings under the 2017 UBS Revolving Financing generally bear interest at a rate per annum equal to one-month LIBOR plus 3.55% (the “Revolver
Financing Rate”). The Company pays a fee on any undrawn amounts of 2.50% per annum; provided that if 50% or less of the 2017 UBS Revolving Financing is drawn, the fee will be 2.75% per annum. Any amounts borrowed under the 2017 UBS
Revolving Financing will mature, and all accrued and unpaid interest will be due and payable, on December 5, 2019. As of December 31, 2018, there were no borrowings outstanding under the 2017 UBS Revolving Financing. As of June 30, 2018,
there were $17.8 million in borrowings outstanding under the 2017 UBS Revolving Financing.
F-32
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 5. Notes Payable – (continued)
As of December 31, 2017, SPV issued and sold an additional $50.0 million notes (the “2017 Revolving Notes”) secured by the SPV Assets to
UBS. Cash is only exchanged when the 2017 Revolving Notes are drawn. Under the terms of the Indenture under which the 2017 Revolving Notes were issued (the “2017 Revolver Indenture”), the holders of the 2017 Revolving Notes are entitled to
(i) periodic interest payments equal to their pro rata portion of the interest collected on the SPV Assets and (ii) their pro-rata portion of the net appreciation (depreciation) on the SPV Assets at
maturity (the “Total Return of the 2017 Revolving Notes”).
The fair value of the Company’s Notes Payable is estimated based on the rate at
which similar facilities would be priced. At December 31, 2018 and June 30, 2018, the fair value of the Notes Payable was estimated at $102.0 million and $119.8 million, respectively, which the Company concluded was a
Level 3 fair value.
On November 9, 2016, the Company entered into the $50.0 million Senior Secured Revolving Credit Facility (the
“Citi Revolving Financing”) with Citibank, N.A. (“Citibank”), which was secured by collateral consisting primarily of commercial loans and corporate bonds. There were no upfront costs paid in the establishment of the Citi
Revolving Financing.
Borrowings under the Citi Revolving Financing generally bore interest at a rate per annum equal to LIBOR plus 4.85%. The default
interest rate was equal to the interest rate then in effect plus 2.00%. The Citi Revolving Financing required the payment of an unused fee of 2.85% annually for any undrawn amounts below 75% of the Citi Revolving Financing, and 0.75% annually for
any undrawn amounts above 75% of the Citi Revolving Financing. Borrowings under the Citi Revolving Financing were based on a borrowing base. The Citi Revolving Financing generally required payment of interest on a quarterly basis and all outstanding
principal was due upon maturity. The Citi Revolving Financing also required mandatory prepayment of interest and principal upon certain events.
The
Company has repaid in full all indebtedness, liabilities and other obligations under, and terminated, its Citi Revolving Financing on December 8, 2017. In accordance with the termination of the Citi Revolving Financing, all liens on collateral
securing the Citi Revolving Financing were released.
On July 2, 2018, the Company closed the public offering of $30 million in aggregate
principal amount of 6.125% notes due 2023 (the “Notes”). On July 12, 2018, the underwriters exercised their over-allotment option to purchase an additional $4.5 million in aggregate principal amount of the Notes. The total net
proceeds to the Company from the Notes, including the exercise of the underwriters’ over-allotment option, after deducting underwriting discounts and commissions of approximately $1.0 million and estimated offering expenses of
approximately $230,000, were approximately $33.2 million.
The Notes will mature on July 1, 2023 and bear interest at a rate of 6.125%. The
Notes are direct unsecured obligations and rank pari passu, which means equal in right of payment, with all outstanding and future unsecured indebtedness issued by the Company. Because the Notes are not secured by any of the Company’s assets,
they are effectively subordinated to all of the Company’s existing and future secured unsubordinated indebtedness (or any indebtedness that is initially unsecured as to which we subsequently grant a security interest), to the extent of the
value of the assets securing such indebtedness. The Notes are structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s subsidiaries and financing vehicles, including, without limitation,
borrowings under the Term Financing and the 2017 UBS Revolving Financing. The Notes are obligations exclusively of the Company and not of any of the Company’s subsidiaries. None of the Company’s subsidiaries is a guarantor of the Notes and
the Notes will not be required to be guaranteed by any subsidiary the Company may acquire or create in the future.
F-33
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 5. Notes Payable – (continued)
The Notes may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after July 1, 2020. Interest on the
Notes is payable quarterly on January 1, April 1, July 1 and October 1 of each year. The Notes are listed on the NASDAQ Global Select Market (“NASDAQ”) under the trading symbol “CMFNL.” The Company
may from time to time repurchase Notes in accordance with the 1940 Act and the rules promulgated thereunder.
As of December 31, 2018, the
outstanding principal balance of the Notes was approximately $34.5 million and had an estimated fair value of $34.1 million based on the closing price as of December 31, 2018 as traded on NASDAQ.
Cash, restricted (as shown on the Unaudited Consolidated Statements of Assets and Liabilities) is held by the trustee of the Term Financing and the 2017 UBS
Revolving Financing, and the Citi Revolving Financing up until its expiration, and is restricted to purchases of investments by SPV and LLC that must meet certain eligibility criteria identified by the Indenture. As of December 31, 2018, SPV
and LLC had aggregate assets of $202.6 million, which included $197.2 million of the Company’s portfolio investments at fair value, $1.8 million of accrued interest receivable and $3.6 million in cash held by the trustees of the
Term Financing and the 2017 UBS Revolving Financing (together, the “UBS Financing Facility”, and with the Citi Revolving Financing, the “Financing Facilities”). As of June 30, 2018, SPV and LLC had aggregate assets of
$234.5 million, which included $232.8 million of the Company’s portfolio investments at fair value, $0.7 million of accrued interest receivable and $1.0 million in cash held by the trustee of the Term Financing. For the
three and six months ended December 31, 2018, the weighted average outstanding debt balance and the weighted average stated interest rate under the Financing Facilities was $112.9 million and 5.07%, respectively and $108.8 million and
5.12%, respectively. For the three and six months ended December 31, 2017, the weighted average outstanding debt balance and the weighted average stated interest rate under the Financing Facilities was $122.3 million and 4.35%,
respectively and $118.6 million and 4.28%, respectively.
Note 6. Indemnification, Guarantees, Commitments and Contingencies
In the normal course of business, the Company enters into contracts that provide a variety of representations and warranties and general indemnifications. Such
contracts include those with certain service providers, brokers and trading counterparties. Any exposure to the Company under these arrangements is unknown as it would involve future claims that may be made against the Company; however, based on the
Company’s experience, the risk of loss is remote and no such claims are expected to occur. As such, the Company has not accrued any liability in connection with such indemnifications.
The Company’s Board of Directors declared the following quarterly distributions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Declared
|
|
Ex-Date
|
|
Record Date
|
|
Pay Date
|
|
Amount
|
|
Fiscal Quarter
|
|
August 23, 2018
|
|
September 17, 2018
|
|
September 18, 2018
|
|
October 5, 2018
|
|
$0.2500
|
|
1st 2019
|
|
November 6, 2018
|
|
December 13, 2018
|
|
December 14, 2018
|
|
January 3, 2019
|
|
$0.2500
|
|
2nd 2019
|
Loans purchased by the Company may include revolving credit agreements or other financing commitments obligating the Company
to advance additional amounts on demand. The Company generally sets aside sufficient liquid assets to cover its unfunded commitments, if any.
F-34
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 6. Indemnification, Guarantees, Commitments and Contingencies – (continued)
The following table details the unfunded commitments as of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
Unfunded
Commitment
|
|
|
Fair
Value
|
|
|
Annual
Non-use
Fee
|
|
|
Expiration
Date
|
|
|
1888 Industrial Services, LLC
|
|
$
|
891,089
|
|
|
$
|
—
|
|
|
|
7.80
|
|
|
|
9/30/21
|
|
|
PR Wireless, Inc.
|
|
|
1,292,534
|
|
|
|
—
|
|
|
|
0.35
|
|
|
|
6/27/19
|
|
|
Sears Holding Company Delayed Draw
|
|
|
7,857,143
|
|
|
|
|
|
|
|
0.75
|
|
|
|
7/31/19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Unfunded Commitments
|
|
$
|
10,040,766
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table details the unfunded commitments as of June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
Unfunded
Commitment
|
|
|
Fair
Value
|
|
|
Annual
Non-use
Fee
|
|
|
Expiration
Date
|
|
|
1888 Industrial Services, LLC
|
|
$
|
693,069
|
|
|
$
|
—
|
|
|
|
0.50
|
|
|
|
9/30/21
|
|
|
PR Wireless, Inc.
|
|
|
1,846,478
|
|
|
|
—
|
|
|
|
0.35
|
|
|
|
6/27/19
|
|
|
U.S. Well Services, LLC
|
|
|
215,004
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1/31/22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Unfunded Commitments
|
|
$
|
2,754,551
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7. Agreements and Related Party Transactions
Investment Advisory Agreement
Pursuant to the Advisory
Agreement, the Company has agreed to pay to the Adviser a base management fee of 1.75% of gross assets, including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents and fair value of derivatives
associated with the Company’s financing, and an incentive fee consisting of two parts.
The first part of the incentive fee, which is calculated and
payable quarterly in arrears, equals 20.0% of the “pre-incentive fee net investment income” (as defined in the agreement) for the immediately preceding quarter, subject to a hurdle rate of
2.0% per quarter (8.0% annualized), and is subject to a “catch-up” feature. The incentive fee is subject to a total return requirement, which provides that no incentive fee in respect of the
Company’s pre-incentive fee net investment income will be payable except to the extent 20.0% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding
quarters exceeds the cumulative incentive fees accrued and/or paid for the 11 preceding quarters. The net pre-incentive fee investment income used to calculate this part of the incentive fee is also included
in the amount of the Company’s gross assets used to calculate the 1.75% base management fee.
The second part of the incentive fee is calculated and
payable in arrears as of the end of each calendar year and equals 20.0% of the aggregate cumulative realized capital gains from inception through the end of each calendar year, computed net of aggregate cumulative realized capital losses and
aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid capital gain incentive fees.
The Adviser agreed to permanently waive: (i) all or portions of base management fees through December 31, 2014, to the extent required to support an
annualized dividend yield of 9.0% per annum based on the price per share of the Company’s common stock in the Offering of $15.00, and (ii) all or portions of the incentive fee for
F-35
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 7. Agreements and Related Party Transactions – (continued)
the years ended December 31, 2014, 2015, and 2016 to the extent required to support an annualized dividend yield of 9.0%, 9.25% and 9.375% per annum,
respectively, based on the price per share of the Company’s common stock in the Offering of $15.00. Fees permanently waived by the Adviser are not subject to future repayment of recoupment by the Company.
For the three and six months ended December 31, 2018, $1,405,207 and $2,757,152 in base management fees were earned by the Adviser, of which $1,405,297
was payable at December 31, 2018. For the three and six months ended December 31, 2017, $1,161,353 and $2,315,233 in base management fees were earned by the Adviser, of which $2,315,233 was payable at December 31, 2017.
For the three and six months ended December 31, 2018, the Company incurred $753,721 and $874,042 of incentive fees related to pre-incentive fee net investment income, of which $22,000 was waived. As of December 31, 2018, $1,566,513 of such incentive fees are currently payable to the Adviser and $693,771 of pre-incentive fees incurred by the Company were generated from deferred interest (i.e. PIK and certain discount accretion) and are not payable until such amounts are received in cash. For the three and six months
ended December 31, 2017, the Company incurred $921,782 and $906,758, respectively, of incentive fees related to pre-incentive fee net investment income. As of December 31, 2017, $1,162,320 of
incentive fees were currently payable to the Adviser and $414,939 of pre-incentive fees incurred by the Company were generated from deferred interest (i.e., PIK and certain discount accretion) and are not
payable until such amounts are received in cash.
The capital gains incentive fee consists of fees related to both realized gains, realized capital losses
and unrealized capital depreciation. With respect to the incentive fee expense accrual relating to the capital gains incentive fee, U.S. GAAP requires that the capital gains incentive fee accrual consider the cumulative aggregate unrealized
appreciation in the calculation, as a capital gains incentive fee would be payable if such unrealized appreciation were realized, even though such unrealized appreciation is not permitted to be considered in calculating the fee actually payable
under the Advisory Agreement. As of December 31, 2018, there was no capital gains incentive fee accrued, earned or payable to the Adviser under the Advisory Agreement. As of June 30, 2018, there was no capital gains incentive fee accrued,
earned or payable to the Adviser under the Advisory Agreement.
The Advisory Agreement provides that, absent willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations under the Advisory Agreement, the Adviser and its officers, managers, partners, agents, employees, controlling persons and members, and
any other person or entity affiliated with it, are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the
rendering of the Adviser’s services under the Advisory Agreement or otherwise as the Adviser.
Administration Agreement
The Company entered into an administration agreement with the Adviser (the “Administration Agreement”) pursuant to which the Adviser furnishes the
Company with office facilities and equipment and will provide the Company with the clerical, bookkeeping, recordkeeping and other administrative services necessary to conduct
day-to-day operations. Under the Administration Agreement, the Adviser performs, or oversees the performance of the Company’s required administrative services,
which includes, among other things, being responsible for the financial records which it is required to maintain and preparing reports to its stockholders and reports filed with the SEC. In addition, the Adviser assists the Company in determining
and publishing its net asset value, oversees the preparation and filing of its tax returns and the printing and dissemination of reports and other materials to its
F-36
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 7. Agreements and Related Party Transactions – (continued)
stockholders, and generally oversees the payment of its expenses and the performance of administrative and professional services rendered to it by others.
Under the Administration Agreement, the Adviser also provides managerial assistance on the Company’s behalf to those portfolio companies that have accepted its offer to provide such assistance. The Adviser has also retained the services of
accounting and back office professionals on an as needed basis through a services agreement with the Cyrus Capital Partners, L.P. to assist the Adviser in fulfilling certain of its obligations to the Company under the Administration Agreement. The
Company incurred costs of $341,633 and $679,696 under the Administration Agreement for the three and six months ended December 31, 2018. The Company incurred costs of $184,561 and $311,790 under the Administration Agreement for the three and
six months ended December 31, 2017, respectively.
As of December 31, 2018 and June 30, 2018, the Company recorded no accrued expenses or
other liabilities on its Unaudited Consolidated Statements of Assets and Liabilities for reimbursement of expenses owed to the Adviser under the Administration Agreement.
License Agreement
The Company has entered into a license
agreement with the Adviser under which the Adviser has agreed to grant the Company a non-exclusive, royalty-free license to use the name “CM Finance.” Under this agreement, the Company has a right to
use the “CM Finance” name for so long as the Adviser or one of its affiliates remains the Adviser. Other than with respect to this limited license, the Company has no legal right to the “CM Finance” name.
Stifel Arrangement
In December 2013, the Company entered
into an arrangement pursuant to which Stifel Venture Corp. (“Stifel”) made a capital contribution to the Company on February 5, 2014 and the Company granted Stifel certain rights, such as a right to nominate for election a member of
the Company’s board of directors. Stifel has not exercised its right to nominate for election a member of the Company’s board of directors. Stifel does not have any rights to exercise a controlling influence over the Company’s day-to-day operations or the investment management function of the Adviser.
As
of December 31, 2018, three of the investment professionals employed by the Adviser as part of its investment team were also employees of Stifel, Nicolaus & Company, Incorporated or its affiliates and were members of the Adviser’s
investment committee designated by Stifel. Although these three investment professionals dedicated substantially all of their time to the business and activities of the Adviser, they are dual employees of both Stifel, Nicolaus & Company,
Incorporated or its affiliates and the Adviser. In addition, a member of the Adviser’s investment committee is an employee of Stifel, Nicolaus & Company, Incorporated or its affiliates and as a result, may continue to engage in
investment advisory activities for Stifel, Nicolaus & Company, Incorporated or its affiliates. As of December 31, 2018, Stifel owned approximately 16.0% of the Company’s outstanding common stock, and also holds a 20.0% interest in
the Adviser.
Note 8. Directors’ Fees
Each of
the Company’s four independent directors receives (i) an annual fee of $75,000, and (ii) $2,500 plus reimbursement of reasonable out-of-pocket expenses
incurred in connection with attending in person or telephonically each regular board of directors meeting and each special telephonic meeting. The Company’s independent directors also receive $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with each committee meeting attended in person and each telephonic committee meeting. The
F-37
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 8. Directors’ Fees – (continued)
chairman of the audit committee receives an annual fee of $7,500. The chairperson of the valuation committee, the nominating and corporate governance committee
and the compensation committee receives an annual fee of $2,500, $2,500 and $2,500, respectively. The Company has obtained directors’ and officers’ liability insurance on behalf of the Company’s directors and officers. Independent
directors have the option of having their directors’ fees paid in shares of the Company’s common stock issued at a price per share equal to the greater of net asset value or the market price at the time of payment. For the three and six
months ended December 31, 2018, the Company recorded directors’ fees of $101,250 and $202,500, of which $93,448 were payable at December 31, 2018. For the three and six months ended December 31, 2017, the Company recorded
directors’ fees of $99,000 and $198,667, of which $96,746 were payable at December 31, 2017.
Note 9. Net Change in Net Assets Resulting from
Operations Per Share
Basic earnings per share is computed by dividing earnings available to common stockholders by the weighted average number of
shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis.
The following table sets forth the computation of the weighted average basic and diluted net increase in net assets per share from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Net Increase (Decrease)
in Net Assets Per Share
|
|
|
|
|
Three months ended December 31,
|
|
|
Six months ended December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Net increase (decrease) in net assets resulting from operations
|
|
$
|
(9,382,296
|
)
|
|
$
|
4,859,147
|
|
|
$
|
(7,954,255
|
)
|
|
$
|
7,994,863
|
|
|
Weighted average shares of common stock outstanding
|
|
|
13,638,869
|
|
|
|
13,690,480
|
|
|
|
13,644,483
|
|
|
|
13,690,182
|
|
|
Basic/diluted net increase (decrease) in net assets from operations per share
|
|
$
|
(0.69
|
)
|
|
$
|
0.35
|
|
|
$
|
(0.58
|
)
|
|
$
|
0.58
|
|
Note 10. Distributions
The following table reflects the cash dividend distributions per share that the Company declared and/or paid to its stockholders since the Offering in February
2014. Stockholders of record as of each respective record date were entitled to receive the distribution:
|
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Record Date
|
|
Payment Date
|
|
Amount
Per
Share
|
|
|
March 14, 2014
|
|
March 24, 2014
|
|
March 31, 2014
|
|
$
|
0.1812
|
|
|
May 14, 2014
|
|
June 16, 2014
|
|
July 1, 2014
|
|
$
|
0.3375
|
|
|
September 4, 2014
|
|
September 18, 2014
|
|
October 1, 2014
|
|
$
|
0.3375
|
|
|
November 6, 2014
|
|
December 18, 2014
|
|
January 5, 2015
|
|
$
|
0.3375
|
|
|
January 28, 2015
|
|
March 18, 2015
|
|
April 2, 2015
|
|
$
|
0.3469
|
|
|
May 6, 2015
|
|
June 8, 2015
|
|
July 5, 2015
|
|
$
|
0.3469
|
|
|
June 10, 2015*
|
|
September 1, 2015
|
|
September 15, 2015
|
|
$
|
0.4300
|
|
|
June 10, 2015
|
|
September 18, 2015
|
|
October 2, 2015
|
|
$
|
0.3469
|
|
|
November 3, 2015
|
|
December 18, 2015
|
|
January 5, 2016
|
|
$
|
0.3469
|
|
F-38
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 10. Distributions – (continued)
|
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Record Date
|
|
Payment Date
|
|
Amount
Per
Share
|
|
|
February 2, 2016
|
|
March 18, 2016
|
|
April 7, 2016
|
|
$
|
0.3516
|
|
|
April 28, 2016
|
|
June 17, 2016
|
|
July 7, 2016
|
|
$
|
0.3516
|
|
|
August 25, 2016
|
|
September 16, 2016
|
|
October 6, 2016
|
|
$
|
0.3516
|
|
|
November 3, 2016
|
|
December 16, 2016
|
|
January 5, 2017
|
|
$
|
0.3516
|
|
|
November 3, 2016
|
|
March 17, 2017
|
|
April 6, 2017
|
|
$
|
0.2500
|
|
|
May 2, 2017
|
|
June 16, 2017
|
|
July 6, 2017
|
|
$
|
0.2500
|
|
|
August 24, 2017
|
|
September 8, 2017
|
|
October 5, 2017
|
|
$
|
0.2500
|
|
|
November 7, 2017
|
|
December 15, 2017
|
|
January 4, 2018
|
|
$
|
0.2500
|
|
|
February 6, 2018
|
|
March 16, 2018
|
|
April 5, 2018
|
|
$
|
0.2500
|
|
|
May 2, 2018
|
|
June 15, 2018
|
|
July 5, 2018
|
|
$
|
0.2500
|
|
|
August 23, 2018
|
|
September 18, 2018
|
|
October 5, 2018
|
|
$
|
0.2500
|
|
|
November 6, 2018
|
|
December 14, 2018
|
|
January 3, 2019
|
|
$
|
0.2500
|
|
The following table reflects, for U.S. federal income tax purposes, the sources of the cash distributions that the Company has paid on its common stock during
the six months ended December 31, 2018 and December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
Distribution
Amount
|
|
|
Percentage
|
|
|
Distribution
Amount
|
|
|
Percentage
|
|
|
Ordinary income and short-term capital gains
|
|
$
|
6,823,243
|
|
|
|
100
|
%
|
|
$
|
6,845,051
|
|
|
|
100
|
%
|
|
Long-term capital gains
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,823,243
|
|
|
|
100
|
%
|
|
$
|
6,845,051
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 11. Share Repurchase Program
As described in Note 2, the Company has a share repurchase program under which the Company may repurchase up to $5.0 million shares of its common stock
until the earlier of (i) May 1, 2019 or (ii) the repurchase of $5.0 million in aggregate amount of its common stock. During the three and six months ended December 31, 2018, the Company repurchased 30,999 and 42,214 shares
of its common stock on the open market for $257,336 and $358,573. The Company’s NAV per share increased by $0.01 for the three and six months ended December 31, 2018 as a result of the share repurchases. The following table summarizes the
Company’s share repurchases under the share repurchase program for the six months ended December 31, 2018 and December 31, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
December 31,
|
|
|
Six months ended
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Number of shares repurchased
|
|
|
30,999
|
|
|
|
—
|
|
|
|
42,214
|
|
|
|
—
|
|
|
Cost of shares repurchased, including commissions
|
|
$
|
257,336
|
|
|
|
—
|
|
|
$
|
358,573
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average price per share
|
|
$
|
8.25
|
|
|
|
—
|
|
|
$
|
8.44
|
|
|
|
—
|
|
|
Net asset value per share at period end
|
|
$
|
11.49
|
|
|
|
—
|
|
|
$
|
11.49
|
|
|
|
—
|
|
|
Weighted average discount to period end net asset value
|
|
|
28.19
|
%
|
|
|
—
|
|
|
|
26.52
|
%
|
|
|
—
|
|
F-39
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 12. Share Transactions
The following table summarizes the total shares issued for the six months ended December 31, 2018 and December 31, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Balance at beginning of period
|
|
|
13,649,504
|
|
|
$
|
200,203,363
|
|
|
|
13,689,221
|
|
|
$
|
200,568,530
|
|
|
Reinvestments of stockholder distributions
|
|
|
5,826
|
|
|
|
49,707
|
|
|
|
1,259
|
|
|
|
11,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of repurchased shares
|
|
|
(42,214
|
)
|
|
|
(358,531
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Balance at end of period
|
|
|
13,613,116
|
|
|
$
|
199,894,539
|
|
|
|
13,690,480
|
|
|
$
|
200,580,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 13. Financial Highlights
The following represents the per share data and the ratios to average net assets for CM Finance Inc:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Per Share Data:(1)
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$
|
12.57
|
|
|
$
|
12.41
|
|
|
Net investment income
|
|
|
0.52
|
|
|
|
0.49
|
|
|
Net realized and unrealized gains (losses)
|
|
|
(1.11
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations
|
|
|
(0.59
|
)
|
|
|
0.59
|
|
|
|
|
|
|
Capital transactions(2)
|
|
|
|
|
|
|
|
|
|
Share repurchases
|
|
|
0.01
|
|
|
|
—
|
|
|
Dividends from net investment income
|
|
|
(0.50
|
)
|
|
|
(0.50
|
)
|
|
Distributions from net realized gains
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in net assets resulting from capital transactions
|
|
|
(0.49
|
)
|
|
|
(0.50
|
)
|
|
Offering costs
|
|
|
—
|
|
|
|
—
|
|
|
Net asset value, end of period
|
|
$
|
11.49
|
|
|
$
|
12.50
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value per share, end of period
|
|
$
|
8.60
|
|
|
$
|
8.15
|
|
|
|
|
|
|
Total return based on market
value(3)
|
|
|
(24.58
|
)%
|
|
|
(13.65
|
)%
|
|
|
|
|
|
Shares outstanding at end of period
|
|
|
13,613,116
|
|
|
|
13,690,480
|
|
F-40
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 13. Financial Highlights – (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Ratio/Supplemental Data:
|
|
|
|
|
|
|
|
|
|
Net assets, at end of period
|
|
$
|
156,436,308
|
|
|
$
|
171,109,737
|
|
|
Ratio of total expenses to average net assets
|
|
|
12.72
|
%
|
|
|
9.88
|
%
|
|
Ratio of net expenses to average net assets
|
|
|
12.69
|
%
|
|
|
9.88
|
%
|
|
Ratio of interest expense and fees and amortization of deferred debt issuance costs to average net
assets
|
|
|
5.86
|
%
|
|
|
3.90
|
%
|
|
Ratio of net investment income before fee waiver to average net assets
|
|
|
8.65
|
%
|
|
|
7.81
|
%
|
|
Ratio of net investment income after fee waiver to average net assets
|
|
|
8.68
|
%
|
|
|
7.81
|
%
|
|
Total Notes Payable
|
|
|
136,500,000
|
|
|
|
119,830,000
|
|
|
Asset Coverage Ratio(6)
|
|
|
2.15
|
|
|
|
2.46
|
|
|
Portfolio Turnover Rate
|
|
|
32
|
%
|
|
|
20
|
%
|
|
*
|
Net asset value at beginning of period reflects the deduction of the sales load of $0.25 per share paid by the
stockholder from the $15.00 offering price.
|
|
(1)
|
The per share data was derived by using the shares outstanding during the period.
|
|
(2)
|
The per share data for dividends and distributions declared reflects the actual amount of the dividends and
distributions declared per share during the period.
|
|
(3)
|
Total returns are historical and are calculated by determining the percentage change in the market value with
all dividends distributions, if any, reinvested. Dividends and distributions are assumed to be reinvested at prices obtained under the company’s dividend reinvestment plan. Total investment return does not reflect sales load.
|
|
(6)
|
Asset coverage ratio is equal to (i) the sum of (A) net assets at the end of the period and (B) debt
outstanding at the end of the period, divided by (ii) total debt outstanding at the end of the period.
|
|
(7)
|
For the period from February 6, 2014 through June 30, 2014.
|
Note 14. Other Fee Income
The other fee income consists
of structuring fee income, amendment fee income and royalty income. The following tables summarize the Company’s other fee income for the three and six months ended December 31, 2018 and December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months
ended December 31,
|
|
|
For the six months
ended December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Loan Amendment/Consent Fee
|
|
$
|
277,365
|
|
|
$
|
—
|
|
|
$
|
432,520
|
|
|
$
|
9,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Fee Income
|
|
$
|
277,365
|
|
|
$
|
—
|
|
|
$
|
432,520
|
|
|
$
|
9,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-41
CM Finance Inc and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
December 31, 2018
Note 15. Tax Information
As of December 31, 2018, the Company’s aggregate investment unrealized appreciation and depreciation based on cost for U.S. federal income tax
purposes were as follows:
|
|
|
|
|
|
|
Tax cost
|
|
$
|
307,290,045
|
|
|
|
|
|
|
|
|
Gross unrealized appreciation
|
|
|
4,357,482
|
|
|
Gross unrealized depreciation
|
|
|
(28,312,222
|
)
|
|
|
|
|
|
|
|
Net unrealized investment depreciation
|
|
$
|
(23,954,740
|
)
|
|
|
|
|
|
|
As of June 30, 2018, the Company’s aggregate investment unrealized appreciation and depreciation based on cost for
U.S. federal income tax purposes were as follows:
|
|
|
|
|
|
|
Tax cost
|
|
$
|
302,647,282
|
|
|
|
|
|
|
|
|
Gross unrealized appreciation
|
|
|
6,015,163
|
|
|
Gross unrealized depreciation
|
|
|
(15,070,432
|
)
|
|
|
|
|
|
|
|
Net unrealized investment depreciation
|
|
$
|
(9,055,269
|
)
|
|
|
|
|
|
|
Note 16. Subsequent Events
On February 5, 2019, our board of directors declared a distribution for the quarter ended March 31, 2019 of $0.25 per share payable on April 4,
2019 to stockholders of record as of March 15, 2019.
F-42
Report of Independent Registered Public
Accounting Firm
To the
Stockholders and the Board of Directors of
CM Finance Inc
Opinion on the Financial Statements
We have audited the
accompanying consolidated statement of assets and liabilities, including the consolidated schedule of investments, of CM Finance Inc and subsidiaries (the Company) as of June 30, 2018, and the related consolidated statements of operations, changes
in net assets and cash flows for the year then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the
financial position of the Company as of June 30, 2018, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our
audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we
express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of investments owned as of June 30, 2018, by correspondence with the
custodian or the agents of the underlying investments. We believe that our audit provides a reasonable basis for our opinion.
/s/ RSM US LLP
We have served
as the Company’s auditor since 2017.
New York, New York
September 4, 2018
F-43
Report of Independent Registered Public
Accounting Firm
The Board of Directors and
Shareholders of
CM Finance Inc
We have
audited the accompanying consolidated statements of assets and liabilities of CM Finance Inc and subsidiaries (the “Company”), including the consolidated schedules of investments as of June 30, 2017 and 2016, and the related
consolidated statements of operations, changes in net assets and cash flows for each of the years in the three year period ended June 30, 2017. These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our
procedures included confirmation of securities owned as of June 30, 2017 and 2016, by correspondence with the custodians or the agents of the underlying investments. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the
CM Finance Inc and subsidiaries at June 30, 2017 and 2016, and the consolidated results of their operations, changes in their net assets and their cash flows for each of the years in the three year period ended June 30, 2017 in conformity
with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
September 6, 2017
New York, NY
F-44
CM Finance Inc and Subsidiaries
Consolidated Statements of Assets and Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Non-controlled, non-affiliated investments, at fair value (amortized cost of $302,647,282 and
$ 270,467,740, respectively)
|
|
$
|
293,592,013
|
|
|
$
|
254,907,171
|
|
|
Derivatives, at fair value (cost of $0 and $0, respectively)
|
|
|
229,918
|
|
|
|
5,830,501
|
|
|
Cash
|
|
|
5,620,441
|
|
|
|
10,646,697
|
|
|
Cash, restricted
|
|
|
2,706,273
|
|
|
|
22,616,177
|
|
|
Receivable for investments sold
|
|
|
7,751,875
|
|
|
|
—
|
|
|
Interest receivable
|
|
|
4,011,450
|
|
|
|
1,627,774
|
|
|
Deferred offering costs
|
|
|
121,922
|
|
|
|
186,513
|
|
|
Other receivables
|
|
|
245,550
|
|
|
|
—
|
|
|
Prepaid expenses and other assets
|
|
|
255,139
|
|
|
|
219,045
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
314,534,581
|
|
|
$
|
296,033,878
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Notes payable:
|
|
|
|
|
|
|
|
|
|
Term loan
|
|
$
|
102,000,000
|
|
|
$
|
102,000,000
|
|
|
Revolving credit facility
|
|
|
17,823,000
|
|
|
|
—
|
|
|
Deferred debt issuance costs
|
|
|
(1,953,771
|
)
|
|
|
(578,074
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable, net
|
|
|
117,869,229
|
|
|
|
101,421,926
|
|
|
Payable for investments purchased
|
|
|
12,569,450
|
|
|
|
12,490,000
|
|
|
Dividend payable
|
|
|
3,417,848
|
|
|
|
3,422,307
|
|
|
Deferred financing costs payable
|
|
|
2,071,167
|
|
|
|
620,500
|
|
|
Income-based incentive fees payable
|
|
|
2,294,678
|
|
|
|
274,073
|
|
|
Base management fees payable
|
|
|
1,319,853
|
|
|
|
1,132,391
|
|
|
Accrued provision for taxes
|
|
|
2,579,337
|
|
|
|
—
|
|
|
Derivatives, at fair value (cost $0 and $0, respectively)
|
|
|
229,918
|
|
|
|
5,830,501
|
|
|
Interest payable
|
|
|
303,153
|
|
|
|
205,027
|
|
|
Directors’ fees payable
|
|
|
99,296
|
|
|
|
100,000
|
|
|
Allocation of administrative cost from Adviser payable
|
|
|
—
|
|
|
|
85,000
|
|
|
Accrued expenses and other liabilities
|
|
|
257,986
|
|
|
|
504,041
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
143,011,915
|
|
|
|
126,085,766
|
|
|
|
|
|
|
Commitments and Contingencies (Note 6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets
|
|
|
|
|
|
|
|
|
|
Common stock, par value $0.001 per share (100,000,000 shares authorized, 13,649,504 and 13,689,221
shares issued and outstanding, respectively)
|
|
|
13,649
|
|
|
|
13,689
|
|
|
Additional paid-in capital
|
|
|
198,700,999
|
|
|
|
199,066,123
|
|
|
Accumulated net realized loss
|
|
|
(21,087,280
|
)
|
|
|
(11,231,827
|
)
|
|
Undistributed (distributions in excess of) net investment income
|
|
|
2,950,567
|
|
|
|
(2,339,304
|
)
|
|
Net unrealized depreciation on investments
|
|
|
(9,055,269
|
)
|
|
|
(15,560,569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Assets
|
|
|
171,522,666
|
|
|
|
169,948,112
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Net Assets
|
|
$
|
314,534,581
|
|
|
$
|
296,033,878
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Asset Value Per Share
|
|
$
|
12.57
|
|
|
$
|
12.41
|
|
See notes to consolidated financial statements.
F-45
CM Finance Inc and Subsidiaries
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the twelve months ended June 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
Investment Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
28,691,187
|
|
|
$
|
29,476,315
|
|
|
$
|
33,683,108
|
|
|
Payment in-kind interest income
|
|
|
2,609,037
|
|
|
|
423,632
|
|
|
|
960,603
|
|
|
Dividend income
|
|
|
9,005,887
|
|
|
|
—
|
|
|
|
—
|
|
|
Payment in-kind dividend income
|
|
|
333,333
|
|
|
|
—
|
|
|
|
—
|
|
|
Other fee income
|
|
|
152,308
|
|
|
|
1,112,250
|
|
|
|
936,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
40,791,752
|
|
|
|
31,012,197
|
|
|
|
35,579,922
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
6,310,842
|
|
|
|
4,748,449
|
|
|
|
4,048,527
|
|
|
Base management fees
|
|
|
4,871,706
|
|
|
|
4,652,064
|
|
|
|
5,511,532
|
|
|
Income-based incentive fees
|
|
|
3,932,710
|
|
|
|
1,289,927
|
|
|
|
1,229,031
|
|
|
Provision for tax expense
|
|
|
2,579,337
|
|
|
|
—
|
|
|
|
—
|
|
|
Professional fees
|
|
|
1,063,528
|
|
|
|
806,810
|
|
|
|
1,039,802
|
|
|
Allocation of administrative costs from Adviser
|
|
|
1,198,397
|
|
|
|
987,286
|
|
|
|
785,846
|
|
|
Amortization of deferred debt issuance costs
|
|
|
695,470
|
|
|
|
932,417
|
|
|
|
1,441,044
|
|
|
Insurance expense
|
|
|
351,923
|
|
|
|
345,697
|
|
|
|
367,327
|
|
|
Directors’ fees
|
|
|
402,240
|
|
|
|
501,233
|
|
|
|
425,922
|
|
|
Custodian and administrator fees
|
|
|
295,032
|
|
|
|
480,269
|
|
|
|
442,598
|
|
|
Offering expense
|
|
|
186,513
|
|
|
|
—
|
|
|
|
—
|
|
|
Other expenses
|
|
|
455,645
|
|
|
|
818,532
|
|
|
|
434,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
22,343,343
|
|
|
|
15,562,684
|
|
|
|
15,725,966
|
|
|
Waiver of income-based incentive fees
|
|
|
(527,224
|
)
|
|
|
(249,071
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net expenses
|
|
|
21,816,119
|
|
|
|
15,313,613
|
|
|
|
15,725,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
18,975,633
|
|
|
|
15,698,584
|
|
|
|
19,853,956
|
|
|
|
|
|
|
|
Net realized and unrealized gain/(loss) on investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gain/(loss) from investments
|
|
|
(9,855,453
|
)
|
|
|
(11,809,335
|
)
|
|
|
283,276
|
|
|
Net change in unrealized appreciation/(depreciation) in value of investments
|
|
|
6,505,300
|
|
|
|
19,690,216
|
|
|
|
(29,482,002
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total realized and unrealized gain/(loss) on investments
|
|
|
(3,350,153
|
)
|
|
|
7,880,881
|
|
|
|
(29,198,726
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations
|
|
$
|
15,625,480
|
|
|
$
|
23,579,465
|
|
|
$
|
(9,344,770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income per share
|
|
$
|
1.39
|
|
|
$
|
1.15
|
|
|
$
|
1.45
|
|
|
Earnings (loss) per share
|
|
$
|
1.14
|
|
|
$
|
1.72
|
|
|
$
|
(0.68
|
)
|
|
Weighted average shares of common stock outstanding
|
|
|
13,689,823
|
|
|
|
13,686,288
|
|
|
|
13,674,197
|
|
|
Distributions paid per common share
|
|
$
|
1.00
|
|
|
$
|
1.20
|
|
|
$
|
1.83
|
|
See notes to consolidated financial statements.
F-46
CM Finance Inc and Subsidiaries
Consolidated Statements of Changes in Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the twelve months ended
June 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
Net assets at beginning of year
|
|
$
|
169,948,112
|
|
|
$
|
162,749,883
|
|
|
$
|
196,950,849
|
|
|
|
|
|
|
|
Increase (decrease) in net assets resulting from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
18,975,633
|
|
|
|
15,698,584
|
|
|
|
19,853,956
|
|
|
Net realized gain/(loss) on investments
|
|
|
(9,855,453
|
)
|
|
|
(11,809,335
|
)
|
|
|
283,276
|
|
|
Net change in unrealized appreciation (depreciation) on investments
|
|
|
6,505,300
|
|
|
|
19,690,216
|
|
|
|
(29,482,002
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations
|
|
|
15,625,480
|
|
|
|
23,579,465
|
|
|
|
(9,344,770
|
)
|
|
|
|
|
|
|
Stockholder distributions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions from net investment income
|
|
|
(13,685,762
|
)
|
|
|
(16,467,071
|
)
|
|
|
(20,614,360
|
)
|
|
Distributions from net realized gains
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,366,660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in net assets resulting from stockholder distributions
|
|
|
(13,685,762
|
)
|
|
|
(16,467,071
|
)
|
|
|
(24,981,020
|
)
|
|
|
|
|
|
|
Capital transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinvestments of stockholder distributions
|
|
|
25,014
|
|
|
|
85,835
|
|
|
|
124,824
|
|
|
Repurchase of common stock
|
|
|
(390,178
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from capital transactions
|
|
|
(365,164
|
)
|
|
|
85,835
|
|
|
|
124,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets
|
|
|
1,574,554
|
|
|
|
7,198,229
|
|
|
|
(34,200,966
|
)
|
|
Net assets at end of period (including undistributed (distributions in excess of) net
investment income of $2,950,567, $(3,750,362), and $(1,736,009), respectively)
|
|
$
|
171,522,666
|
|
|
$
|
169,948,112
|
|
|
$
|
162,749,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-47
CM Finance Inc and Subsidiaries
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the twelve months ended
June 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations
|
|
$
|
15,625,480
|
|
|
$
|
23,579,465
|
|
|
$
|
(9,344,770
|
)
|
|
|
|
|
|
|
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net
cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination and purchase of investments
|
|
|
(172,238,259
|
)
|
|
|
(134,235,087
|
)
|
|
|
(63,049,676
|
)
|
|
Payment in-kind interest
|
|
|
(2,609,037
|
)
|
|
|
(423,632
|
)
|
|
|
(960,603
|
)
|
|
Payment in-kind dividends
|
|
|
(333,333
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Sales and repayments of investments
|
|
|
137,045,592
|
|
|
|
162,646,483
|
|
|
|
95,132,109
|
|
|
Net realized (gain) loss on investments
|
|
|
9,855,453
|
|
|
|
11,809,335
|
|
|
|
(283,276
|
)
|
|
Net change in unrealized (appreciation) depreciation on investments
|
|
|
(6,505,300
|
)
|
|
|
(19,690,216
|
)
|
|
|
29,482,002
|
|
|
Amortization of discount/premium on investments
|
|
|
(3,899,958
|
)
|
|
|
(2,899,890
|
)
|
|
|
(2,110,864
|
)
|
|
Amortization of deferred debt issuance costs
|
|
|
695,470
|
|
|
|
932,417
|
|
|
|
1,441,044
|
|
|
|
|
|
Net (increase) decrease in operating assets:
|
|
|
|
|
|
Cash, restricted
|
|
|
19,909,904
|
|
|
|
(4,592,711
|
)
|
|
|
(14,589,762
|
)
|
|
Interest receivable
|
|
|
(2,383,676
|
)
|
|
|
269,936
|
|
|
|
1,003,094
|
|
|
Receivable for investments sold
|
|
|
(7,751,875
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Other receivables
|
|
|
(245,550
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Prepaid expenses and other assets
|
|
|
(36,094
|
)
|
|
|
15,792
|
|
|
|
(2,133
|
)
|
|
|
|
|
Net increase (decrease) in operating liabilities:
|
|
|
|
|
|
Payable for investments purchased
|
|
|
79,450
|
|
|
|
3,661,250
|
|
|
|
5,840,095
|
|
|
Interest payable
|
|
|
98,126
|
|
|
|
29,235
|
|
|
|
7,134
|
|
|
Accrued provisions for income taxes
|
|
|
2,579,337
|
|
|
|
—
|
|
|
|
—
|
|
|
Directors fees payable
|
|
|
(704
|
)
|
|
|
100,000
|
|
|
|
—
|
|
|
Accrued expenses and other liabilities
|
|
|
(331,055
|
)
|
|
|
(356,324
|
)
|
|
|
367,290
|
|
|
Base management fees payable
|
|
|
187,462
|
|
|
|
(125,377
|
)
|
|
|
(163,210
|
)
|
|
Income-based incentive fees payable
|
|
|
2,020,605
|
|
|
|
(1,467
|
)
|
|
|
(1,447,720
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(8,237,962
|
)
|
|
|
40,719,209
|
|
|
|
41,320,754
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
Payment for deferred financing costs
|
|
|
(620,500
|
)
|
|
|
(258,542
|
)
|
|
|
(1,266,458
|
)
|
|
Deferred offering costs
|
|
|
64,591
|
|
|
|
—
|
|
|
|
—
|
|
|
Distributions to shareholders
|
|
|
(13,665,207
|
)
|
|
|
(17,768,707
|
)
|
|
|
(24,787,592
|
)
|
|
Repurchase of common stock
|
|
|
(390,178
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Proceeds from borrowing on revolving credit facility
|
|
|
53,378,000
|
|
|
|
41,522,649
|
|
|
|
34,939,022
|
|
|
Repayments of borrowing on revolving credit facility
|
|
|
(35,555,000
|
)
|
|
|
(72,000,978
|
)
|
|
|
(53,308,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
3,211,706
|
|
|
|
(48,505,578
|
)
|
|
|
(44,423,180
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
(5,026,256
|
)
|
|
|
(7,786,369
|
)
|
|
|
(3,102,426
|
)
|
|
|
|
|
Cash:
|
|
|
|
|
|
Beginning of year
|
|
|
10,646,697
|
|
|
|
18,433,066
|
|
|
|
21,535,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
5,620,441
|
|
|
$
|
10,646,697
|
|
|
$
|
18,433,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental and non-cash financing cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
6,212,715
|
|
|
$
|
4,719,214
|
|
|
$
|
4,041,393
|
|
|
Cash paid for taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Issuance of shares pursuant to Dividend Reinvestment Plan
|
|
|
25,014
|
|
|
|
85,835
|
|
|
|
124,824
|
|
|
Non-cash purchase of investments
|
|
$
|
—
|
|
|
$
|
14,343,675
|
|
|
$
|
—
|
|
|
Non-cash sale of investments
|
|
$
|
—
|
|
|
$
|
(14,343,675
|
)
|
|
$
|
—
|
|
See notes to consolidated financial statements.
F-48
CM Finance Inc and subsidiaries
Consolidated Schedule of Investments
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments(1)(2)
|
|
Industry
|
|
Interest Rate
|
|
Initial
Acquisition
Date
|
|
|
Maturity
Date
|
|
Principal
Amount/
Shares(3)
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
% of
Net
Assets
|
|
|
Non-Controlled/Non-Affiliates
|
|
|
Senior Secured First Lien Debt Investments
|
|
|
1888 Industrial Services, LLC -
Revolver(4)(5)
|
|
Energy Equipment & Services
|
|
3M L+5.00% (1.00% Floor)
|
|
|
10/11/2016
|
|
|
09/30/2021
|
|
$
|
2,376,238
|
|
|
$
|
1,683,168
|
|
|
$
|
1,683,168
|
|
|
|
0.98
|
%
|
|
1888 Industrial Services, LLC - Term
A(4)
|
|
Energy Equipment & Services
|
|
3M L+5.00% (1.00% Floor)
|
|
|
9/30/2016
|
|
|
09/30/2021
|
|
|
4,950,495
|
|
|
|
4,950,495
|
|
|
|
4,950,495
|
|
|
|
2.89
|
%
|
|
1888 Industrial Services, LLC - Term
B(3)(4)
|
|
Energy Equipment & Services
|
|
3M L+8.00% PIK (1.00% Floor)
|
|
|
9/30/2016
|
|
|
09/30/2021
|
|
|
11,687,047
|
|
|
|
5,912,941
|
|
|
|
8,765,286
|
|
|
|
5.11
|
%
|
|
American Gaming Systems Inc.(6)
|
|
Hotel, Restaurants & Leisure
|
|
3M L+4.25% (1.00% Floor)
|
|
|
2/9/2018
|
|
|
02/15/2024
|
|
|
20,400,451
|
|
|
|
20,400,451
|
|
|
|
20,400,451
|
|
|
|
11.89
|
%
|
|
CareerBuilder, LLC(6)
|
|
Professional Services
|
|
3M L+6.75% (1.00% Floor)
|
|
|
7/27/2017
|
|
|
07/27/2023
|
|
|
10,994,114
|
|
|
|
10,705,928
|
|
|
|
10,994,114
|
|
|
|
6.41
|
%
|
|
Deluxe Toronto Ltd.(6)
|
|
Media
|
|
3M L+5.50% (1.00% Floor)
|
|
|
6/29/2018
|
|
|
12/07/2020
|
|
|
5,000,000
|
|
|
|
4,950,000
|
|
|
|
4,950,000
|
|
|
|
2.89
|
%
|
|
Exela Intermedia LLC(7)
|
|
IT Services
|
|
3M L+6.50% (1.00% Floor)
|
|
|
6/5/2018
|
|
|
07/12/2023
|
|
|
5,468,354
|
|
|
|
5,524,248
|
|
|
|
5,524,678
|
|
|
|
3.22
|
%
|
|
Exela Intermedia LLC(7)
|
|
IT Services
|
|
Fixed 10.00%
|
|
|
6/19/2018
|
|
|
07/15/2023
|
|
|
5,500,000
|
|
|
|
5,685,426
|
|
|
|
5,685,900
|
|
|
|
3.32
|
%
|
|
FPC Holdings, Inc.(6)
|
|
Distributors
|
|
3M L+4.50% (1.25% Floor)
|
|
|
3/28/2018
|
|
|
11/18/2022
|
|
|
12,468,750
|
|
|
|
12,104,452
|
|
|
|
12,468,750
|
|
|
|
7.27
|
%
|
|
GEE Group, Inc.(6)(8)
|
|
Professional Services
|
|
2M L+13.75% (1.00% Floor)
|
|
|
3/26/2018
|
|
|
03/31/2021
|
|
|
12,286,453
|
|
|
|
12,286,453
|
|
|
|
12,286,453
|
|
|
|
7.16
|
%
|
|
Hostway Corp(6)
|
|
IT Services
|
|
3M L+5.75%
|
|
|
4/19/2018
|
|
|
12/13/2019
|
|
|
12,060,739
|
|
|
|
11,817,448
|
|
|
|
11,799,021
|
|
|
|
6.88
|
%
|
|
Immucor, Inc.(6)
|
|
Healthcare Equipment & Services
|
|
3M L+5.00% (1.00% Floor)
|
|
|
6/27/2017
|
|
|
06/15/2021
|
|
|
7,425,000
|
|
|
|
7,366,701
|
|
|
|
7,499,250
|
|
|
|
4.37
|
%
|
|
Liberty Oilfield Services LLC(6)(9)
|
|
Energy Equipment & Services
|
|
1M L+7.625% (1.00% Floor)
|
|
|
9/19/2017
|
|
|
09/19/2022
|
|
|
6,458,750
|
|
|
|
6,347,581
|
|
|
|
6,458,750
|
|
|
|
3.77
|
%
|
|
Montreign Operating Company, LLC(6)
|
|
Hotel, Restaurants & Leisure
|
|
1M L+8.25% (1.00% Floor)
|
|
|
12/16/2016
|
|
|
01/24/2023
|
|
|
13,199,738
|
|
|
|
13,246,185
|
|
|
|
12,935,744
|
|
|
|
7.54
|
%
|
|
Premiere Global Services,
Inc.(6)(9)
|
|
Diversified Telecommunication Services
|
|
3M L+6.50% (1.00% Floor)
|
|
|
5/6/2016
|
|
|
12/08/2021
|
|
|
10,748,527
|
|
|
|
10,225,894
|
|
|
|
10,533,557
|
|
|
|
6.14
|
%
|
|
PR Wireless LLC(5)
|
|
Wireless Telecommunication Services
|
|
3M L+5.25% (1.00% Floor)
|
|
|
11/15/2017
|
|
|
06/27/2020
|
|
|
2,308,097
|
|
|
|
461,619
|
|
|
|
461,619
|
|
|
|
0.27
|
%
|
|
RPX Corporation
|
|
Professional Services
|
|
3M L+6.00%
|
|
|
6/8/2018
|
|
|
6/8/2024
|
|
|
10,000,000
|
|
|
|
9,900,190
|
|
|
|
9,900,000
|
|
|
|
5.77
|
%
|
|
U.S. Well Services, LLC(3)(7)(9)
|
|
Energy Equipment & Services
|
|
1M L+9.00% (1.00% Floor)
|
|
|
2/1/2017
|
|
|
02/02/2022
|
|
|
9,633,228
|
|
|
|
9,684,648
|
|
|
|
9,633,228
|
|
|
|
5.62
|
%
|
|
U.S. Well Services, LLC -
Revolver(5)
|
|
Energy Equipment & Services
|
|
2M L+6.00% (1.00% Floor)
|
|
|
2/1/2017
|
|
|
02/02/2022
|
|
|
920,856
|
|
|
|
705,852
|
|
|
|
705,852
|
|
|
|
0.41
|
%
|
|
Zinc Acquisition Holdings, LP(6)
|
|
Chemicals
|
|
3M L+10.00% (1.00% Floor)
|
|
|
10/9/2017
|
|
|
09/29/2024
|
|
|
7,500,000
|
|
|
|
7,430,251
|
|
|
|
7,500,000
|
|
|
|
4.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Senior Secured First Lien Debt Investments
|
|
|
171,386,837
|
|
|
|
161,389,931
|
|
|
|
165,136,316
|
|
|
|
96.28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Second Lien Debt Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AP NMT Acquisition BV(6)(9)(10)
|
|
Media
|
|
3M L+9.00% (1.00% Floor)
|
|
|
8/12/2014
|
|
|
08/13/2022
|
|
|
20,000,000
|
|
|
|
19,166,531
|
|
|
|
20,000,000
|
|
|
|
11.66
|
%
|
|
Caelus Energy Alaska 03, LLC(6)
|
|
Oil, Gas & Consumable Fuels
|
|
3M L+7.50% (1.25% Floor)
|
|
|
4/17/2014
|
|
|
04/15/2020
|
|
|
26,000,000
|
|
|
|
24,848,113
|
|
|
|
24,180,000
|
|
|
|
14.10
|
%
|
|
Intermedia Holdings, Inc.(6)
|
|
IT Services
|
|
3M L+9.50% (1.00% Floor)
|
|
|
1/3/2017
|
|
|
02/01/2025
|
|
|
5,000,000
|
|
|
|
4,911,867
|
|
|
|
5,000,000
|
|
|
|
2.91
|
%
|
|
International Wire Group, Inc.
|
|
Electronic Equipment
|
|
Fixed 10.75%
|
|
|
4/27/2017
|
|
|
08/01/2021
|
|
|
7,000,000
|
|
|
|
6,915,565
|
|
|
|
6,580,000
|
|
|
|
3.84
|
%
|
|
Lionbridge Technologies, Inc.(3)
|
|
Commercial Services & Supplies
|
|
1M L+9.75% (1.00% Floor)
|
|
|
2/6/2017
|
|
|
02/28/2025
|
|
|
12,000,000
|
|
|
|
11,789,661
|
|
|
|
12,000,000
|
|
|
|
7.00
|
%
|
See notes to
consolidated financial statements.
F-49
CM Finance Inc and subsidiaries
Consolidated Schedule of Investments (continued)
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments(1)(2)
|
|
Industry
|
|
Interest Rate
|
|
Initial
Acquisition
Date
|
|
|
Maturity
Date
|
|
|
Principal
Amount/
Shares(3)
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
% of
Net
Assets
|
|
|
Montrose Environmental Group, Inc.
|
|
Commercial Services & Supplies
|
|
3M L+9.50%
|
|
|
9/29/2017
|
|
|
|
09/30/2020
|
|
|
$
|
20,000,000
|
|
|
$
|
19,688,421
|
|
|
$
|
19,600,000
|
|
|
|
11.43
|
%
|
|
Premiere Global Services, Inc.(6)
|
|
Diversified Telecommunication Services
|
|
3M L+9.50% (1.00% Floor)
|
|
|
11/30/2016
|
|
|
|
06/06/2022
|
|
|
|
15,000,000
|
|
|
|
14,679,729
|
|
|
|
14,400,000
|
|
|
|
8.39
|
%
|
|
TouchTunes Interactive Networks,
Inc.(6)
|
|
Media
|
|
1M L+8.25% (1.00% Floor)
|
|
|
5/4/2017
|
|
|
|
05/27/2022
|
|
|
|
7,000,000
|
|
|
|
6,977,435
|
|
|
|
7,000,000
|
|
|
|
4.08
|
%
|
|
Trident USA Health Services, LLC -
Tranche A(3)
|
|
Healthcare Providers & Services
|
|
3M L+10.00% PIK (1.25% Floor)
|
|
|
11/29/2017
|
|
|
|
07/31/2020
|
|
|
|
2,612,643
|
|
|
|
2,493,712
|
|
|
|
377,266
|
|
|
|
0.22
|
%
|
|
Trident USA Health Services, LLC -
Tranche B(3)
|
|
Healthcare Providers & Services
|
|
3M L+10.00% PIK (1.25% Floor)
|
|
|
11/29/2017
|
|
|
|
07/31/2020
|
|
|
|
20,956,435
|
|
|
|
20,018,194
|
|
|
|
10,203,688
|
|
|
|
5.95
|
%
|
|
ZeroChaos Parent, LLC(6)
|
|
Professional Services
|
|
3M L+8.25% (1.00% Floor)
|
|
|
11/21/2017
|
|
|
|
10/31/2023
|
|
|
|
8,000,000
|
|
|
|
7,871,114
|
|
|
|
7,860,000
|
|
|
|
4.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Senior Secured Second Lien Debt Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143,569,078
|
|
|
|
139,360,342
|
|
|
|
127,200,954
|
|
|
|
74.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured Debt Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trident USA Health Services, LLC - Holdco A Note
|
|
Healthcare Providers & Services
|
|
—
|
|
|
|
|
|
|
07/31/2020
|
|
|
|
2,426,201
|
|
|
|
—
|
|
|
|
731,742
|
|
|
|
0.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Unsecured Debt Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,426,201
|
|
|
|
—
|
|
|
|
731,742
|
|
|
|
0.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity, Warrants and Other Investments
|
|
|
1888 Industrial Services, LLC (Equity
Interest)(4)(11)(12)
|
|
Energy Equipment & Services
|
|
|
|
|
|
|
|
|
|
|
|
|
11,880
|
|
|
|
—
|
|
|
|
1
|
|
|
|
0.00
|
%
|
|
PR Wireless, Inc., $0.01 strike
(Warrants)(11)
|
|
Telecommunication Services
|
|
|
|
|
|
|
|
|
6/27/2027
|
|
|
|
201
|
|
|
|
1,374,009
|
|
|
|
—
|
|
|
|
0.00
|
%
|
|
Zinc Acquisition Holdings, LP (Common
Stock)(13)
|
|
Chemicals
|
|
—
|
|
|
|
|
|
|
|
|
|
|
523
|
|
|
|
523,000
|
|
|
|
523,000
|
|
|
|
0.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity, Warrants and Other Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,604
|
|
|
|
1,897,009
|
|
|
|
523,001
|
|
|
|
0.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Controlled/Non-Affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
317,394,720
|
|
|
$
|
302,647,282
|
|
|
$
|
293,592,013
|
|
|
|
171.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities in excess other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(122,069,347
|
)
|
|
|
(71.17
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
171,522,666
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-50
CM Finance Inc and subsidiaries
Consolidated Schedule of Investments (continued)
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industry
|
|
|
Interest
Rate
|
|
|
Maturity
Date
|
|
|
Notional
Amount
|
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
|
% of
Net
Assets
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivative - Notes
payable(11)(14)
|
|
|
Diversified Financial Services
|
|
|
|
|
|
|
|
12/5/2020
|
|
|
$
|
102,000,000
|
|
|
$
|
—
|
|
|
$
|
157,223
|
|
|
|
0.09
|
%
|
|
Embedded derivative - Notes
payable(11)(14)
|
|
|
Diversified Financial Services
|
|
|
|
|
|
|
|
12/5/2019
|
|
|
|
50,000,000
|
|
|
|
—
|
|
|
|
72,695
|
|
|
|
0.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152,000,000
|
|
|
|
—
|
|
|
|
229,918
|
|
|
|
0.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return Swap(11)(14)
|
|
|
Diversified Financial Services
|
|
|
|
1M L+2.75%
|
|
|
|
12/5/2020
|
|
|
|
102,000,000
|
|
|
|
—
|
|
|
|
(157,223
|
)
|
|
|
(0.09
|
%)
|
|
Embedded derivative - Notes
payable(11)(14)
|
|
|
Diversified Financial Services
|
|
|
|
|
|
|
|
12/5/2019
|
|
|
|
50,000,000
|
|
|
|
—
|
|
|
|
(72,695
|
)
|
|
|
(0.04
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152,000,000
|
|
|
|
—
|
|
|
|
(229,918
|
)
|
|
|
(0.13
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
304,000,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The Company’s investments are generally acquired in private transactions exempt from registration under
the Securities Act of 1933, as amended (the “Securities Act”) and, therefore, are generally subject to limitations on resale, and may be deemed to be “restricted securities’’ under the Securities Act of 1933.
|
|
(2)
|
All investments are non-controlled and non-affiliated issuers. All investments are valued in good faith by the
board of directors.
|
|
(3)
|
Principal amount includes capitalized PIK interest.
|
|
(4)
|
Effective 10/1/17, AAR Intermediate Holdings, LLC changed its name to 1888 Industrial Services, LLC.
|
|
(5)
|
Refer to Note 6 for more detail on the unfunded commitments.
|
|
(6)
|
A portion or all is held by the Company indirectly through CM Finance SPV Ltd. and pledged as collateral for
the Total Return Swaps and pledged as collateral for the revolving credit facility held through UBS AG, London Branch .
|
|
(7)
|
Security, or a portion thereof, unsettled as of June 30, 2018.
|
|
(8)
|
First Lien Unitranche Last Out Investment, which accounts for 4.18% of our investment portfolio at fair value.
|
|
(9)
|
The investment is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940. The
Company may not acquire any non-qualifying asset unless, at the time of acquisition, qualifying assets represent at least 70% of the Company’s total assets. Non-qualifying assets represent 15.88% of total assets.
|
|
(10)
|
A portfolio company domiciled in the Netherlands. The jurisdiction of the security issuer may be a different
country than the domicile of the portfolio company.
|
|
(11)
|
Securities are non-income producing.
|
|
(12)
|
CM Finance Inc’s investment in 1888 Industrial Services, LLC (Equity Interest) is held through its wholly
owned subsidiary, CM Portfolio Companies LLC.
|
|
(13)
|
CM Finance Inc’s investments in Zinc Acquisition Holdings, LP are held through its wholly owned
subsidiary, Zinc Borrower Blocker, LLC.
|
|
(14)
|
Refer to Note 5 for more detail on the Total Return Swaps and the Embedded derivatives - Notes Payable.
|
|
|
|
1M L – 1 month LIBOR (2.09% as of June 30, 2018)
|
|
3M L – 3 month LIBOR (2.34% as of June 30, 2018)
|
|
PIK – Payment-In-Kind
|
See notes to consolidated financial statements.
F-51
CM Finance Inc and subsidiaries
Consolidated Schedule of Investments
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments(1)
|
|
Industry
|
|
Interest Rate
|
|
Base
Floor
Rate
|
|
|
Maturity
Date
|
|
|
Principal
Amount/
Shares(2)
|
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
|
% of
Net
Assets
|
|
|
Non-Controlled/Non-Affiliates
|
|
|
Senior Secured First Lien Debt Investments
|
|
|
AAR Intermediate Holdings, LLC -
Revolver(3)
|
|
Oilfield Services
|
|
3M L + 5.00%
|
|
|
1.00
|
%
|
|
|
9/30/2021
|
|
|
$
|
198,020
|
|
|
$
|
198,020
|
|
|
$
|
198,020
|
|
|
|
0.12
|
%
|
|
AAR Intermediate Holdings, LLC - Term A
|
|
Oilfield Services
|
|
3M L + 5.00%
|
|
|
1.00
|
%
|
|
|
9/30/2021
|
|
|
|
4,950,495
|
|
|
|
4,950,495
|
|
|
|
4,950,495
|
|
|
|
2.91
|
%
|
|
AAR Intermediate Holdings, LLC - Term B
|
|
Oilfield Services
|
|
3M L + 4.00% PIK
|
|
|
1.00
|
%
|
|
|
9/30/2021
|
|
|
|
10,398,827
|
|
|
|
4,624,720
|
|
|
|
6,759,238
|
|
|
|
3.98
|
%
|
|
American Gaming Systems, Inc.(4)
|
|
Entertainment and Leisure
|
|
3M L + 5.50%
|
|
|
1.00
|
%
|
|
|
2/15/2024
|
|
|
|
18,000,000
|
|
|
|
17,955,003
|
|
|
|
17,955,000
|
|
|
|
10.56
|
%
|
|
Dayton Superior Corporation(4)
|
|
Construction & Building
|
|
3M L + 8.00%
|
|
|
1.00
|
%
|
|
|
11/15/2021
|
|
|
|
9,950,000
|
|
|
|
9,686,413
|
|
|
|
9,950,000
|
|
|
|
5.85
|
%
|
|
FPC Holdings, Inc.(4)
|
|
Trucking and Leasing
|
|
3M L + 4.00%
|
|
|
1.25
|
%
|
|
|
11/19/2019
|
|
|
|
9,586,590
|
|
|
|
8,588,755
|
|
|
|
9,203,126
|
|
|
|
5.41
|
%
|
|
Immucor, Inc.(4)(5)
|
|
Healthcare-Products/Services
|
|
3M L + 5.00%
|
|
|
1.00
|
%
|
|
|
6/15/2021
|
|
|
|
7,500,000
|
|
|
|
7,425,000
|
|
|
|
7,425,000
|
|
|
|
4.37
|
%
|
|
Medical Solutions L.L.C.(4)
|
|
Healthcare-Products/
Services
|
|
3M L + 4.25%
|
|
|
1.00
|
%
|
|
|
6/14/2024
|
|
|
|
4,000,000
|
|
|
|
3,980,000
|
|
|
|
3,980,000
|
|
|
|
2.34
|
%
|
|
Melissa & Doug, LLC(5)
|
|
Consumer Products
|
|
3M L + 4.50%
|
|
|
1.00
|
%
|
|
|
6/19/2024
|
|
|
|
1,000,000
|
|
|
|
995,000
|
|
|
|
995,000
|
|
|
|
0.59
|
%
|
|
Montreign Operating Company,
LLC(4)(5)
|
|
Entertainment and Leisure
|
|
1M L + 8.25%
|
|
|
1.00
|
%
|
|
|
1/24/2023
|
|
|
|
13,232,821
|
|
|
|
13,287,467
|
|
|
|
13,232,821
|
|
|
|
7.79
|
%
|
|
PR Wireless, Inc.(6)
|
|
Telecommunications
|
|
3M L + 9.00%
|
|
|
1.00
|
%
|
|
|
6/29/2020
|
|
|
|
16,490,000
|
|
|
|
15,522,048
|
|
|
|
15,500,600
|
|
|
|
9.12
|
%
|
|
Premiere Global Services, Inc.(4)
|
|
Business Services
|
|
3M L + 6.50%
|
|
|
1.00
|
%
|
|
|
12/8/2021
|
|
|
|
11,355,789
|
|
|
|
10,668,572
|
|
|
|
11,242,231
|
|
|
|
6.61
|
%
|
|
Redbox Automated Retail, LLC(4)
|
|
Retail
|
|
3M L + 7.50%
|
|
|
1.00
|
%
|
|
|
9/27/2021
|
|
|
|
7,437,500
|
|
|
|
7,241,540
|
|
|
|
7,437,500
|
|
|
|
4.38
|
%
|
|
U.S. Well Services, LLC
|
|
Oilfield Services
|
|
1M L + 11.00%
|
|
|
1.00
|
%
|
|
|
2/2/2022
|
|
|
|
3,969,450
|
|
|
|
3,969,450
|
|
|
|
3,969,450
|
|
|
|
2.34
|
%
|
|
U.S. Well Services, LLC -
Revolver(3)
|
|
Oilfield Services
|
|
1M L + 6.00%
|
|
|
1.00
|
%
|
|
|
2/2/2022
|
|
|
|
507,514
|
|
|
|
507,514
|
|
|
|
507,514
|
|
|
|
0.30
|
%
|
|
YRC Worldwide, Inc.(4)(7)
|
|
Trucking and Leasing
|
|
1M L + 7.50%
|
|
|
1.00
|
%
|
|
|
2/13/2019
|
|
|
|
13,937,359
|
|
|
|
13,901,008
|
|
|
|
13,797,986
|
|
|
|
8.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Senior Secured First Lien Debt Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132,514,365
|
|
|
|
123,501,005
|
|
|
|
127,103,981
|
|
|
|
74.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Second Lien Debt Investments
|
|
|
AP NMT Acquisition BV(4)(7)(8)
|
|
Media
|
|
3M L + 9.00%
|
|
|
1.00
|
%
|
|
|
8/13/2022
|
|
|
|
20,000,000
|
|
|
|
19,020,080
|
|
|
|
15,400,000
|
|
|
|
9.06
|
%
|
|
Bird Electric Enterprises,
LLC(9)(10)
|
|
Utilities
|
|
3M L + 14.00%, 3.00% PIK
|
|
|
1.00
|
%
|
|
|
10/9/2020
|
|
|
|
15,037,500
|
|
|
|
14,809,248
|
|
|
|
7,518,750
|
|
|
|
4.43
|
%
|
|
Caelus Energy Alaska 03, LLC(4)
|
|
Oil and Gas
|
|
3M L + 7.50%
|
|
|
1.25
|
%
|
|
|
4/15/2020
|
|
|
|
26,000,000
|
|
|
|
24,147,353
|
|
|
|
22,100,000
|
|
|
|
13.00
|
%
|
|
Intermedia Holdings, Inc.(4)
|
|
Business Services
|
|
3M L + 9.50%
|
|
|
1.00
|
%
|
|
|
2/1/2025
|
|
|
|
5,000,000
|
|
|
|
4,903,645
|
|
|
|
4,900,000
|
|
|
|
2.88
|
%
|
|
International Wire Group, Inc.(6)
|
|
Metals and Mining
|
|
10.75%
|
|
|
—
|
|
|
|
8/1/2021
|
|
|
|
11,254,000
|
|
|
|
11,064,076
|
|
|
|
11,057,055
|
|
|
|
6.51
|
%
|
|
Lionbridge Technologies, Inc.(4)
|
|
Business Services
|
|
3M L + 9.75%
|
|
|
1.00
|
%
|
|
|
2/28/2025
|
|
|
|
12,000,000
|
|
|
|
11,768,297
|
|
|
|
11,760,000
|
|
|
|
6.92
|
%
|
|
Premiere Global Services, Inc.(4)
|
|
Business Services
|
|
3M L + 9.50%
|
|
|
1.00
|
%
|
|
|
6/6/2022
|
|
|
|
15,000,000
|
|
|
|
14,622,459
|
|
|
|
14,700,000
|
|
|
|
8.65
|
%
|
|
TNS, Inc.(6)
|
|
Telecommunications
|
|
1M L + 8.00%
|
|
|
1.00
|
%
|
|
|
8/14/2020
|
|
|
|
15,092,924
|
|
|
|
15,095,599
|
|
|
|
15,092,924
|
|
|
|
8.88
|
%
|
|
TouchTunes Interactive Networks, Inc.
|
|
Entertainment and Leisure
|
|
3M L + 8.25%
|
|
|
1.00
|
%
|
|
|
5/27/2022
|
|
|
|
7,000,000
|
|
|
|
6,973,432
|
|
|
|
7,000,000
|
|
|
|
4.12
|
%
|
|
Trident USA Health Services, LLC(4)
|
|
Healthcare-Products/Services
|
|
3M L + 9.50%
|
|
|
1.25
|
%
|
|
|
7/31/2020
|
|
|
|
21,878,286
|
|
|
|
21,807,281
|
|
|
|
17,065,063
|
|
|
|
10.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Senior Secured Second Lien Debt Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148,262,710
|
|
|
|
144,211,470
|
|
|
|
126,593,792
|
|
|
|
74.49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to
consolidated financial statements.
F-52
CM Finance Inc and subsidiaries
Consolidated Schedule of Investments (continued)
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments(1)
|
|
Industry
|
|
|
|
Maturity
Date
|
|
|
Principal
Amount/
Shares(2)
|
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
|
% of
Net
Assets
|
|
|
Equity, Warrants and Other
Investments(11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAR Intermediate Holdings, LLC (Equity Interest)
|
|
Oilfield Services
|
|
|
|
|
|
|
|
$
|
11,880
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
|
—
|
|
|
Endeavour International Holding B.V., $3.01 strike (Warrants)(7)
|
|
Oil and Gas
|
|
|
|
|
11/3/2017
|
|
|
|
160,000
|
|
|
|
160,000
|
|
|
|
80
|
|
|
|
—
|
|
|
PR Wireless, Inc., $0.01 strike (Warrants)
|
|
Telecommunications
|
|
|
|
|
6/24/2027
|
|
|
|
201
|
|
|
|
1,374,009
|
|
|
|
—
|
|
|
|
—
|
|
|
U.S. Well Services, LLC
|
|
Oilfield Services
|
|
Class A Units
|
|
|
|
|
|
|
2,519,434
|
|
|
|
1,221,256
|
|
|
|
1,129,744
|
|
|
|
0.66
|
%
|
|
|
|
|
|
Class B Units
|
|
|
|
|
|
|
920,856
|
|
|
|
—
|
|
|
|
79,573
|
|
|
|
0.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity, Warrants and Other Investments
|
|
|
|
|
|
|
|
|
|
|
3,612,371
|
|
|
|
2,755,265
|
|
|
|
1,209,398
|
|
|
|
0.71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Controlled/Non-Affiliates
|
|
|
|
|
|
|
|
|
|
$
|
284,389,446
|
|
|
$
|
270,467,740
|
|
|
$
|
254,907,171
|
|
|
|
149.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities in excess of other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(84,959,059
|
)
|
|
|
(49.99
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169,948,112
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industry
|
|
|
Interest
Rate
|
|
|
Maturity
Date
|
|
|
Notional
Amount
|
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
|
% of
Net
Assets
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivative -
Notes Payable(12)
|
|
|
Diversified Financial Services
|
|
|
|
|
|
|
|
|
|
|
$
|
102,000,000
|
|
|
$
|
—
|
|
|
$
|
5,830,501
|
|
|
|
3.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102,000,000
|
|
|
|
—
|
|
|
|
5,830,501
|
|
|
|
3.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return Swap(11)(12)
|
|
|
Diversified Financial Services
|
|
|
|
1M L + 2.75%
|
|
|
|
12/4/2018
|
|
|
|
102,000,000
|
|
|
|
—
|
|
|
|
(5,830,501
|
)
|
|
|
(3.43
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102,000,000
|
|
|
|
—
|
|
|
|
(5,830,501
|
)
|
|
|
(3.43
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
204,000,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
All investments are non-controlled and non-affiliated issuers. All investments are valued in good faith by the
board of directors.
|
|
(2)
|
Principal amount includes capitalized PIK interest.
|
|
(3)
|
Refer to Note 6 for more detail on the unfunded commitment.
|
|
(4)
|
Held by the Company indirectly through CM Finance SPV, Ltd. and pledged as collateral for the Total Return
Swaps.
|
|
(5)
|
Security, or a portion thereof, unsettled as of June 30, 2017.
|
|
(6)
|
Held by the Company indirectly through CM Finance SPV, LLC and pledged as collateral for the revolving credit
facility held through Citibank, N.A.
|
|
(7)
|
The investment is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940. The
Company may not acquire any non-qualifying asset unless, at the time of acquisition, qualifying assets represent at least 70% of the Company’s total assets. Non-qualifying assets represent 9.86% of total assets.
|
|
(8)
|
A portfolio company domiciled in the Netherlands. The jurisdiction of the security issuer may be a different
country than the domicile of the portfolio company.
|
|
(9)
|
Classified as non-accrual asset.
|
|
(10)
|
Includes 2.00% default rate.
|
|
(11)
|
Securities are non-income producing.
|
|
(12)
|
Refer to Note 5 for more detail on the Total Return Swaps and the Embedded derivatives - Notes Payable.
|
|
|
|
1M L – 1 month LIBOR (1.22% as of June 30, 2017)
|
|
3M L – 3 month LIBOR (1.30% as of June 30, 2017)
|
|
PIK – Payment-In-Kind
See notes to consolidated financial statements.
|
F-53
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 1. Organization
CM Finance Inc (“CMFN” or the “Company”), a Maryland corporation formed in May 2013, is a closed-end, externally managed,
non-diversified management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), and has elected to be treated as a
regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code (the “Code”) for U.S. federal income tax purposes. The Company is an investment company and accordingly follows the investment company
accounting and reporting guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification Topic 946 Financial Services – Investment Companies.
On February 11, 2014, the Company completed its initial public offering (the “Offering”), selling 7,666,666 shares of its common stock, par
value $0.001, including the underwriters’ over-allotment, at a price of $15.00 per share with net proceeds of approximately $111.5 million.
CM
Finance LLC, a Maryland limited liability company, commenced operations in March 2012. Immediately prior to the Offering, CM Finance LLC was merged with and into the Company (the “Merger”). In connection with the Merger, the Company issued
6,000,000 shares of common stock and $39.8 million in debt to the pre-existing CM Finance LLC investors, consisting of funds managed by Cyrus Capital Partners, L.P. (the “Original Investors” or the “Cyrus Funds”). The Company had
no assets or operations prior to completion of the Merger and, as a result, the books and records of CM Finance LLC became the books and records of the Company, as the surviving entity. Immediately after the Merger, the Company issued 2,181,818
shares of its common stock to Stifel Venture Corp. in exchange for $32.7 million in cash. The Company used all of the proceeds of the sale of shares to Stifel (“Stifel”), to repurchase 2,181,818 shares of common stock from the Original
Investors. Immediately after the completion of the Offering, the Company had 13,666,666 shares outstanding. The Company used a portion of the net proceeds of the Offering to repay 100% of the debt issued to the Original Investors in connection with
the Merger.
Upon its election to be regulated as a BDC on February 5, 2014, the Company entered into an investment advisory agreement (the
“Advisory Agreement”) and an administrative agreement with CM Investment Partners LLC (the “Adviser”) as its investment adviser and administrator, respectively.
The Company’s primary investment objective is to maximize total return to stockholders in the form of current income and capital appreciation by
investing directly in debt and related equity of privately held middle- market companies to help these companies fund acquisitions, growth or refinancing. The Company invests primarily in middle-market companies in the form of unitranche loans,
standalone first and second lien and mezzanine loans. The Company may also invest in unsecured debt, bonds and in the equity of portfolio companies through warrants and other instruments.
As a BDC, the Company is required to comply with certain regulatory requirements. For instance, as a BDC, the Company must not acquire any assets other than
“qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of total assets are qualifying assets. Qualifying assets include investments in “eligible portfolio companies.” Under the
relevant Securities and Exchange Commission (“SEC”) rules, the term “eligible portfolio company” includes all private operating companies, operating companies whose securities are not listed on a national securities exchange, and
certain public operating companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million, in each case organized and with their principal of business in the United States.
F-54
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 1. Organization – (continued)
On September 23, 2014, the Company formed CM Portfolio Companies LLC, a wholly owned and consolidated taxable subsidiary.
The Company has formed certain additional taxable subsidiaries (collectively, the “Taxable Subsidiaries”), which are taxed as corporations for
federal income tax purposes. At June 30, 2018, the Company had four Taxable Subsidiaries: CM Portfolio Companies LLC, Bird Electric Blocker, LLC, U.S. Well Services Blocker, LLC and Zinc Borrower Blocker, LLC. These Taxable Subsidiaries allow
the Company to hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements applicable to a RIC under the Code.
Note 2. Significant Accounting Policies
The following is
a summary of significant accounting policies followed by the Company.
a. Basis of Presentation
The accompanying consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and
all values are stated in U.S. dollars, unless noted otherwise. The financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the periods included herein as required by
U.S. GAAP. These adjustments are normal and recurring in nature.
The preparation of consolidated financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the fair value of investments and other amounts reported in the consolidated financial statements and accompanying notes. Management believes that the estimates utilized in preparing
the Company’s consolidated financial statements are reasonable and prudent. Actual results could differ materially from these estimates. All material inter-company balances and transactions have been eliminated.
As permitted under Regulation S-X and ASC Topic 946, the Company will generally not consolidate its investment in a portfolio company other than an investment
company subsidiary or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company consolidated the results of the Company’s wholly-owned subsidiaries, CM Finance SPV Ltd.
(“SPV”) and CM Finance SPV LLC (“LLC”), which are special purpose vehicles used to finance certain investments, and CM Portfolio Companies LLC, Bird Electric Blocker, LLC, U.S. Well Services Blocker, LLC and Zinc Borrower
Blocker, LLC in its consolidated financial statements. All intercompany balances and transactions have been eliminated.
b. Revenue Recognition,
Security Transactions, and Realized/Unrealized Gains or Losses
Interest income, adjusted for amortization of premium and accretion of discount, is
recorded on an accrual basis. Origination, closing, commitment, and amendment fees, purchase and original issue discounts associated with loans to portfolio companies are accreted into interest income over the respective terms of the applicable
loans. Accretion of discounts or premiums is calculated by the effective interest or straight-line method, as applicable, as of the purchase date and adjusted only for material amendments or prepayments. Upon the prepayment of a loan or debt
security, any prepayment penalties are included in other fee income and unamortized fees and discounts are recorded as interest income and are non-recurring in nature.
F-55
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 2. Significant Accounting Policies – (continued)
Loans are placed on non-accrual status when principal or interest payments are past due 90 days or more or when there is reasonable doubt that principal or
interest will be collected. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s
judgment about ultimate collectability of principal. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current.
Dividend income is recorded on the ex-dividend date.
Origination, closing, commitment, and amendment fees, purchase and original issue discounts associated with loans to portfolio companies are accreted into
interest income over the respective terms of the applicable loans. Accretion of discounts or premiums is calculated by the effective interest or straight-line method, as applicable, as of the purchase date and adjusted only for material amendments
or prepayments. Upon the prepayment of a loan or debt security, any prepayment penalties and unamortized fees and discounts are recorded as interest income and are non-recurring in nature. During the twelve months ended June 30,
2018, June 30, 2017 and June 30, 2016, $2,839,313, $3,015,154 and $1,067,639 of prepayment penalties and unamortized discounts upon prepayment were recorded as interest income, respectively.
Investment transactions are accounted for on a trade-date basis. Realized gains or losses on investments are determined by calculating the difference between
the net proceeds from the disposition and the amortized cost basis of the investments, without regard to unrealized gains or losses previously recognized. Realized gains or losses on the sale of investments are calculated using the specific
identification method. The Company reports changes in fair value of investments as a component of the net change in unrealized appreciation (depreciation) on investments in the Consolidated Statements of Operations.
Management reviews all loans that become 90 days or more past due on principal or interest or when there is reasonable doubt that principal or interest will
be collected for possible placement on non-accrual status. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal
depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current, although management
may make exceptions to this general rule if the loan has sufficient collateral value and is in the process of collection.
The Company may hold debt
investments in its portfolio that contain a payment-in-kind (“PIK”) interest provision. PIK interest, which represents contractually deferred interest added to the investment balance that is generally due at maturity, is recorded on an
accrual basis to the extent that such amounts are expected to be collected. PIK interest is not accrued if the Company does not expect the issuer to be able to pay all principal and interest when due. The Company earned PIK interest of $2,609,037,
$423,632 and $960,603 during the twelve months ended June 30, 2018, June 30, 2017 and June 30, 2016, respectively.
The Company may
hold equity investments in its portfolio that contain a PIK dividend provision. PIK dividends, which represents contractual dividend payments added to the investment balance, is recorded on an accrual basis to the extent that such amounts are
expected to be collected. The Company earned PIK dividends of $333,333 during the twelve months ended June 30, 2018. The Company earned no PIK dividends during the twelve months ended June 30, 2017 and June 30, 2016.
F-56
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 2. Significant Accounting Policies – (continued)
c. Paid In Capital
The Company records the proceeds from
the sale of its common stock to common stock and additional paid-in capital, after all commissions and marketing support fees.
d. Net Increase in Net
Assets Resulting from Operations per Share
The net increase in net assets resulting from operations per share is calculated based upon the weighted
average number of shares of common stock outstanding during the reporting period.
e. Distributions
Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount to be paid out as a dividend or distribution is generally
determined by the board of directors each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are generally distributed annually, although the Company may decide to retain such capital gains
for investment.
The Company has adopted a dividend reinvestment plan that provides for reinvestment of any distributions the Company declares in cash on
behalf of the Company’s stockholders, unless a stockholder elects to receive cash. As a result, if the Company’s board of directors authorizes, and the Company declares, a cash distribution, then the Company’s stockholders who have
not “opted out” of the Company’s dividend reinvestment plan will have their cash distributions automatically reinvested in additional shares of the Company’s common stock, rather than receiving the cash distribution.
f. Cash and Restricted Cash
Cash and restricted cash
consist of bank demand deposits. The Company deposits its cash in financial institutions and, at times, such balance may be in excess of the Federal Deposit Insurance Corporation insurance limits. All of the Company’s cash deposits are held at
large established high credit quality financial institutions and management believes that the risk of loss associated with any uninsured balances is remote. The Company has restrictions on the uses of the cash held by SPV and LLC based on the terms
of the Notes Payable. For more information on the Notes Payable, see Note 5.
g. Deferred Offering Costs
Deferred offering costs consist of fees and expenses incurred in connection with the offer and sale of the Company’s common stock and bonds, including
legal, accounting, printing fees and other related expenses, as well as costs incurred in connection with the filing of a shelf registration statement. These costs are capitalized when incurred and recognized as a reduction of offering proceeds when
the offering becomes effective.
h. Investment Transactions and Expenses
Purchases of loans, including revolving credit agreements, are recorded on a fully committed basis until the funded and unfunded portions are known or
estimable, which in many cases may not be until settlement.
Expenses are accrued as incurred.
F-57
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 2. Significant Accounting Policies – (continued)
Deferred debt issuance costs, incurred in connection with the Company’s Notes Payable, are amortized using the straight line method over the life of the
notes.
Offering costs were charged to paid-in capital upon sale of shares in the Offering.
i. Investment Valuation
The Company applies fair value
accounting to all of its financial instruments in accordance with the 1940 Act and ASC Topic 820 – Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework used to measure fair value and
requires disclosures for fair value measurements. In accordance with ASC 820, the Company has categorized its investments and financial instruments carried at fair value, based on the priority of the valuation technique, into a three-level fair
value hierarchy as discussed in Note 4. Fair value is a market-based measure considered from the perspective of the market participant who holds the financial instrument rather than an entity specific measure. Therefore, when market assumptions
are not readily available, the Company’s own assumptions are set to reflect those that management believes market participants would use in pricing the financial instrument at the measurement date.
Fair value is defined as the price that would be received upon a sale of an asset in an orderly transaction between market participants at the measurement
date. Market participants are buyers and sellers in the principal (or most advantageous) market for the asset that (a) are independent of us, (b) are knowledgeable, having a reasonable understanding about the asset based on all available
information (including information that might be obtained through due diligence efforts that are usual and customary), (c) are able to transact for the asset, and (d) are willing to transact for the asset or liability (that is, they are
motivated but not forced or otherwise compelled to do so).
Securities that are traded on securities exchanges (including such securities traded in the
after hour’s market) are valued on the basis of the closing price on the valuation date (if such prices are available). Securities that are traded on more than one securities exchange are valued at the closing price on the primary securities
exchange on which such securities are traded on the valuation date (or if reported on the consolidated tape, then their last sales price on the consolidated tape). Listed options for which the last sales price falls between the last “bid”
and “ask” prices for such options are valued at their last sales price on the date of the valuation on the primary securities exchange on which such options are traded. Options for which the last sales price on the valuation date does not
fall between the last “bid” and “ask” prices are valued at the average of the last “bid” and “ask” prices for such options on that date. To the extent these securities are actively traded, and valuation
adjustments are not applied, they are categorized in Level 1 of the fair value hierarchy. The Company did not hold any Level 1 investments as of June 30, 2018 or June 30, 2017.
Investments that are not traded on securities exchanges but are traded on the over-the-counter (“OTC”) markets (such as term loans, notes and
warrants) are valued using various techniques, which may consider recently executed transactions in securities of the issuer or comparable issuers, market price quotations (when observable) and fundamental data relating to the issuer. These
investments are categorized in Level 2 of the fair value hierarchy, or in instances when lower relative weight is placed on transaction prices, quotations, or similar observable inputs, they are categorized in Level 3.
The embedded derivative in the Term Notes and the 2017 Revolving Notes (as defined in Note 5) payable from SPV to UBS AG, London Branch (together with its
affiliates, “UBS”) and total return swaps referencing the terms of the Term Notes payable and the total return of the 2017 Revolving Notes referencing the 2017 Revolving Notes (together, the “TRS”) are valued based on the change
in fair value and the underlying accrued
F-58
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 2. Significant Accounting Policies – (continued)
interest of the portfolio of assets held in SPV less the accrued interest payable on the financing due to the TRS counterparty, UBS. Consideration has been
given to counterparty risk. The Company has assessed the unsecured risk of the counterparty, UBS, in the form of credit ratings and the trading levels of that risk and has determined that the counterparty risk is minimal. The Company also notes that
counterparty risk is further mitigated by the monthly settlement of both the interest portion of the embedded derivative referencing the Term Notes and the 2017 Revolving Notes payable and the TRS. If the Company were to determine that counterparty
risk were material, an adjustment to the fair value of the TRS would be made. The embedded derivative in the Term Notes and the 2017 Revolving Notes payable and the TRS have been categorized in Level 3 of the fair value hierarchy. See Note 4 and
Note 5 for more detail.
Investments for which market quotations are not readily available or may be considered unreliable are fair valued, in good faith,
using a method determined to be appropriate in the given circumstances. The valuation methods used include the Cost Approach, the Market Approach and the Income Approach. Inputs used in these approaches may include, but are not limited to, interest
rate yield curves, credit spreads, recovery rates, comparable company transactions, trading multiples, and volatilities. The valuation method of the Company may change as changes in the underlying company dictates, such as moving from the Cost
Approach to Market Approach when underlying conditions change at the company. Because of the inherent uncertainty of valuation in these circumstances, the fair values for the aforementioned investments may differ significantly from values that would
have been used had a ready and liquid market for such investments existed or from the amounts that might ultimately be realized, and such differences could be material.
The Company’s valuation policies and procedures are developed by the Adviser, which is also responsible for ensuring that the valuation policies and
procedures are consistently applied across all investments of the Company, and approved by the Company’s board of directors. The valuations are continuously monitored and the valuation process for Level 3 investments is completed on a quarterly
basis and is designed to subject the valuation of Level 3 investments to an appropriate level of consistency, oversight and review. The valuation process begins with each portfolio company or investment being initially valued by the investment
professionals of the Adviser responsible for the portfolio investment. These investment professionals prepare the preliminary valuations based on their evaluation of financial and operating data, company specific developments, market valuations of
comparable securities from the same company or that of comparable companies as well as any other relevant factors including recent purchases and sales that may have occurred preceding month-end.
Valuation models are typically calibrated upon initial funding, and are re-calibrated as necessary upon subsequent material events (including, but not limited
to additional financing activity, changes in comparable companies, and recent trades). The preliminary valuation conclusions are then documented and discussed with senior management of the Adviser. On a periodic basis and at least once annually,
independent valuation firm(s) engaged by the Company conduct independent appraisals and review the Adviser’s preliminary valuations and make their own independent assessment. The Valuation Committee of the Company’s board of directors then
reviews the preliminary valuations of the Adviser and that of the independent valuation firms. The Valuation Committee discusses the valuations and makes a recommendation to the Company’s board of directors regarding the fair value of each
investment in good faith based on the input of the Adviser and the independent valuation firms. Upon recommendation by the Valuation Committee and a review of the valuation materials of the Adviser and the third party independent valuation firms,
the board of directors of the Company determines, in good faith, the fair value of each investment.
For more information on the classification of the
Company’s investments by major categories, see Note 4.
F-59
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 2. Significant Accounting Policies – (continued)
The fair value of the Company’s assets and liabilities that qualify as financial instruments under U.S. GAAP approximates the carrying amounts presented
in the Consolidated Statements of Assets and Liabilities.
j. Income Taxes
The Company has elected to be treated, for U.S. federal income tax purposes, as a RIC under Subchapter M of the Code. To qualify and maintain qualification as
a RIC, the Company must, among other things, meet certain source of income and asset diversification requirements and distribute to stockholders, for each taxable year, at least 90% of the Company’s “investment company taxable
income’’ which is generally the Company’s net ordinary income plus the excess, if any, of realized net short-term capital gains over realized net long-term capital losses. If the Company continues to qualify as a RIC and continues to
satisfy the annual distribution requirement, the Company will not have to pay corporate level federal income taxes on any income that the Company distributes to its stockholders. The Company intends to make distributions in an amount sufficient to
maintain RIC status each year and to avoid any federal income taxes on income. The Company will also be subject to nondeductible federal excise taxes if the Company does not distribute to its stockholders at least 98% of net ordinary income, 98.2%
of capital gains, if any, and any recognized and undistributed income from prior year for which it paid no federal income taxes. Additionally, certain of the Company’s consolidated subsidiaries are subject to U.S. federal and state income
taxes. For the twelve months ended June 30, 2018, June 30, 2017 and June 30, 2016, the Company recorded a provision for taxes of $2,579,337, $0 and $0, respectively, for U.S. federal and state income taxes related to Taxable Subsidiaries,
respectively.
Book and tax basis differences that are permanent differences are reclassified among the Company’s capital accounts, as appropriate at
year-end. Additionally, the tax character of distributions is determined in accordance with the Code, which differs from U.S. GAAP. During the year ended June 30, 2018, June 30, 2017 and June 30, 2016, the Company recorded
distributions of $13.7 million, $16.5 million and $20.6 million, respectively. The tax character of a portion of these distributions may be return of capital.
U.S. GAAP requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine
whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet a more-likely-than-not threshold would be recorded as a tax expense in the current year. The
Company’s policy is to recognize accrued interest and penalties associated with uncertain tax positions as part of the tax provision.
The Company
has analyzed such tax positions and has concluded that no unrecognized tax benefits should be recorded for uncertain tax positions for any tax year since inception. Each of the tax years since inception remains subject to examination by taxing
authorities. This conclusion may be subject to review and adjustment at a later date based on factors, including but not limited to, ongoing analysis and changes to laws, regulations, and interpretations thereof.
Permanent differences between investment company taxable income and net investment income for financial reporting purposes are reclassified among capital
accounts in the financial statements to reflect their tax character. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. During the years ended June 30,
2018, June 30, 2017 and June 30, 2016, the Company
F-60
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 2. Significant Accounting Policies – (continued)
reclassified for book purposes amounts arising from permanent book/tax differences related to the different tax treatment of paydown gains and losses, and
income/(loss) from wholly owned subsidiaries as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
Additional paid-in capital
|
|
$
|
—
|
|
|
$
|
(742,700
|
)
|
|
$
|
179,708
|
|
|
Distributions in excess of net investment income
|
|
|
—
|
|
|
|
165,192
|
|
|
|
(562,692
|
)
|
|
Accumulated net realized gain (loss)
|
|
|
—
|
|
|
|
577,508
|
|
|
|
382,984
|
|
The tax character of all distributions paid by the Company during the years ended June 30, 2018, June 30, 2017
and June 30, 2016 were ordinary income.
At June 30, 2018, June 30, 2017 and June 30, 2016, the components of distributable
earnings on a tax basis detailed below differ from the amounts reflected in the Company’s Consolidated Statement of Assets and Liabilities by temporary and other book/tax differences, primarily relating to the tax treatment of dividends payable
and non-deductible incentive fee income unvested, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
Undistributed net investment income
|
|
$
|
7,140,649
|
|
|
$
|
1,314,066
|
|
|
$
|
3,342,241
|
|
|
Accumulated capital gains (losses) and other
|
|
|
(2,474,763
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Capital loss carryover
|
|
|
(18,612,517
|
)
|
|
|
(11,231,827
|
)
|
|
|
—
|
|
|
Unrealized appreciation (depreciation)
|
|
|
(9,055,269
|
)
|
|
|
(17,062,588
|
)
|
|
|
(36,010,159
|
)
|
|
Distributions payable
|
|
|
(3,417,848
|
)
|
|
|
(3,422,307
|
)
|
|
|
(4,809,778
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of tax distributable earnings at year end
|
|
$
|
(26,419,748
|
)
|
|
$
|
(30,402,656
|
)
|
|
$
|
(37,477,696
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For tax purposes, net realized capital losses may be carried over to offset future capital gains, if any. These capital losses
can be carried forward for an indefinite period, and will retain their character as either short-term or long-term capital losses. As of June 30, 2018, the Company had a net short-term capital loss carryforward of $1,068,849 and a net long-term
capital loss carryforward of $17,543,668 available to be carried forward for an indefinite period.
A RIC may elect to defer any capital losses incurred
after October 31, 2017 (“post-October”) to the beginning of the following fiscal year. As of June 30, 2018, the Company had a post-October short-term capital loss deferral of $202,160 and a post-October long-term capital loss
deferral of $2,272,603. These losses are deemed to arise on July 1, 2018.
In addition, as of June 30, 2018, June 30, 2017, and
June 30, 2016, the wholly owned taxable subsidiary, CM Portfolio Companies LLC recorded a deferred tax asset and a corresponding valuation allowance of approximately $172,769, $557,059 and $557,059, respectively.
k. Capital Gains Incentive Fee
Under U.S. GAAP, the
Company calculates the capital gains incentive fee payable to the Adviser as if the Company had realized all investments at their fair values as of the reporting date. Accordingly, the Company
F-61
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 2. Significant Accounting Policies – (continued)
accrues a provisional capital gains incentive fee taking into account any unrealized gains or losses. As the provisional capital gains incentive fee is subject
to the performance of investments until there is a realization event, the amount of provisional capital gains incentive fee accrued at a reporting date may vary from the incentive fee that is ultimately realized and the differences could be
material.
The cost basis used to compute gains and losses for the purpose of determining incentive fees is the fair value of the Company’s
investment on February 5, 2014, at the time the Company priced its Offering.
As of June 30, 2018, June 30, 2017 and June 30,
2016, there was no capital gains incentive fee payable to the Adviser under the Advisory Agreement.
l. Share Repurchase Program
On May 2, 2018, the Company’s board of directors authorized a new discretionary repurchase program of up to $5.0 million shares of our common
stock, until the earlier of (i) May 1, 2019 or (ii) the repurchase of $5.0 million in aggregate amount of the common stock. Under the discretionary repurchase program, the Company may, but is not obligated to, repurchase the
outstanding common stock from time to time in the open market provided that the Company complies with the prohibitions under its insider trading policies and procedures and the applicable provisions the Securities Exchange Act of 1934, as amended.
In addition, any repurchases will be conducted in accordance with the 1940 Act. The timing and number of shares to be repurchased will depend on a number of factors, including market conditions and alternative investment opportunities and no
assurances can be given that any common stock, or any particular amount, will be purchased. The Company will retire immediately all shares of common stock that are purchased in connection with the share repurchase program. During the period ended
June 30, 2018, the Company repurchased 42,627 shares of common stock on the open market for $390,178 (including commissions). Refer to Note 11 for additional information concerning share repurchases.
Note 3. Recent Accounting Pronouncements
From time to
time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by the Company as of the specified effective date. The Company believes that the impact of recently issued standards that are not yet
effective will not have a material impact on its financial statements upon adoption.
In November 2016, the FASB issued Accounting Standards Update
(“ASU”) 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which requires that the statements of cash flows explain the change during the period in the total of cash, cash equivalents,
and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the
beginning-of-period and end-of-period total amounts shown on the statements of cash flows. The new guidance is effective for annual and interim periods, beginning after December 15, 2017, and early adoption is permitted and is to be applied on
a retrospective basis. Management is currently evaluating the impact ASU 2016-18 will have on the Company’s consolidated financial statements and disclosures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (“ASU
2016-15”), which is intended to reduce the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for annual periods beginning after
December 15, 2017, and interim periods
F-62
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 3. Recent Accounting Pronouncements – (continued)
therein. Early adoption is permitted. Management is currently evaluating the impact ASU 2016-15 will have on the Company’s consolidated financial
statements and disclosures.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the
revenue recognition requirements in Revenue Recognition (Topic 605). In 2016, the FASB issued additional guidance which clarified, amended, and technically corrected prior guidance. Under the new guidance, an entity should recognize revenue to
depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In May 2016, ASU 2016-12 amended ASU 2014-09 and deferred
the effective period to annual periods beginning after December 15, 2017, and interim periods therein. Early adoption is permitted. Management is currently evaluating the impact these changes will have on the Company’s consolidated
financial statements and disclosures.
In October 2016, the U.S. Securities and Exchange Commission (“SEC”) adopted new rules and amended rules
(together “final rules”) intended to modernize the reporting and disclosures of information by registered investment companies. In part, the final rules amend Regulation S-X and require standardized, enhanced disclosure about derivatives
in investment company financial statements, as well as other amendments. The compliance date for the amendments to Regulation S-X was August 1, 2017. The Company has adopted the final rules, as applicable, and the revised presentation is
reflected in the Company’s consolidated financial statements for the periods presented.
Note 4. Investments
The Company’s investments at any time may include securities and other financial instruments, including, without limitation, corporate and government
bonds, convertible securities, collateralized loan obligations, term loans, trade claims, equity securities, privately negotiated securities, direct placements, working interests, warrants and investment derivatives (such as credit default swaps,
recovery swaps, total return swaps, options, forward contracts, and futures) (all of the foregoing collectively referred to in these financial statements as “investments”).
a. Certain Risk Factors
In the ordinary course of
business, the Company manages a variety of risks including market risk, liquidity risk and credit risk. The Company identifies, measures and monitors risk through various control mechanisms, including trading limits and diversifying exposures and
activities across a variety of instruments, markets and counterparties.
Market risk is the risk of potential adverse changes to the value of financial
instruments because of changes in market conditions, including as a result of changes in the credit quality of a particular issuer, credit spreads, interest rates, and other movements and volatility in security prices or commodities. In particular,
the Company may invest in issuers that are experiencing or have experienced financial or business difficulties (including difficulties resulting from the initiation or prospect of significant litigation or bankruptcy proceedings), which involves
significant risks. The Company manages its exposure to market risk through the use of risk management strategies and various analytical monitoring techniques.
F-63
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 4. Investments – (continued)
The Company’s assets may, at any time, include securities and other financial instruments or obligations that are illiquid or thinly traded, making
purchase or sale of such securities and financial instruments at desired prices or in desired quantities difficult. Furthermore, the sale of any such investments may be possible only at substantial discounts, and it may be extremely difficult to
value any such investments accurately.
Credit risk is the potential loss the Company may incur from a failure of an issuer to make payments according to
the terms of a contract. The Company is subject to credit risk because of its strategy of investing in the debt of leveraged companies and its involvement in derivative instruments. The Company’s exposure to credit risk on its investments is
limited to the fair value of the investments. The Company’s TRS contract is executed pursuant to an International Swaps and Derivatives Association (“ISDA”) master agreement (the “ISDA Agreement”) that the Company currently
has in place with UBS. At June 30, 2018 and June 30, 2017, the Company had all of its counterparty credit risk associated with non-performance for swaps with UBS. With regard to derivatives, the Company attempts to limit its credit risk by
considering its counterparty’s (or its guarantor’s) credit rating. The Company’s policy is to not hold counterparty collateral on ISDA Agreements, but would do so if the exposure were material.
b. Investments
Investment purchases, sales and principal
payments/paydowns are summarized below for the twelve months ended June 30, 2018, June 30, 2017 and June 30, 2016, respectively. These purchase and sale amounts exclude derivative instruments as well as non cash restructurings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
June 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
Investment purchases, at cost (including PIK interest)
|
|
$
|
175,180,629
|
|
|
$
|
134,658,719
|
|
|
$
|
64,010,279
|
|
|
Investment sales and repayments
|
|
|
137,045,592
|
|
|
|
162,646,483
|
|
|
|
95,132,109
|
|
The composition of the Company’s investments as of June 30, 2018, as a percentage of the total portfolio, at
amortized cost and fair value, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment at
Amortized Cost
|
|
|
Percentage
|
|
|
Investments at
Fair Value
|
|
|
Percentage
|
|
|
Senior Secured First Lien Debt Investments
|
|
$
|
161,389,931
|
|
|
|
53.40
|
%
|
|
$
|
165,136,316
|
|
|
|
56.30
|
%
|
|
Senior Secured Second Lien Debt Investments
|
|
|
139,360,342
|
|
|
|
46.00
|
|
|
|
127,200,954
|
|
|
|
43.30
|
|
|
Unsecured Debt Investments
|
|
|
—
|
|
|
|
—
|
|
|
|
731,742
|
|
|
|
0.20
|
|
|
Equity, Warrants and Other Investments
|
|
|
1,897,009
|
|
|
|
0.60
|
|
|
|
523,001
|
|
|
|
0.20
|
|
|
Embedded derivative – Notes Payable
|
|
|
—
|
|
|
|
—
|
|
|
|
229,918
|
|
|
|
2.29
|
|
|
Total Return Swap
|
|
|
—
|
|
|
|
—
|
|
|
|
(229,918
|
)
|
|
|
(2.29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
302,647,282
|
|
|
|
100.00
|
%
|
|
$
|
293,592,013
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-64
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 4. Investments – (continued)
The composition of the Company’s investments as of June 30, 2017, as a percentage of the total portfolio, at amortized cost and fair value, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment at
Amortized Cost
|
|
|
Percentage
|
|
|
Investments at
Fair Value
|
|
|
Percentage
|
|
|
Senior Secured First Lien Debt Investments
|
|
$
|
123,501,005
|
|
|
|
45.66
|
%
|
|
$
|
127,103,981
|
|
|
|
49.86
|
%
|
|
Senior Secured Second Lien Debt Investments
|
|
|
144,211,470
|
|
|
|
53.32
|
|
|
|
126,593,792
|
|
|
|
49.66
|
|
|
Equity, Warrants and Other Investments
|
|
|
2,755,265
|
|
|
|
1.02
|
|
|
|
1,209,398
|
|
|
|
0.48
|
|
|
Embedded derivative – Notes Payable
|
|
|
—
|
|
|
|
—
|
|
|
|
5,830,501
|
|
|
|
2.29
|
|
|
Total Return Swap
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,830,501
|
)
|
|
|
(2.29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
270,467,740
|
|
|
|
100.00
|
%
|
|
$
|
254,907,171
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company adopted the Global Industry Classification Standard (“GICS”) codes to identify industry
groupings in 2018. The following tables shows the portfolio composition by industry grouping at fair value at June 30, 2018 by GICS codes and by the Company’s original industry classification:
|
|
|
|
|
|
|
|
|
|
|
Industry Classification (GICS)
|
|
Investments at
Fair Value
|
|
|
Percentage of
Total Portfolio
|
|
|
Professional Services
|
|
$
|
41,040,567
|
|
|
|
13.98
|
%
|
|
Hotels, Restaurants & Leisure
|
|
|
33,336,195
|
|
|
|
11.36
|
|
|
Energy Equipment & Services
|
|
|
32,196,779
|
|
|
|
10.97
|
|
|
Media
|
|
|
31,950,000
|
|
|
|
10.88
|
|
|
Commercial Services & Supplies
|
|
|
31,600,000
|
|
|
|
10.76
|
|
|
IT Services
|
|
|
28,009,599
|
|
|
|
9.54
|
|
|
Diversified Telecommunication Services
|
|
|
24,933,557
|
|
|
|
8.49
|
|
|
Oil, Gas & Consumable Fuels
|
|
|
24,180,000
|
|
|
|
8.24
|
|
|
Distributors
|
|
|
12,468,750
|
|
|
|
4.25
|
|
|
Health Care Providers & Services
|
|
|
11,312,696
|
|
|
|
3.85
|
|
|
Chemicals
|
|
|
8,023,000
|
|
|
|
2.73
|
|
|
Health Care Equipment & Supplies
|
|
|
7,499,250
|
|
|
|
2.55
|
|
|
Electronic Equipment
|
|
|
6,580,000
|
|
|
|
2.24
|
|
|
Wireless Telecommunication Services
|
|
|
461,620
|
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
293,592,013
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industry Classification (Original)
|
|
Investments at
Fair Value
|
|
|
Percentage of
Total Portfolio
|
|
|
Business Services
|
|
$
|
82,974,124
|
|
|
|
28.26
|
%
|
|
Entertainment and Leisure
|
|
|
40,336,195
|
|
|
|
13.74
|
|
|
Oilfield Services
|
|
|
32,196,780
|
|
|
|
10.97
|
|
|
Media
|
|
|
24,950,000
|
|
|
|
8.50
|
|
|
Oil and Gas
|
|
|
24,180,000
|
|
|
|
8.23
|
|
|
IT Services
|
|
|
23,009,599
|
|
|
|
7.84
|
|
|
Environmental Services
|
|
|
19,600,000
|
|
|
|
6.67
|
|
|
Healthcare-Products/Services
|
|
|
18,811,945
|
|
|
|
6.41
|
|
|
Trucking and Leasing
|
|
|
12,468,750
|
|
|
|
4.25
|
|
|
Chemicals
|
|
|
8,023,000
|
|
|
|
2.73
|
|
F-65
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 4. Investments – (continued)
|
|
|
|
|
|
|
|
|
|
|
Industry Classification (Original)
|
|
Investments at
Fair Value
|
|
|
Percentage of
Total Portfolio
|
|
|
Metals and Mining
|
|
$
|
6,580,000
|
|
|
|
2.24
|
%
|
|
Telecommunications
|
|
|
461,620
|
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
293,592,013
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
The following tables shows the portfolio composition by industry grouping at fair value at June 30, 2017 by GICS codes
and by the Company’s original industry classification:
|
|
|
|
|
|
|
|
|
|
|
Industry Classification (GICS)
|
|
Investments at
Fair Value
|
|
|
Percentage of
Total Portfolio
|
|
|
Hotels, Restaurants & Leisure
|
|
$
|
31,187,821
|
|
|
|
12.24
|
%
|
|
Diversified Telecommunication Services
|
|
|
25,942,231
|
|
|
|
10.18
|
|
|
Oil, Gas & Consumable Fuels
|
|
|
22,100,080
|
|
|
|
8.67
|
|
|
Health Care Providers & Services
|
|
|
21,045,063
|
|
|
|
8.26
|
|
|
IT Services
|
|
|
19,992,924
|
|
|
|
7.84
|
|
|
Energy Equipment & Services
|
|
|
17,594,035
|
|
|
|
6.90
|
|
|
Wireless Telecommunication Services
|
|
|
15,500,600
|
|
|
|
6.08
|
|
|
Media
|
|
|
15,400,000
|
|
|
|
6.04
|
|
|
Road & Rail
|
|
|
13,797,986
|
|
|
|
5.41
|
|
|
Commercial Services & Supplies
|
|
|
11,760,000
|
|
|
|
4.61
|
|
|
Electronic Equipment
|
|
|
11,057,055
|
|
|
|
4.34
|
|
|
Building Products
|
|
|
9,950,000
|
|
|
|
3.90
|
|
|
Distributors
|
|
|
9,203,126
|
|
|
|
3.61
|
|
|
Electric Utilities
|
|
|
7,518,750
|
|
|
|
2.95
|
|
|
Specialty Retail
|
|
|
7,437,500
|
|
|
|
2.92
|
|
|
Health Care Equipment & Supplies
|
|
|
7,425,000
|
|
|
|
2.91
|
|
|
Household Durables
|
|
|
7,000,000
|
|
|
|
2.75
|
|
|
Leisure Products
|
|
|
995,000
|
|
|
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
254,907,171
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industry Classification (Original)
|
|
Investments at
Fair Value
|
|
|
Percentage of
Total Portfolio
|
|
|
Business Services
|
|
$
|
42,602,231
|
|
|
|
16.71
|
%
|
|
Entertainment and Leisure
|
|
|
38,187,821
|
|
|
|
14.98
|
|
|
Telecommunications
|
|
|
30,593,524
|
|
|
|
12.00
|
|
|
Healthcare-Products/Services
|
|
|
28,470,063
|
|
|
|
11.17
|
|
|
Trucking and Leasing
|
|
|
23,001,112
|
|
|
|
9.02
|
|
|
Oil and Gas
|
|
|
22,100,080
|
|
|
|
8.67
|
|
|
Oilfield Services
|
|
|
17,594,035
|
|
|
|
6.90
|
|
|
Media
|
|
|
15,400,000
|
|
|
|
6.04
|
|
|
Metals and Mining
|
|
|
11,057,055
|
|
|
|
4.34
|
|
|
Construction & Building
|
|
|
9,950,000
|
|
|
|
3.91
|
|
|
Utilities
|
|
|
7,518,750
|
|
|
|
2.95
|
|
|
Retail
|
|
|
7,437,500
|
|
|
|
2.92
|
|
|
Consumer Products
|
|
|
995,000
|
|
|
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
254,907,171
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
F-66
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 4. Investments – (continued)
The following table shows the portfolio composition by geographic grouping at fair value at June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Percentage
Total Portfolio
|
|
|
U.S. West
|
|
$
|
74,078,950
|
|
|
|
25.23
|
%
|
|
U.S. Northeast
|
|
|
57,586,322
|
|
|
|
19.62
|
|
|
U.S. Southeast
|
|
|
53,203,880
|
|
|
|
18.12
|
|
|
U.S. Southwest
|
|
|
43,208,281
|
|
|
|
14.72
|
|
|
U.S. Midwest
|
|
|
29,251,885
|
|
|
|
9.96
|
|
|
International
|
|
|
24,950,000
|
|
|
|
8.50
|
|
|
U.S. Mid-Atlantic
|
|
|
11,312,695
|
|
|
|
3.85
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
293,592,013
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
The following table shows the portfolio composition by geographic grouping at fair value at June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Percentage
Total Portfolio
|
|
|
U.S. West
|
|
$
|
56,376,504
|
|
|
|
22.12
|
%
|
|
U.S. Southeast
|
|
|
48,867,831
|
|
|
|
19.17
|
|
|
U.S. Northeast
|
|
|
44,044,876
|
|
|
|
17.28
|
|
|
U.S. Southwest
|
|
|
32,844,487
|
|
|
|
12.88
|
|
|
U.S. Mid-Atlantic
|
|
|
32,157,987
|
|
|
|
12.62
|
|
|
U.S. Midwest
|
|
|
25,215,486
|
|
|
|
9.89
|
|
|
Europe
|
|
|
15,400,000
|
|
|
|
6.04
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
254,907,171
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
The Company’s primary investment objective is to maximize total return to stockholders in the form of current income and
capital appreciation by investing directly in debt and related equity of privately held middle- market companies to help these companies fund acquisitions, growth or refinancing. During the twelve months ended June 30, 2018, the Company made
investments in new and existing portfolio companies of approximately $43.0 million and $129.5 million, respectively, to which it was not previously contractually committed to provide financial support. During the twelve months ended
June 30, 2018, the Company made investments of $1.9 million in companies to which it was previously committed to provide financial support through the terms of the revolvers. The details of the Company’s investments have been disclosed on
the Consolidated Schedule of Investments.
c. Derivatives
Derivative contracts include total return swaps and embedded derivatives in Notes Payable. The Company enters into derivative contracts as part of its
investment strategies.
The Company and UBS entered into two TRS transactions whereby the Company will receive the total return of the Term Notes and the
Revolving Notes (as defined in Note 5) purchased by UBS and pay the Financing Rate and the Revolver Financing Rate (both as defined in Note 5). Therefore, amounts required for the future satisfaction of the swaps may be greater or less than the
amount recorded. Realized and change in unrealized gains and losses on total return swaps, if any, are included in the net realized gain or loss on derivative, and net change in unrealized appreciation (depreciation) on derivative in the
Consolidated Statements of Operations. On December 5, 2016, the TRS on the Revolving Notes expired.
F-67
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 4. Investments – (continued)
In connection with the TRS transactions, the Company entered into an ISDA Agreement with UBS. The ISDA Agreement includes provisions for general obligations,
representations, collateral and events of default or termination. Under an ISDA Agreement, the Company typically may offset with the counterparty certain derivative payable and/or receivable with collateral held and/or posted and create one single
net payment (close-out netting) in the event of default or termination.
The Company’s ISDA Agreement may contain provisions for early termination of
OTC derivative transactions in the event the net assets of the Company decline below specific levels (“net asset contingent features”). If these levels are triggered, the Company’s counterparty has the right to terminate such
transaction and require the Company to pay or receive a settlement amount in connection with the terminated transaction.
The Company has determined that
the Term Notes payable from SPV to UBS related to the Term Financing (discussed further in Note 5) contains an embedded derivative. SPV is obligated to pay UBS the net appreciation (depreciation) of the SPV Assets, as defined below, as well as pay
any income generated by the SPV Assets until maturity. Therefore, amounts required for the future satisfaction of the note may be greater or less than the amount recorded. Realized and change in unrealized gains and losses on the embedded derivative
is included in the net realized gain or loss on derivatives, and net change in unrealized appreciation (depreciation) on derivative in the Consolidated Statements of Operations.
The following table reflects the fair value and notional amount or number of contracts of the Company’s derivative contracts, none of which were
designated as hedging instruments under U.S. GAAP, which are presented on a gross basis, at June 30, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Notional
|
|
|
Contracts
|
|
|
Credit Risk:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return Swaps
|
|
$
|
—
|
|
|
$
|
229,918
|
|
|
$
|
152,000,000
|
|
|
|
2
|
|
|
Embedded derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes Payable
|
|
|
229,918
|
|
|
|
—
|
|
|
|
152,000,000
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross fair value of derivative contracts
|
|
|
229,918
|
|
|
|
229,918
|
|
|
|
|
|
|
|
|
|
|
Counterparty netting
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net fair value of derivative contracts
|
|
|
229,918
|
|
|
|
229,918
|
|
|
|
|
|
|
|
|
|
|
Collateral not offset
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount
|
|
$
|
229,918
|
|
|
$
|
229,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-68
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 4. Investments – (continued)
The following table reflects the fair value and notional amount or number of contracts of the Company’s derivative contracts, none of which were
designated as hedging instruments under U.S. GAAP, which are presented on a gross basis, at June 30, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Notional
|
|
|
Contracts
|
|
|
Credit Risk:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return Swaps
|
|
$
|
—
|
|
|
$
|
5,830,501
|
|
|
|
102,000,000
|
|
|
|
1
|
|
|
Embedded derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes Payable
|
|
|
5,830,501
|
|
|
|
—
|
|
|
|
102,000,000
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross fair value of derivative contracts
|
|
|
5,830,501
|
|
|
|
5,830,501
|
|
|
|
|
|
|
|
|
|
|
Counterparty netting
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net fair value of derivative contracts
|
|
|
5,830,501
|
|
|
|
5,830,501
|
|
|
|
|
|
|
|
|
|
|
Collateral not offset
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount
|
|
$
|
5,830,501
|
|
|
$
|
5,830,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table reflects the amount of gains (losses) on derivatives included in the Consolidated Statements of Operations
for the twelve months ended June 30, 2018, June 30, 2017 and June 30, 2016, respectively. None of the derivatives were designated as hedging instruments under U.S. GAAP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net change in unrealized appreciation
(depreciation) on investments and derivatives
|
|
|
|
|
June 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
Total Return Swaps
|
|
$
|
(5,600,583
|
)
|
|
$
|
(3,241,158
|
)
|
|
$
|
(7,225,891
|
)
|
|
Embedded derivatives Notes Payable
|
|
|
5,600,583
|
|
|
|
3,241,158
|
|
|
|
7,225,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
d. Fair Value Measurements
ASC 820 defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market
participants at the measurement date. ASC 820 also establishes a framework for measuring fair value and a valuation hierarchy that prioritizes the inputs used in the valuation of an asset or liability based upon their transparency. The valuation
hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Classification within the hierarchy is based upon the lowest
level of input that is significant to the fair value measurement. The Company’s assets and liabilities measured at fair value have been classified in the following three categories:
Level 1 – valuation is based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to
access at the measurement date.
Level 2 – valuation is based on inputs other than quoted prices included within Level 1 that are observable for
the asset or liability, either directly or indirectly, such as (a) quoted prices for similar assets or liabilities in active markets; (b) quoted prices for identical or similar assets or liabilities in markets that are not active, that is,
markets in which there are few transactions for the asset or liability, the prices are not current, or price quotations
F-69
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 4. Investments – (continued)
vary substantially either over time or among market makers, or in which little information is released publicly; (c) inputs other than quoted prices that
are observable for the asset or liability; or (d) inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 – valuation is based on unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that
observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. However, the fair value measurement objective remains the same, that is, an
exit price from the perspective of a market participant that holds the asset or owes the liability. Therefore, unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the
asset or liability, including assumptions about risk. Unobservable inputs are developed based on the best information available under the circumstances, which might include the Company’s own data. The Company’s own data used to develop
unobservable inputs is adjusted if information is reasonably available without undue cost and effort that indicates that market participants would use different assumptions.
The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of
security, whether the security is new and not yet established in the marketplace, the liquidity of the market and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or
unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
Estimates of fair value for cash and restricted cash are measured using observable, quoted market prices, or Level 1 inputs. All other fair value
significant estimates are measured using unobservable inputs, or Level 3 inputs.
The following table summarizes the classifications within the fair value
hierarchy of the Company’s assets and liabilities measured at fair value as of June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured First Lien Debt Investments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
165,136,316
|
|
|
$
|
165,136,316
|
|
|
Senior Secured Second Lien Debt Investments
|
|
|
—
|
|
|
|
—
|
|
|
|
127,200,954
|
|
|
|
127,200,954
|
|
|
Unsecured Debt Investment
|
|
|
—
|
|
|
|
—
|
|
|
|
523,001
|
|
|
|
523,001
|
|
|
Equity, Warrants and Other Investments
|
|
|
—
|
|
|
|
—
|
|
|
|
731,742
|
|
|
|
731,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
|
—
|
|
|
|
—
|
|
|
|
293,592,013
|
|
|
|
293,592,013
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivative Notes Payable
|
|
|
—
|
|
|
|
—
|
|
|
|
229,918
|
|
|
|
229,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
229,918
|
|
|
|
229,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
293,821,931
|
|
|
$
|
293,821,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return Swaps
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(229,918
|
)
|
|
$
|
(229,918
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
(229,918
|
)
|
|
|
(229,918
|
)
|
|
Total Liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(229,918
|
)
|
|
$
|
(229,918
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-70
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 4. Investments – (continued)
The following table summarizes the classifications within the fair value hierarchy of the Company’s assets and liabilities measured at fair value as of
June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured First Lien Debt Investments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
127,103,981
|
|
|
$
|
127,103,981
|
|
|
Senior Secured Second Lien Debt Investments
|
|
|
—
|
|
|
|
—
|
|
|
|
126,593,792
|
|
|
|
126,593,792
|
|
|
Equity, Warrants and Other Investments
|
|
|
—
|
|
|
|
—
|
|
|
|
1,209,398
|
|
|
|
1,209,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
|
—
|
|
|
|
—
|
|
|
|
254,907,171
|
|
|
|
254,907,171
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivative Notes Payable
|
|
|
—
|
|
|
|
—
|
|
|
|
5,830,501
|
|
|
|
5,830,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
5,830,501
|
|
|
|
5,830,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
260,737,672
|
|
|
$
|
260,737,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return Swaps
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(5,830,501
|
)
|
|
$
|
(5,830,501
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,830,501
|
)
|
|
|
(5,830,501
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(5,830,501
|
)
|
|
$
|
(5,830,501
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3
inputs for the twelve months ended June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured
First Lien
Debt Investments
|
|
|
Senior Secured
Second Lien
Debt Investments
|
|
|
Unsecured
Debt
Investments
|
|
|
Equity, Warrants
and Other
Investments
|
|
|
Total Investments
|
|
|
Balance as of June 30, 2017
|
|
$
|
127,103,981
|
|
|
$
|
126,593,792
|
|
|
$
|
—
|
|
|
$
|
1,209,398
|
|
|
$
|
254,907,171
|
|
|
Purchases (including PIK interest)
|
|
|
146,198,516
|
|
|
|
28,125,780
|
|
|
|
—
|
|
|
|
856,333
|
|
|
|
175,180,629
|
|
|
Sales
|
|
|
(109,135,505
|
)
|
|
|
(19,044,748
|
)
|
|
|
—
|
|
|
|
(8,865,339
|
)
|
|
|
(137,045,592
|
)
|
|
Amortization
|
|
|
2,819,035
|
|
|
|
1,080,923
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,899,958
|
|
|
Net realized gains (losses)
|
|
|
(1,993,120
|
)
|
|
|
(7,494,333
|
)
|
|
|
—
|
|
|
|
(368,000
|
)
|
|
|
(9,855,453
|
)
|
|
Transfers in
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,518,750
|
|
|
|
7,518,750
|
|
|
Transfers out
|
|
|
—
|
|
|
|
(7,518,750
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,518,750
|
)
|
|
Net change in unrealized (depreciation) appreciation
|
|
|
143,409
|
|
|
|
5,458,290
|
|
|
|
731,742
|
|
|
|
171,859
|
|
|
|
6,505,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2018
|
|
$
|
165,136,316
|
|
|
$
|
127,200,954
|
|
|
$
|
731,742
|
|
|
$
|
523,001
|
|
|
$
|
293,592,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) relating to assets and liabilities still held as of
June 30, 2018
|
|
$
|
499,934
|
|
|
$
|
(6,577,103
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(6,077,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-71
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 4. Investments – (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Return
Swaps
|
|
|
Embedded
derivatives – Notes
Payable
|
|
|
Total
Derivatives
|
|
|
Balance as of June 30, 2017
|
|
$
|
(5,830,501
|
)
|
|
$
|
5,830,501
|
|
|
$
|
—
|
|
|
Net change in unrealized (depreciation) appreciation
|
|
|
5,600,583
|
|
|
|
(5,600,583
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2018
|
|
$
|
(229,918
|
)
|
|
$
|
229,918
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) relating to assets and liabilities still held as of
June 30, 2018
|
|
$
|
5,600,583
|
|
|
$
|
(5,600,583
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3
inputs for the twelve months ended June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured
First Lien
Debt Investments
|
|
|
Senior Secured
Second Lien
Debt Investments
|
|
|
Equity, Warrants
and Other
Investments
|
|
|
Total
Investments
|
|
|
Balance as of June 30, 2016
|
|
$
|
157,088,252
|
|
|
$
|
114,871,040
|
|
|
$
|
154,872
|
|
|
$
|
272,114,164
|
|
|
Purchases (including PIK interest)
|
|
|
85,369,205
|
|
|
|
49,289,514
|
|
|
|
—
|
|
|
|
134,658,719
|
|
|
Sales
|
|
|
(120,462,364
|
)
|
|
|
(42,029,096
|
)
|
|
|
(155,023
|
)
|
|
|
(162,646,483
|
)
|
|
Amortization
|
|
|
2,181,436
|
|
|
|
718,454
|
|
|
|
—
|
|
|
|
2,899,890
|
|
|
Net realized gains (losses)
|
|
|
(7,726,105
|
)
|
|
|
(2,832,172
|
)
|
|
|
(1,251,058
|
)
|
|
|
(11,809,335
|
)
|
|
Transfers in
|
|
|
—
|
|
|
|
—
|
|
|
|
1,221,256
|
|
|
|
—
|
|
|
Transfers out
|
|
|
(1,221,256
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Net change in unrealized (depreciation) appreciation
|
|
|
11,874,812
|
|
|
|
6,576,053
|
|
|
|
1,239,351
|
|
|
|
19,690,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2017
|
|
$
|
127,103,981
|
|
|
$
|
126,593,792
|
|
|
$
|
1,209,398
|
|
|
$
|
254,907,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) relating to assets and liabilities still held as of
June 30, 2017
|
|
$
|
4,757,548
|
|
|
$
|
2,669,423
|
|
|
$
|
(11,858
|
)
|
|
$
|
7,415,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Return
Swaps
|
|
|
Embedded
derivatives – Notes
Payable
|
|
|
Total
Derivatives
|
|
|
Balance as of June 30, 2016
|
|
$
|
(9,071,659
|
)
|
|
$
|
9,071,659
|
|
|
$
|
—
|
|
|
Net change in unrealized (depreciation) appreciation
|
|
|
3,241,158
|
|
|
|
(3,241,158
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2017
|
|
$
|
(5,830,501
|
)
|
|
$
|
5,830,501
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) relating to assets and liabilities still held as of
June 30, 2017
|
|
$
|
3,241,158
|
|
|
$
|
(3,241,158
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers into Level 3 during or at the end of the reporting period are reported under Level 1 or Level 2 as of the beginning
of the period. Transfers out of Level 3 during or at the end of the reporting period are reported under Level 3 as of the beginning of the period. Changes in unrealized gains (losses) relating to Level 3 instruments are included in net change in
unrealized (depreciation) appreciation on investments and derivatives on the Consolidated Statements of Operations.
During the twelve months ended
June 30, 2018 and June 30, 2017, the Company did not transfer any investments among Levels 1 and 2 and 3.
F-72
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 4. Investments – (continued)
The following tables present the ranges of significant unobservable inputs used to value the Company’s Level 3 investments as of June 30, 2018 and
June 30, 2017. These ranges represent the significant unobservable inputs that were used in the valuation of each type of investment. These inputs are not representative of the inputs that could have been used in the valuation of any one
investment. For example, the highest market yield presented in the table for senior secured notes is appropriate for valuing a specific investment but may not be appropriate for valuing any other investment. Accordingly, the ranges of inputs
presented below do not represent uncertainty in, or possible ranges of, fair value measurements of the Company’s Level 3 investments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of
June 30, 2018
|
|
|
Valuation
Methodology
|
|
Unobservable
Input(s)
|
|
Weighted
Average
|
|
Range
|
|
Senior Secured First Lien Debt Investments
|
|
$
|
40,599,649
|
|
|
Yield Analysis
|
|
Market Yields
|
|
10.3%
|
|
6.7% – 16.4%
|
|
Unitranche First Lien Debt Investments
|
|
|
12,286,453
|
|
|
Discounted
Cash Flow
|
|
Discount Rate
|
|
17.2%
|
|
15.7% – 18.7%
|
|
Senior Secured First Lien Debt Investments
|
|
|
65,321,315
|
|
|
Discounted
Cash Flow
|
|
Discount Rate
|
|
8.2%
|
|
5.7% – 11.7%
|
|
Senior Secured First Lien Debt Investments
|
|
|
12,935,744
|
|
|
Broker Quoted
|
|
Market Comparable
|
|
98.0%
|
|
97.0% – 99.0%
|
|
Senior Secured First Lien Debt Investments
|
|
|
37,859,599
|
|
|
Recent Purchase
|
|
Recent Purchase
|
|
N/A
|
|
N/A
|
|
Senior Secured Second Lien Debt Investments
|
|
|
53,340,953
|
|
|
Yield Analysis
|
|
Market Yields
|
|
18.8%
|
|
10.7% – 43.5%
|
|
Senior Secured Second Lien Debt Investments
|
|
|
69,993,557
|
|
|
Discounted
Cash Flow
|
|
Discount Rate
|
|
11.6%
|
|
7.6% – 16.2%
|
|
Equity, Warrants and Other Investments
|
|
|
1,254,743
|
|
|
EV Multiple
|
|
EBITDA Multiple
|
|
0.0x
|
|
0.0x – 0.0x
|
|
Total Return Swaps
|
|
|
(229,918
|
)
|
|
Intrinsic Value
|
|
Intrinsic Value
|
|
N/A
|
|
N/A
|
|
Embedded derivatives – Note Payable
|
|
|
229,918
|
|
|
Intrinsic Value
|
|
Intrinsic Value
|
|
N/A
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of
June 30, 2017
|
|
|
Valuation
Methodology
|
|
Unobservable
Input(s)
|
|
Weighted
Average
|
|
Range
|
|
Senior Secured First Lien Debt Investments
|
|
$
|
83,516,160
|
|
|
Yield Analysis
|
|
Market Yields
|
|
9.7%
|
|
5.2% – 17.8%
|
|
Senior Secured First Lien Debt Investments
|
|
|
43,587,821
|
|
|
Recent Purchase
|
|
Recent Purchase
|
|
N/A
|
|
N/A
|
|
Senior Secured Second Lien Debt Investments
|
|
|
108,536,737
|
|
|
Yield Analysis
|
|
Market Yields
|
|
14.6%
|
|
7.4% – 33.8%
|
|
Senior Secured Second Lien Debt Investments
|
|
|
18,057,055
|
|
|
Recent Purchase
|
|
Recent Purchase
|
|
N/A
|
|
N/A
|
|
Equity, Warrants and Other Investments
|
|
|
1,209,398
|
|
|
EV Multiple
|
|
Revenue
|
|
2.0x
|
|
2.0x
|
|
Total Return Swaps
|
|
|
(5,830,501
|
)
|
|
Intrinsic Value
|
|
Intrinsic Value
|
|
N/A
|
|
N/A
|
|
Embedded derivatives – Note
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable
|
|
|
5,830,501
|
|
|
Intrinsic Value
|
|
Intrinsic Value
|
|
N/A
|
|
N/A
|
F-73
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 4. Investments – (continued)
Fair value measurements categorized within Level 3 are sensitive to changes in the assumptions or methodology used to determine fair value and such changes
could result in a significant increase or decrease in the fair value. Significant increases in illiquidity discounts, PIK discounts and market yields would result in significantly lower fair value measurements.
Note 5. Notes Payable
On May 23, 2013, as amended
on June 6, 2013, December 4, 2013, September 26, 2014, July 20, 2015, August 14, 2015, February 28, 2017 and November 20, 2017, the Company, through SPV, entered into a $102.0 million financing
transaction (the “Term Financing”) due December 5, 2020 with UBS. The Term Financing is collateralized by the portion of the Company’s assets held by SPV (the “SPV Assets”) and pledged as collateral as noted in the
Consolidated Schedule of Investments. Borrowings under the Term Financing bear interest (i) at a rate per annum equal to one-month London Interbank Offered Rate (“LIBOR”) plus 2.75% through December 4, 2018, and (ii) at a
rate per annum equal to one-month LIBOR plus 2.55% from December 5, 2018 through December 5, 2020 (the “Term Financing Rate”). The Company also incurs an annual fee of approximately 1% of the outstanding borrowings under the Term
Financing. As of June 30, 2018 and June 30, 2017, there were $102.0 million and $102.0 million borrowings outstanding under the Term Financing, respectively.
On December 4, 2013, as amended on September 26, 2014 and July 17, 2015, the Company, through SPV, entered into a $50.0 million revolving
financing (the “2013 UBS Revolving Financing”), which expired in accordance with its terms on December 5, 2016. From December 4, 2013 through September 24, 2014, the 2013 UBS Revolving Financing bore interest at a fixed rate
of 2.10% per annum on drawn amounts and 0.50% per annum on any undrawn portion. From September 26, 2014 through December 5, 2016, the 2013 UBS Revolving Financing bore interest at a fixed rate of 2.00% on drawn amounts and
0.50% per annum on any undrawn portion. As of June 30, 2018 and June 30, 2017, there were no borrowings outstanding under the 2013 UBS Revolving Financing.
The initial financing transaction with UBS was executed in four steps:
First, the Company organized SPV, a consolidated wholly owned bankruptcy remote special purpose vehicle in the Cayman Islands to purchase the SPV Assets
through (i) the issuance and sale of notes secured by the SPV Assets (the “Term Notes”) to UBS and the Company and (ii) the transfer of cash to the Company. UBS purchased Term Notes with a face value of $76.5 million, which
represent 51% of the Term Notes issued and outstanding, for $76.5 million in cash. The Company purchased Term Notes with a face value of $73.5 million (which are eliminated in consolidation), which represent 49% of the Term Notes issued and
outstanding. Under the terms of the indenture under which the Term Notes were issued (the “Indenture”), the holders of the Term Notes are entitled to (i) periodic interest payments equal to their pro rata portion of the interest
collected on the assets held by SPV and (ii) their pro-rata portion of the net appreciation (depreciation) on the SPV Assets at maturity (the “Total Return of the Term Notes”). This represents the embedded derivative in the Term Notes
payable from SPV to UBS. On September 26, 2014, the Company increased the size of the Term Facility to $102.0 million. In connection with the upsize, UBS purchased additional Term Notes with a face value of $25.5 million for $25.5 million
in cash. The Company also purchased additional Term Notes with a face value of $24.5 million.
Second, the Company and UBS entered into a TRS
transaction whereby the Company would receive the Total Return of the Term Notes purchased by UBS and pay the Financing Rate.
F-74
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 5. Notes Payable – (continued)
Third, SPV issued and sold an additional $50.0 million notes (the “2013 Revolving Notes”) secured by the SPV Assets to UBS. Cash was only exchanged
when the 2013 Revolving Notes were drawn. Under the terms of the Indenture under which the 2013 Revolving Notes were issued (the “2013 Revolver Indenture”), the holders of the 2013 Revolving Notes were entitled to (i) periodic
interest payments equal to their pro rata portion of the interest collected on the SPV Assets and (ii) their pro-rata portion of the net appreciation (depreciation) on the SPV Assets at maturity (the “Total Return of the 2013 Revolving
Notes”).
Fourth, the Company and UBS entered into another TRS transaction whereby the Company would receive the Total Return of the Revolving Notes
purchased by UBS and pay the revolver financing rate. On December 5, 2016, the 2013 Revolving Notes matured and the corresponding TRS transaction associated with the 2013 Revolving Notes unwound in unison. On November 20, 2017, the Company
and UBS entered into another TRS transaction whereby the Company will receive the total return of the $50 million notes (the “2017 Revolving Notes) purchased by UBS and pay the Revolver Financing Rate (defined below).
On November 20, 2017, the Company entered into a $50 million revolving financing facility (the “2017 UBS Revolving Financing”) with UBS.
Borrowings under the 2017 UBS Revolving Financing generally bear interest at a rate per annum equal to one-month LIBOR plus 3.55% (the “Revolver Financing Rate”). The Company pays a fee on any undrawn amounts of 2.50% per annum;
provided that if 50% or less of the 2017 UBS Revolving Financing is drawn, the fee will be 2.75% per annum. Any amounts borrowed under the 2017 UBS Revolving Financing will mature, and all accrued and unpaid interest will be due and payable, on
December 5, 2019. As of June 30, 2018 and June 30, 2017, there were $17.8 million and $0 in borrowings outstanding under the 2017 UBS Revolving Financing, respectively.
As of December 31, 2017, SPV issued and sold an additional $50.0 million notes (the “2017 Revolving Notes”) secured by the SPV Assets to UBS.
Cash is only exchanged when the 2017 Revolving Notes are drawn. Under the terms of the Indenture under which the 2017 Revolving Notes were issued (the “2017 Revolver Indenture”), the holders of the 2017 Revolving Notes are entitled to
(i) periodic interest payments equal to their pro rata portion of the interest collected on the SPV Assets and (ii) their pro-rata portion of the net appreciation (depreciation) on the SPV Assets at maturity (the “Total Return of the
2017 Revolving Notes”).
The fair value of the Company’s Notes Payable is estimated based on the rate at which similar facilities would be
priced. At June 30, 2018 and June 30, 2017, the fair value of the Notes Payable was estimated at $119.8 million and $102.0 million, respectively, which the Company concluded was a Level 3 fair value.
On November 9, 2016, the Company entered into the $50.0 million Senior Secured Revolving Credit Facility (the “Citi Revolving Financing”) with
Citibank, N.A. (“Citibank”), which was secured by collateral consisting primarily of commercial loans and corporate bonds. There were no upfront costs paid in the establishment of the Citi Revolving Financing.
Borrowings under the Citi Revolving Financing generally bore interest at a rate per annum equal to LIBOR plus 4.85%. The default interest rate was equal to
the interest rate then in effect plus 2.00%. The Citi Revolving Financing required the payment of an unused fee of 2.85% annually for any undrawn amounts below 75% of the Citi Revolving Financing, and 0.75% annually for any undrawn amounts above 75%
of the Citi Revolving Financing. Borrowings under the Citi Revolving Financing were based on a borrowing base. The Citi Revolving Financing generally required payment of interest on a quarterly basis and all outstanding principal was due upon
F-75
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 5. Notes Payable – (continued)
maturity. The Citi Revolving Financing also required mandatory prepayment of interest and principal upon certain events. As of June 30, 2018 and
June 30, 2017, there were no borrowings outstanding under the Citi Revolving Financing.
The Company has repaid in full all indebtedness, liabilities
and other obligations under, and terminated, its Citi Revolving Financing on December 8, 2017. In accordance with the termination of the Citi Revolving Financing, all liens on collateral securing the Citi Revolving Financing were released.
Cash, restricted (as shown on the Consolidated Statements of Assets and Liabilities) is held by the trustee of the Term Financing and the 2017 UBS Revolving
Financing, and the Citi Revolving Financing up until its expiration, and is restricted to purchases of investments by SPV and LLC that must meet certain eligibility criteria identified by the Indenture. As of June 30, 2018, SPV and LLC had
aggregate assets of $234.5 million, which included $232.8 million of the Company’s portfolio investments at fair value, $0.7 million of accrued interest receivable and $1.0 million in cash held by the trustees of the Term Financing and the 2017
UBS Revolving Financing (together, the “UBS Financing Facility”, and with the Citi Revolving Financing, the “Financing Facilities”). As of June 30, 2017, SPV and LLC had assets of $203.4 million, which included
$180.1 million of the Company’s portfolio investments at fair value, $1.0 million of accrued interest receivable and $22.3 million in cash held by the trustee of the UBS Financing Facility. For the twelve months ended June 30, 2018,
the weighted average outstanding debt balance and the weighted average stated interest rate under the Financing Facilities was $120.9 million and 4.46%, respectively. For the twelve months ended June 30, 2017, the weighted average outstanding
debt balance and the weighted average stated interest rate under the Financing Facilities was $115.8 million and 4.10%, respectively.
Note 6.
Indemnification, Guarantees, Commitments and Contingencies
In the normal course of business, the Company enters into contracts that provide a variety
of representations and warranties and general indemnifications. Such contracts include those with certain service providers, brokers and trading counterparties. Any exposure to the Company under these arrangements is unknown as it would involve
future claims that may be made against the Company; however, based on the Company’s experience, the risk of loss is remote and no such claims are expected to occur. As such, the Company has not accrued any liability in connection with such
indemnifications.
The Company’s Board of Directors declared the following quarterly distributions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Declared
|
|
Ex-Date
|
|
Record Date
|
|
Pay Date
|
|
Amount
|
|
Fiscal
Quarter
|
|
August 24, 2017
|
|
September 7, 2017
|
|
September 8, 2017
|
|
October 5, 2017
|
|
$0.2500
|
|
1st 2018
|
|
November 7, 2017
|
|
December 14, 2017
|
|
December 15, 2017
|
|
January 4, 2018
|
|
$0.2500
|
|
2nd 2018
|
|
February 6, 2018
|
|
March 15, 2018
|
|
March 16, 2018
|
|
April 5, 2018
|
|
$0.2500
|
|
3rd 2018
|
|
May 2, 2018
|
|
June 14, 2018
|
|
June 15, 2018
|
|
July 5, 2018
|
|
$0.2500
|
|
4th 2018
|
Loans purchased by the Company may include revolving credit agreements or other financing commitments obligating the Company
to advance additional amounts on demand. The Company generally sets aside sufficient liquid assets to cover its unfunded commitments, if any.
F-76
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 6. Indemnification, Guarantees, Commitments and Contingencies – (continued)
The following table details the Company’s unfunded commitments as of June 30,
2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
Unfunded
Commitment
|
|
|
Fair
Value
|
|
|
Annual
Non-use Fee
|
|
|
Expiration Date
|
|
|
1888 Industrial Services, LLC
|
|
$
|
693,069
|
|
|
$
|
—
|
|
|
|
0.50
|
|
|
|
9/30/21
|
|
|
PR Wireless, Inc.
|
|
|
1,846,478
|
|
|
|
—
|
|
|
|
0.35
|
|
|
|
6/27/19
|
|
|
U.S. Well Services, LLC
|
|
|
215,004
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1/31/22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Unfunded Commitments
|
|
$
|
2,754,551
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table details the Company’s unfunded commitments as of June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
Unfunded
Commitment
|
|
|
Fair
Value
|
|
|
Annual
Non-use Fee
|
|
|
Expiration Date
|
|
|
AAR Intermediate Holdings, LLC
|
|
$
|
792,079
|
|
|
$
|
—
|
|
|
|
0.50
|
|
|
|
9/30/21
|
|
|
U.S. Well Services, LLC
|
|
|
413,342
|
|
|
|
—
|
|
|
|
0.00
|
|
|
|
1/31/22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Unfunded Commitments
|
|
$
|
1,205,421
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7. Agreements and Related Party Transactions
Investment Advisory Agreement
Pursuant to the Advisory
Agreement, the Company has agreed to pay to the Adviser a base management fee of 1.75% of gross assets, as adjusted, including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents and “fair
value of derivatives associated with the Company’s financing”, and an incentive fee consisting of two parts.
The first part of the incentive
fee, which is calculated and payable quarterly in arrears, equals 20.0% of the “pre-incentive fee net investment income” (as defined in the agreement) for the immediately preceding quarter, subject to a hurdle rate of 2.0% per quarter
(8.0% annualized), and is subject to a “catch-up” feature. The incentive fee is subject to a total return requirement, which provides that no incentive fee in respect of the Company’s pre-incentive fee net investment income will be
payable except to the extent 20.0% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding quarters exceeds the cumulative incentive fees accrued and/or paid for the 11 preceding quarters. The
net pre-incentive fee investment income used to calculate this part of the incentive fee is also included in the amount of the Company’s gross assets used to calculate the 1.75% base management fee.
The second part of the incentive fee is calculated and payable in arrears as of the end of each calendar year and equals 20.0% of the aggregate cumulative
realized capital gains from inception through the end of each calendar year, computed net of aggregate cumulative realized capital losses and aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate
amount of any previously paid capital gain incentive fees.
The Adviser agreed to permanently waive: (i) all or portions of base management fees
through December 31, 2014, to the extent required to support an annualized dividend yield of 9.0% per annum based on the price per share of the Company’s common stock in the Offering of $15.00, and (ii) all or portions of the
incentive fee for the years ended December 31, 2014, 2015 and 2016, to the extent required to support an annualized dividend
F-77
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 7. Agreements and Related Party Transactions – (continued)
yield of 9.0%, 9.25% and 9.375% per annum, respectively, based on the price per share of the Company’s common stock in of the Offering of $15.00.
Fees permanently waived by the Adviser are not subject to future repayment or recoupment by the Company.
For the twelve months ended June 30, 2018,
$4,871,706 in base management fees were earned by the Adviser, of which $1,319,853 was payable at June 30, 2018. For the twelve months ended June 30, 2017, $4,652,064 in base management fees were earned by the Adviser, of which $1,132,391
was payable at June 30, 2017. For the twelve months ended June 30, 2016, $5,511,532 in base management fees were earned by the Adviser, of which $1,257,768 was payable at June 30, 2016.
For the twelve months ended June 30, 2018, the Company incurred $3,932,710 of incentive fees related to pre-incentive fee net investment income of which
$574,492 was voluntarily waived by the Adviser. As of June 30, 2018, $2,294,678 of such incentive fees are currently payable to the Adviser and $772,234 of pre-incentive fees incurred by the Company were generated from deferred interest (i.e.
PIK and certain discount accretion) and are not payable until such amounts are received in cash. For the twelve months ended June 30, 2017, the Company incurred $1,289,927 of incentive fees related to pre-incentive fee net investment income of
which $249,071 was voluntarily waived by the Adviser. As of June 30, 2017, $43,010 of such incentive fees are currently payable to the Adviser and $231,063 of pre-incentive fees incurred by the Company were generated from deferred interest
(i.e. PIK and certain discount accretion) and are not payable until such amounts are received in cash. For the twelve months ended June 30, 2016, the Company incurred $1,229,031 of incentive fees related to pre-incentive fee net investment
income of which $0 was waived. As of June 30, 2016, $275,540 of such incentive fees were currently payable to the Adviser and $268,472 of pre-incentive fees incurred by the Company were generated from deferred interest (i.e. PIK and certain
discount accretion) and are not payable until such amounts are received in cash. Any voluntary waivers of the incentive fee in no way implies that the Adviser will agree to waive any incentive fee in any future period.
The capital gains incentive fee consists of fees related to both realized gains and unrealized gains. As of June 30, 2018, June 30, 2017 and
June 30, 2016, there were no capital gains incentive fee earned or payable to the Adviser under the Advisory Agreement.
With respect to the
incentive fee expense accrual relating to the capital gains incentive fee, U.S. GAAP requires that the capital gains incentive fee accrual consider the cumulative aggregate unrealized appreciation in the calculation, as a capital gains incentive fee
would be payable if such unrealized appreciation were realized, even though such unrealized appreciation is not permitted to be considered in calculating the fee actually payable under the Advisory Agreement.
The Advisory Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless
disregard of its duties and obligations under the Advisory Agreement, the Adviser and its officers, managers, partners, agents, employees, controlling persons and members, and any other person or entity affiliated with it, are entitled to
indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of the Adviser’s services under the Advisory
Agreement or otherwise as the Adviser.
F-78
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 7. Agreements and Related Party Transactions – (continued)
Administration Agreement
The Company entered into an
administration agreement with the Adviser (the “Administration Agreement”) pursuant to which the Adviser furnishes the Company with office facilities and equipment and will provide the Company with the clerical, bookkeeping, recordkeeping
and other administrative services necessary to conduct day-to-day operations. Under the Administration Agreement, the Adviser performs, or oversees the performance of the Company’s required administrative services, which includes, among other
things, being responsible for the financial records which it is required to maintain and preparing reports to its stockholders and reports filed with the SEC. In addition, the Adviser assists the Company in determining and publishing its net asset
value, oversees the preparation and filing of its tax returns and the printing and dissemination of reports and other materials to its stockholders, and generally oversees the payment of its expenses and the performance of administrative and
professional services rendered to it by others. Under the Administration Agreement, the Adviser also provides managerial assistance on the Company’s behalf to those portfolio companies that have accepted its offer to provide such assistance.
The Adviser has also retained the services of accounting and back office professionals on an as needed basis through a services agreement with the Cyrus Capital Partners, L.P. to assist the Adviser in fulfilling certain of its obligations to the
Company under the Administration Agreement. The Company incurred costs of $1,198,397 under the Administration Agreement for the twelve months ended June 30, 2018. The Company incurred costs of $987,286 under the Administration Agreement for the
twelve months ended June 30, 2017. The Company incurred costs of $785,846 under the Administration Agreement for the twelve months ended June 30, 2016.
As of June 30, 2018 and June 30, 2017, the Company recorded $0 and $85,000, respectively, in accrued expenses and other liabilities on its
Consolidated Statements of Assets and Liabilities for reimbursement of expenses owed to the Adviser under the Administration Agreement.
License
Agreement
The Company has entered into a license agreement with the Adviser under which the Adviser has agreed to grant the Company a non-exclusive,
royalty-free license to use the name “CM Finance.” Under this agreement, the Company has a right to use the “CM Finance” name for so long as the Adviser or one of its affiliates remains the Adviser. Other than with respect to
this limited license, the Company has no legal right to the “CM Finance” name.
Stifel Arrangement
In December 2013, the Company entered into an arrangement pursuant to which Stifel made a capital contribution to the Company on February 5, 2014 and the
Company granted Stifel certain rights, such as a right to nominate for election a member of the Company’s board of directors. Stifel has not exercised its right to nominate for election a member of the Company’s board of directors. Stifel
does not have any rights to exercise a controlling influence over the Company’s day-to-day operations or the investment management function of the Adviser.
Four of the investment professionals employed by the Adviser as part of its investment team are also employees of Stifel, Nicolaus & Company,
Incorporated or its affiliates and are members of the Adviser’s investment committee designated by Stifel. Although these four investment professionals dedicate substantially all of their time to the business and activities of the Adviser, they
are dual employees of both Stifel, Nicolaus & Company,
F-79
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 7. Agreements and Related Party Transactions – (continued)
Incorporated or its affiliates and the Adviser, and a member of the Adviser’s investment committee is an employee of Stifel, Nicolaus & Company,
Incorporated or its affiliates and as a result, may continue to engage in investment advisory activities for Stifel, Nicolaus & Company, Incorporated or its affiliates. As of June 30, 2018, Stifel owned approximately 16.0% of the
Company’s outstanding common stock, and also holds a 20.0% interest in the Adviser.
Note 8. Directors Fees
Each of the Company’s four independent directors receives (i) an annual fee of $75,000, and (ii) $2,500 plus reimbursement of reasonable
out-of-pocket expenses incurred in connection with attending in person or telephonically each regular board of directors meeting and each special telephonic meeting. The Company’s independent directors also receive $1,000 plus reimbursement of
reasonable out-of-pocket expenses incurred in connection with each committee meeting attended in person and each telephonic committee meeting. The chairman of the audit committee receives an annual fee of $7,500. The chairperson of the valuation
committee, the nominating and corporate governance committee and the compensation committee receives an annual fee of $2,500, $2,500 and $2,500, respectively. The Company has obtained directors’ and officers’ liability insurance on behalf
of the Company’s directors and officers. Independent directors have the option of having their directors’ fees paid in shares of the Company’s common stock issued at a price per share equal to the greater of net asset value or the
market price at the time of payment. For the twelve months ended June 30, 2018, June 30, 2017 and June 30, 2016, the Company recorded directors’ fees of $402,240, $501,233 and $425,922, respectively. As of June 30, 2018
and June 30, 2017, the Company recorded directors’ fees payable of $99,296 and $100,000, respectively.
Note 9. Net Change in Net Assets
Resulting from Operations Per Share
Basic earnings per share is computed by dividing earnings available to common stockholders by the weighted average
number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis.
The following table sets forth the computation of the weighted average basic and diluted net increase in net assets per share from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Net Increase (Decrease)
in Net Assets Per Share
|
|
|
|
|
Twelve Months
Ended
June 30, 2018
|
|
|
Twelve Months
Ended
June 30, 2017
|
|
|
Twelve Months
Ended
June 30, 2016
|
|
|
Net increase (decrease) in net assets resulting from operations
|
|
$
|
15,625,480
|
|
|
$
|
23,579,465
|
|
|
$
|
(9,344,770
|
)
|
|
Weighted average shares of common stock outstanding
|
|
|
13,689,823
|
|
|
|
13,686,288
|
|
|
|
13,674,197
|
|
|
Basic/diluted net increase (decrease) in net assets from operations per share
|
|
$
|
1.14
|
|
|
$
|
1.72
|
|
|
$
|
(0.68
|
)
|
F-80
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 10. Distributions
The following table reflects the
cash distributions per share that the Company declared and/or paid to its stockholders since the Offering in February 2014. Stockholders of record as of each respective record date were entitled to receive the distribution:
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Record Date
|
|
Payment Date
|
|
Amount Per Share
|
|
March 14, 2014
|
|
March 24, 2014
|
|
March 31, 2014
|
|
$0.1812
|
|
May 14, 2014
|
|
June 16, 2014
|
|
July 1, 2014
|
|
$0.3375
|
|
September 4, 2014
|
|
September 18, 2014
|
|
October 1, 2014
|
|
$0.3375
|
|
November 6, 2014
|
|
December 18, 2014
|
|
January 5, 2015
|
|
$0.3375
|
|
January 28, 2015
|
|
March 18, 2015
|
|
April 2, 2015
|
|
$0.3469
|
|
May 6, 2015
|
|
June 8, 2015
|
|
July 5, 2015
|
|
$0.3469
|
|
June 10, 2015*
|
|
September 1, 2015
|
|
September 15, 2015
|
|
$0.4300
|
|
June 10, 2015
|
|
September 18, 2015
|
|
October 2, 2015
|
|
$0.3469
|
|
November 3, 2015
|
|
December 18, 2015
|
|
January 5, 2016
|
|
$0.3469
|
|
February 2, 2016
|
|
March 18, 2016
|
|
April 7, 2016
|
|
$0.3516
|
|
April 28, 2016
|
|
June 17, 2016
|
|
July 7, 2016
|
|
$0.3516
|
|
August 25, 2016
|
|
September 16, 2016
|
|
October 6, 2016
|
|
$0.3516
|
|
November 3, 2016
|
|
December 16, 2016
|
|
January 5, 2017
|
|
$0.3516
|
|
November 3, 2016
|
|
March 17, 2017
|
|
April 6, 2017
|
|
$0.2500
|
|
May 2, 2017
|
|
June 16, 2017
|
|
July 6, 2017
|
|
$0.2500
|
|
August 24, 2017
|
|
September 8, 2017
|
|
October 5, 2017
|
|
$0.2500
|
|
November 7, 2017
|
|
March 16, 2018
|
|
April 5, 2018
|
|
$0.2500
|
|
May 2, 2018
|
|
June 15, 2018
|
|
July 5, 2018
|
|
$0.2500
|
|
August 23, 2018
|
|
September 18, 2018
|
|
October 5, 2018
|
|
$0.2500
|
The following table reflects for U.S. federal income tax purposes the sources of the cash dividend distributions that the Company has paid on its common stock
during the twelve months ended June 30, 2018, June 30, 2017 and June 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended June 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
Distribution
Amount
|
|
|
Percentage
|
|
|
Distribution
Amount
|
|
|
Percentage
|
|
|
Distribution
Amount
|
|
|
Percentage
|
|
|
Ordinary income and short-term capital gains
|
|
$
|
13,685,762
|
|
|
|
100
|
%
|
|
$
|
16,467,071
|
|
|
|
100
|
%
|
|
$
|
24,703,847
|
|
|
|
99
|
%
|
|
Long-term capital gains
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
277,173
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,685,762
|
|
|
|
100
|
%
|
|
$
|
16,467,071
|
|
|
|
100
|
%
|
|
$
|
24,981,020
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-81
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 11. Share Repurchase Program
As
described in Note 2, the Company has a share repurchase program under which the Company may repurchase up to $5.0 million shares of its common stock of up to $5.0 million until the earlier of (i) May 1, 2019 or (ii) the repurchase of
$5.0 million in aggregate amount of its common stock. During the period ended June 30, 2018, the Company repurchased 42,627 shares of common stock on the open market for $390,178. The Company’s NAV per share increased by approximately
$0.01 for the period ended June 30, 2018 as a result of the share repurchases. The following table summarizes the Company’s share repurchases under the share repurchase program for the periods ended June 30, 2018 and June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
Ended June 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Number of shares repurchased
|
|
|
42,627
|
|
|
|
—
|
|
|
Cost of shares repurchased, including commissions
|
|
$
|
390,178
|
|
|
|
—
|
|
|
Weighted average price per share
|
|
$
|
9.10
|
|
|
|
—
|
|
|
Net asset value per share at prior quarter end
|
|
$
|
12.55
|
|
|
|
—
|
|
|
Weighted average discount to prior quarter net asset value
|
|
|
27.5
|
%
|
|
|
—
|
|
Note 12. Share Transactions
The following table summarizes the total shares issued and repurchased for the twelve months ended June 30, 2018, June 30, 2017 and
June 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended June 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Balance at beginning of year
|
|
|
13,689,221
|
|
|
$
|
200,568,530
|
|
|
|
13,679,686
|
|
|
$
|
200,482,695
|
|
|
|
13,667,267
|
|
|
$
|
200,357,871
|
|
|
Retirement of repurchased shares
|
|
|
(42,627
|
)
|
|
|
(390,178
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Reinvestments of stockholder distributions
|
|
|
2,910
|
|
|
|
25,011
|
|
|
|
9,535
|
|
|
|
85,835
|
|
|
|
12.419
|
|
|
|
124,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
13,649,504
|
|
|
$
|
200,203,363
|
|
|
|
13,689,221
|
|
|
$
|
200,568,530
|
|
|
|
13,679,686
|
|
|
$
|
200,482,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-82
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 13. Financial Highlights
The following represents
the per share data and the ratios to average net assets for CM Finance Inc:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the twelve
months ended
June 30,
2018
|
|
|
For the twelve
months ended
June 30,
2017
|
|
|
For the twelve
months ended
June 30,
2016
|
|
|
For the twelve
months ended
June 30,
2015
|
|
|
For the period
from
February 6, 2014
through June 30,
2014
|
|
|
Per Share Data:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$
|
12.41
|
|
|
$
|
11.90
|
|
|
$
|
14.41
|
|
|
$
|
14.65
|
|
|
$
|
14.75
|
*
|
|
Net investment income
|
|
|
1.39
|
|
|
|
1.15
|
|
|
|
1.45
|
|
|
|
1.48
|
|
|
|
0.47
|
|
|
Net realized and unrealized gains (losses)
|
|
|
(0.24
|
)
|
|
|
0.56
|
|
|
|
(2.13
|
)
|
|
|
(0.35
|
)
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations
|
|
|
1.15
|
|
|
|
1.71
|
|
|
|
(0.68
|
)
|
|
|
1.13
|
|
|
|
0.51
|
|
|
|
|
|
|
|
|
|
Capital transactions(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share repurchases
|
|
|
0.01
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Dividends from net investment income
|
|
|
(1.00
|
)
|
|
|
(1.20
|
)
|
|
|
(1.51
|
)
|
|
|
(1.37
|
)
|
|
|
(0.52
|
)
|
|
Distributions from net realized gains
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.32
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in net assets resulting from capital transactions
|
|
|
(0.99
|
)
|
|
|
(1.20
|
)
|
|
|
(1.83
|
)
|
|
|
(1.37
|
)
|
|
|
(0.52
|
)
|
|
Offering costs
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
$
|
12.57
|
|
|
$
|
12.41
|
|
|
$
|
11.90
|
|
|
$
|
14.41
|
|
|
$
|
14.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value per share, end of period
|
|
$
|
8.90
|
|
|
$
|
10.00
|
|
|
$
|
8.88
|
|
|
$
|
13.61
|
|
|
$
|
14.56
|
|
|
Total return based on market
value(3)
|
|
|
0.01
|
%
|
|
|
27.93
|
%
|
|
|
(21.26
|
)%
|
|
|
4.23
|
%
|
|
|
0.65
|
%(4)
|
|
Shares outstanding at end of period
|
|
|
13,649,504
|
|
|
|
13,689,221
|
|
|
|
13,679,686
|
|
|
|
13,667,267
|
|
|
|
13,666,666
|
|
|
|
|
|
|
|
|
|
Ratio/Supplemental Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, at end of year
|
|
$
|
171,522,666
|
|
|
$
|
169,948,112
|
|
|
$
|
162,749,883
|
|
|
$
|
196,950,849
|
|
|
$
|
200,216,821
|
|
|
Ratio of total expenses to average net assets
|
|
|
13.06
|
%
|
|
|
9.38
|
%
|
|
|
8.97
|
%
|
|
|
8.95
|
%
|
|
|
5.46
|
%(5)
|
|
Ratio of net expenses to average net assets
|
|
|
12.76
|
%
|
|
|
9.23
|
%
|
|
|
8.97
|
%
|
|
|
8.36
|
%
|
|
|
4.02
|
%(5)
|
|
Ratio of interest expense and fees and amortization of deferred debt issuance costs to average net
assets
|
|
|
4.10
|
%
|
|
|
3.42
|
%
|
|
|
3.13
|
%
|
|
|
2.37
|
%
|
|
|
1.27
|
%(5)
|
|
Ratio of net investment income before fee waiver to average net assets
|
|
|
11.40
|
%
|
|
|
9.31
|
%
|
|
|
11.33
|
%
|
|
|
9.54
|
%
|
|
|
6.58
|
%(5)
|
|
Ratio of net investment income after fee waiver to average net assets
|
|
|
11.10
|
%
|
|
|
9.46
|
%
|
|
|
11.33
|
%
|
|
|
10.13
|
%
|
|
|
8.03
|
%(5)
|
|
Total Notes Payable
|
|
|
119,823,000
|
|
|
|
102,000,000
|
|
|
|
132,478,329
|
|
|
|
150,847,459
|
|
|
|
85,591,314
|
|
|
Asset Coverage Ratio(6)
|
|
|
2.43
|
|
|
|
2.67
|
|
|
|
2.23
|
|
|
|
2.31
|
|
|
|
3.34
|
|
|
Portfolio Turnover Rate
|
|
|
52
|
%
|
|
|
52
|
%
|
|
|
21
|
%
|
|
|
46
|
%
|
|
|
67
|
%(7)
|
F-83
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 13. Financial Highlights – (continued)
|
*
|
Net asset value at beginning of period reflects the deduction of the sales load of $0.25 per share paid by the
stockholder from the $15.00 offering price.
|
|
(1)
|
The per share data was derived by using the shares outstanding during the period.
|
|
(2)
|
The per share data for dividends and distributions declared reflects the actual amount of the dividends and
distributions declared per share during the period.
|
|
(3)
|
Total returns are historical and are calculated by determining the percentage change in the market value with
all dividends distributions, if any, reinvested. Dividends and distributions are assumed to be reinvested at prices obtained under the company’s dividend reinvestment plan.
|
|
(6)
|
Asset coverage ratio is equal to (i) the sum of (A) net assets at the end of the period and
(B) debt outstanding at the end of the period, divided by (ii) total debt outstanding at the end of the period.
|
|
(7)
|
For the period from February 6, 2014 through June 30, 2014.
|
The following represents supplemental ratios and data for CM Finance LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
July 1, 2013 to
February 5, 2014
|
|
|
Twelve months
ended
June 30, 2013
|
|
|
Period from
March 7, 2012 to
June 30, 2012
|
|
|
Total return
|
|
|
7.86
|
%
|
|
|
16.16
|
%
|
|
|
2.58
|
%
|
|
Ratio of net investment income to average members’ capital
|
|
|
8.40
|
%
|
|
|
11.11
|
%
|
|
|
2.06
|
%
|
|
Ratio of operating expenses to average members’ capital
|
|
|
(2.37
|
)%
|
|
|
(1.12
|
)%
|
|
|
(1.34
|
)%
|
|
Ratio of credit facility related expenses to average members’ capital
|
|
|
(1.54
|
)%
|
|
|
(0.29
|
)%
|
|
|
0.00
|
%
|
|
Ratio of total expenses to average members’ capital
|
|
|
(2.53
|
)%
|
|
|
(1.14
|
)%
|
|
|
(1.34
|
)%
|
|
Portfolio turnover rate
|
|
|
41.76
|
%
|
|
|
68.37
|
%
|
|
|
69.68
|
%
|
|
Supplemental Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members’ capital at end of period
|
|
$
|
90,000,000
|
|
|
$
|
87,250,637
|
|
|
$
|
18,141,667
|
|
|
Average members’ capital
|
|
$
|
105,716,373
|
|
|
$
|
55,294,030
|
|
|
$
|
14,790,409
|
|
Total return is calculated based on a time-weighted rate of return methodology for the members, and is not annualized. Total
return is reflected after all investment-related and operating expenses. An individual member’s return may vary from these returns based on the timing of capital transactions. The ratios to average members’ capital are calculated based on
the monthly average members’ capital during the period.
The ratios to average members’ capital are calculated based on the monthly average
members’ capital during the period. Credit facility related expenses include interest expense and amortization of deferred debt issuance costs.
F-84
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 14. Other Fee Income
The other fee income consists
of structuring fee income, amendment fee income and royalty income. The following tables summarize the Company’s other fee income for the twelve months ended June 30, 2018, June 30, 2017 and June 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months
Ended
June 30,
2018
|
|
|
Twelve Months
Ended
June 30,
2017
|
|
|
Twelve Months
Ended
June 30,
2016
|
|
|
Loan Amendment/Consent Fee
|
|
$
|
152,308
|
|
|
$
|
1,112,250
|
|
|
$
|
936,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Fee Income
|
|
$
|
152,308
|
|
|
$
|
1,112,250
|
|
|
$
|
936,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 15. Tax Information
As of June 30, 2018, the Company’s aggregate investment unrealized appreciation and depreciation based on cost for U.S. federal income tax purposes
were as follows:
|
|
|
|
|
|
|
Tax cost
|
|
$
|
302,647,282
|
|
|
|
|
|
|
|
|
Gross unrealized appreciation
|
|
|
6,015,163
|
|
|
Gross unrealized depreciation
|
|
|
(15,070,432
|
)
|
|
|
|
|
|
|
|
Net unrealized investment depreciation
|
|
$
|
(9,055,269
|
)
|
|
|
|
|
|
|
As of June 30, 2017, the Company’s aggregate investment unrealized appreciation and depreciation based on cost for
U.S. federal income tax purposes were as follows:
|
|
|
|
|
|
|
Tax cost
|
|
$
|
271,969,759
|
|
|
|
|
|
|
|
|
Gross unrealized appreciation
|
|
|
3,709,069
|
|
|
Gross unrealized depreciation
|
|
|
(20,771,657
|
)
|
|
|
|
|
|
|
|
Net unrealized investment depreciation
|
|
$
|
(17,062,588
|
)
|
|
|
|
|
|
|
Note 16. Selected Quarterly Financial Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter
Ended
June 30,
2018
|
|
|
For the Quarter
Ended
March 31,
2018
|
|
|
For the Quarter
Ended
December 31,
2017
|
|
|
For the Quarter
Ended
September 30,
2017
|
|
|
Total Investment Income
|
|
$
|
16,942,191
|
|
|
$
|
8,671,377
|
|
|
$
|
8,449,774
|
|
|
$
|
6,728,410
|
|
|
Total Investment Income per Common Share
|
|
|
1.24
|
|
|
|
0.63
|
|
|
|
0.62
|
|
|
|
0.49
|
|
|
Net Investment Income
|
|
|
8,539,905
|
|
|
|
3,733,424
|
|
|
|
3,687,129
|
|
|
|
3,016,176
|
|
|
Net Investment Income per Common Share
|
|
|
0.62
|
|
|
|
0.27
|
|
|
|
0.27
|
|
|
|
0.22
|
|
|
Net Realized and Unrealized Gain
|
|
|
(4,999,323
|
)
|
|
|
357,611
|
|
|
|
1,172,018
|
|
|
|
119,541
|
|
|
Net Realized and Unrealized Gain per Common Share
|
|
|
(0.37
|
)
|
|
|
0.03
|
|
|
|
0.10
|
|
|
|
0.01
|
|
|
Net Increase in Net Assets Resulting from Operations
|
|
|
4,196,512
|
|
|
|
4,091,035
|
|
|
|
4,859,147
|
|
|
|
3,135,717
|
|
|
Basic and Diluted Earnings per Common Share
|
|
|
0.26
|
|
|
|
0.30
|
|
|
|
0.35
|
|
|
|
0.23
|
|
|
Net Asset Value per Common Share at End of Quarter
|
|
|
12.57
|
|
|
|
12.55
|
|
|
|
12.50
|
|
|
|
12.39
|
|
F-85
CM Finance Inc and subsidiaries
Notes to Consolidated Financial Statements
June 30, 2018
Note 16. Selected Quarterly Financial Data (unaudited) – (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter
Ended
June 30,
2017
|
|
|
For the Quarter
Ended
March 31,
2017
|
|
|
For the Quarter
Ended
December 31,
2016
|
|
|
For the Quarter
Ended
September 30,
2016
|
|
|
Total Investment Income
|
|
$
|
7,194,039
|
|
|
$
|
7,081,218
|
|
|
$
|
9,152,091
|
|
|
$
|
7,584,849
|
|
|
Total Investment Income per Common Share
|
|
|
0.53
|
|
|
|
0.52
|
|
|
|
0.67
|
|
|
|
0.55
|
|
|
Net Investment Income
|
|
|
3,433,658
|
|
|
|
3,422,111
|
|
|
|
4,872,012
|
|
|
|
3,970,803
|
|
|
Net Investment Income per Common Share
|
|
|
0.25
|
|
|
|
0.25
|
|
|
|
0.36
|
|
|
|
0.29
|
|
|
Net Realized and Unrealized Gain
|
|
|
1,298,730
|
|
|
|
2,565,911
|
|
|
|
3,682,086
|
|
|
|
334,154
|
|
|
Net Realized and Unrealized Gain per Common Share
|
|
|
0.09
|
|
|
|
0.19
|
|
|
|
0.27
|
|
|
|
0.02
|
|
|
Net Increase in Net Assets Resulting from Operations
|
|
|
4,732,388
|
|
|
|
5,988,022
|
|
|
|
8,554,098
|
|
|
|
4,304,957
|
|
|
Basic and Diluted Earnings per Common Share
|
|
|
0.35
|
|
|
|
0.44
|
|
|
|
0.62
|
|
|
|
0.31
|
|
|
Net Asset Value per Common Share at End of Quarter
|
|
|
12.41
|
|
|
|
12.32
|
|
|
|
12.13
|
|
|
|
11.86
|
|
Note 17. Subsequent Events
The Company has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date the consolidated financial statements
were issued.
Subsequent to the twelve months ended June 30, 2018 through August 31, 2018, the Company invested $34.1 million in five new
portfolio companies and received repayment or sales proceeds of $13.3 million.
On August 23, 2018, our board of directors declared a distribution
for the quarter ended September 30, 2018 of $0.25 per share payable on October 5, 2018 to stockholders of record as of September 18, 2018.
F-86
$15,000,000
6.125% Notes due 2023
Investcorp Credit Management BDC, Inc.
PROSPECTUS
SUPPLEMENT
Book-Running Managers
|
|
|
|
|
|
|
Ladenburg Thalmann
|
|
BB&T Capital Markets
|
|
Janney Montgomery Scott
|
The date of this prospectus supplement is October 16, 2019
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