EDGAR 10-K Filing

Company CIK: 1726548
Filing Year: 2021
Filename: 1726548_10-K_2021_0001564590-21-012534.json

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ITEM 1. BUSINESS
Item 1. Business.
General development of Business.
BC Partners Lending Corporation (the “Company,” “BCPL,” “we,” “us” or “our”) was formed on December 22, 2017 as a corporation under the laws of the State of Maryland and commenced operations on October 2, 2019. We invest primarily in the U.S. middle-market credit sector.
From September 26, 2019 (the “Initial Closing”) through December 31, 2019, we conducted private offerings (the “Private Offering”) of our common stock to investors in reliance on exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). At the closing of each Private Offering, each investor made a capital commitment (a “Capital Commitment”) to purchase shares of our common stock pursuant to a subscription agreement entered into with us. Investors are required to fund drawdowns to purchase shares of our common stock up to the amount of their respective Capital Commitments on an as-needed basis each time we deliver a notice to the investors. As of December 31, 2020, we had $40.4 million in total Capital Commitments from investors ($40.1 million has been drawn down), of which $15.9 million is from the Adviser and its affiliates, executives and employees of the Adviser, and directors of the Company. Following a drawdown in respect of Capital Commitments from the Initial Closing, shares were issued on October 16, 2019. See “Item 1. Description of Business - The Private Offering.”
We have elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), and elected to be treated as a regulated investment company (“RIC”) for U.S. federal income tax purposes, and to qualify annually as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). As a BDC and a RIC, we will be required to comply with certain regulatory requirements. See “Item 1. Description of Business-Regulation as a Business Development Company.”
As a BDC, we are subject to certain regulatory restrictions in making our investments. For example, BDCs generally are not permitted to co-invest with certain affiliated entities in transactions originated by the BDC or its affiliates in the absence of an exemptive order from the Securities and Exchange Commission (“SEC”). However, BDCs are permitted to, and may, simultaneously co-invest in transactions where price is the only negotiated term. On October 23, 2018, the SEC issued an order granting the Company’s application for exemptive relief to co-invest, subject to the satisfaction of certain conditions, in certain private placement transactions, with other funds managed by the Adviser or its affiliates, including BCP Special Opportunities Fund I LP, BCP Special Opportunities Fund II LP, Portman Ridge Finance Corporation and any future funds that are advised by the Adviser or its affiliated investment advisers. Under the terms of the exemptive order, in order for the Company to participate in a co-investment transaction a “required majority” (as defined in Section 57(o) of the 1940 Act) of the Company’s independent directors must conclude that (i) the terms of the proposed transaction, including the consideration to be paid, are reasonable and fair to the Company and its stockholders and do not involve overreaching with respect of the Company or its stockholders on the part of any person concerned, and (ii) the proposed transaction is consistent with the interests of the Company’s stockholders and is consistent with the Company’s investment objectives and strategies and certain criteria established by our board of directors (“the Board”).
Financial information about segments.
Our operations comprise only a single reportable segment.
Description of Business.
The Company-BC Partners Lending Corporation
We primarily invest in the U.S. middle-market credit sector and our investment objective is to generate current income and, to a lesser extent, capital appreciation. We seek to achieve our investment objective primarily through the form of debt investments, which may include secured debt, unsecured debt, other debt and/or equity in private middle-market companies (we define “middle-market companies” as those with annual earnings before interest, taxes, depreciation and amortization (“EBITDA”) between $10 million and $50 million). In addition, to a lesser extent, we may invest in the securities of public companies and in structured products. While our primary focus will be on investments within the United States, we may, on occasion, invest in securities of non-U.S. entities.
We have primarily invested in secured debt of private middle-market companies. As of December 31, 2020, our portfolio, based on fair value, consisted of 89.2% first-lien debt investments and 10.8% other investments. As of December 31, 2020, 87.9% of our debt investments bore interest at floating rates. As of December 31, 2020, we had investments in 38 portfolio companies and the average investment size in each of our portfolio companies was approximately $2.1 million, based on fair value. As of December 31, 2020, the largest single investment based on fair value represented 5.2% of our total investment portfolio. As of December 31, 2020, none of our investments were on non-accrual status.
We generally intend to distribute, out of assets legally available for distribution, substantially all of our available earnings, on a quarterly basis, as determined by our Board in its discretion.
From time to time, we may be exposed to significant market risk. See “Item 1A. Risk Factors-Risks Related to our Business and Structure.” We will be exposed to risks associated with changes in interest rates. Our investment portfolio may be concentrated. We are subject to certain investment restrictions with respect to leverage and type of investments. We or our affiliates may originate loans or engage in similar activities and receive structuring or similar fees.
As a BDC, at least 70% of our assets must be assets of the type listed in Section 55(a) of the 1940 Act, as described below in “Item 1. Description of Business - Regulation as a Business Development Company - Qualifying Assets.” As of December 31, 2020 and 2019, 95.3% and 97.8%, respectively of our investments were qualifying assets.
We are managed by BC Partners Advisors L.P. (the “Adviser”) and supervised by the Board, a majority of whom are not “interested persons” of the Company as defined in the 1940 Act. On April 23, 2018, we entered into an Investment Advisory Agreement with the Adviser, which was amended on each of November 7, 2018 and July 9, 2019 (as amended, the “Investment Advisory Agreement”). On November 6, 2020, the Board unanimously approved the renewal of the Investment Advisory Agreement for a period of twelve months. Under the Investment Advisory Agreement, we have agreed to pay the Adviser a base management fee based on average gross assets, excluding cash and cash equivalents but including assets purchased with borrowed amounts, at the end of the two most recently completed calendar quarters and an incentive fee based on our performance. On August 20, 2019, the Company entered into a letter agreement (the “Letter Agreement”) with the Adviser pursuant to which, for the period ending December 31, 2019, the Adviser waived 50% of the base management fee paid by the Company under the Investment Advisory Agreement. The waiver is prorated for any partial month or quarter. Management fees waived are not subject to recoupment by the Adviser. On August 22, 2019, we entered into an Expense Support and Conditional Reimbursement Agreement (the “Expense Support Agreement”) with the Adviser, the purpose of which is to ensure that no portion of distributions made to our stockholders will be paid from our offering proceeds or borrowings. We engaged BC Partners Management LLC (the “Administrator”) to act as our administrator. On April 23, 2018, we entered into an Administrative Agreement (the “Administration Agreement”) with the Administrator. Under the administration agreement, we have agreed to reimburse the Administrator for services performed to enable us to operate.
The Adviser-BC Partners Advisors L.P.
The Adviser, an affiliate of BC Partners LLP (“BC Partners”), serves as our investment adviser pursuant to the Investment Advisory Agreement between us and the Adviser. Subject to the overall supervision of the Board, the Adviser is responsible for managing our business and activities, including sourcing investment opportunities, conducting research, performing diligence on potential investments, structuring our investments, and monitoring our portfolio companies on an ongoing basis through a team of investment professionals. All investment decisions require the majority approval of the investment committee (the “Investment Committee”).
The Adviser is a leading private equity firm with an over 30-year track record investing in the buyout space across North America and Europe. BC Partners’ assets under management are based on actively managed commitments of its managed funds and relevant vehicles formed for the purpose of co-investing alongside such funds. BC Partners operates a private equity investment platform (“BCP PE”), a credit investment platform (“BCP Credit”), and a real estate investment platform (“BCP RE”) as fully integrated businesses. The investment activity of BCPL takes place primarily within the BCP Credit platform. Integration with the broader BC Partners platform allows BCP Credit to leverage a team of investment professionals across its private equity platform including its operations team. The BCP Credit Investment Team (the “Investment Team”) is led by Ted Goldthorpe who sits on the BCP Credit investment committee. The Adviser also manages other private funds in the BCP Credit platform along with several separate managed accounts focused on credit investments. In April 2019, an affiliate of the Adviser became the adviser to Portman Ridge Finance Corporation (“PTMN”), formerly known as KCAP Financial Inc., a publicly traded BDC.
The Board of Directors
The Board is ultimately responsible for our oversight. We have entered into the Investment Advisory Agreement with the Adviser, pursuant to which the Adviser will manage the Company on a day-to-day basis. The Board is responsible for overseeing the Adviser and other operational service providers in accordance with the provisions of the 1940 Act, applicable provisions of state and other laws and our amended and restated charter, which we refer to as our charter. The Board is currently composed of five members, three of whom are directors who are not “interested persons” of the Company as defined in the 1940 Act, referred to herein as “independent directors”.
Competitive Advantages
The Company targets the lower end of the middle-market which we believe is a less competitive segment offering better structures, stronger covenant packages and greater management and due diligence access. We believe integration with the private equity platform provides BCP Credit and the Adviser with a strong competitive advantage and that this distinct advantage, combined with rigorous and deep due diligence and a focus on establishing downside protection and principal preservation, should generate attractive risk-adjusted returns. We believe that we represent an attractive investment opportunity for the following reasons:
Integration with BC Partners Platform. BCP Credit functions as an integrated business within the existing BC Partners organization, utilizing BC Partners’ existing infrastructure, including investor relations, compliance and fund support. BC Partners believes the integrated model benefits the BCP PE, BCP Credit and BC RE platforms as BC Partners believes the credit platform is highly synergistic and complementary to the other businesses and enables BC Partners to leverage its deal flow and sector knowledge to invest across the capital structure, creating attractive new opportunities for the benefit of all its investors. BCP Credit’s ability to leverage scale and enhance sourcing capabilities throughout the credit cycle is anticipated to be supported by the resources and expertise available to the team from integration with BCP PE.
Experienced Investment Team. The senior members of the Investment Team have successfully invested and managed assets together in liquid and illiquid credit across multiple credit cycles using the same strategies we employ and have developed portfolio monitoring processes over 15 years of investing in credit. We believe this positions the Adviser to effectively identify, assess and select quality investments, while also enabling it to monitor and provide managerial assistance to our portfolio companies.
High Quality Underwriting. We have a strong focus on balancing yield while mitigating the risk of principal impairment through financial and structural protection. The Adviser has experience with and the ability to complete innovative and complex transactions. The Adviser seeks to apply the same private equity style investment process employed for over 30 years at BC Partners LLP.
Diversified Sources of Deal Flow. The Adviser employs a proactive sourcing model not reliant on one individual source or type of source and develop proprietary unbiased viewpoints on credit performance. We anticipate that a substantial majority of our investments will not be intermediated and will be originated without the assistance of investment banks or other traditional Wall Street sources. We seek to develop an active pipeline of high quality opportunities using proprietary and non-proprietary sourcing and then filter appropriately to ensure the highest probability of successful execution. We seek to consider a wide range of transactions supported by the Adviser’s origination and syndication capabilities. We do not intend to invest in loan participations as part of our principal investment strategy, and such products are not intended to be a material component of our portfolio.
Flexible, Differentiated Strategy. The Adviser seeks to optimize exposures as the opportunity set changes and will target smaller capital structures which are insufficiently compelling for large funds. This investment approach targets a stockholder friendly return and governance structure.
Investment Selection and Due Diligence
The Investment Team follows a robust and structured investment process from sourcing through execution, monitoring and exit, utilizing standardized diligence and investment memos to reinforce investment discipline and support repeatable investment processes. We apply rigorous and deep due diligence to the credit opportunities we assess. Priorities are expected to include:
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assessing downside protection and principal preservation through financial and structural protections;
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seeking to generate attractive returns utilizing the skill and experience of the BCP Credit team; and
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leveraging the BCP PE team’s expertise and network.
Deep sector expertise across the entire BC Partners organization is expected to allow the BCP Credit team to focus on those opportunities where it can bring a differentiated angle or expertise to increase the potential for attractive risk-adjusted returns. Investment decisions will be made by the five-member cross functional Investment Committee comprising three members of BCP Credit and two members of BCP PE platforms.
Deal Sourcing. BCP Credit’s sourcing capabilities are supported by longstanding and well-established relationships across both the credit and private equity platforms with intermediaries, advisers, corporations, funds, financial institutions, sponsors, and management teams. BCP Credit takes a proactive approach to sourcing, with the goal being to develop an active pipeline of high-quality opportunities utilizing proprietary and non-proprietary sourcing and then filtering appropriately to target the highest probability of successful execution. BCP Credit’s access to proprietary deal flow is strengthened by its integration with the BCP PE platform and the flow of information from BCP PE to BCP Credit within the BC Partners group. BCP Credit seeks to position itself as a solution provider for financial institutions and businesses with the ability to provide expertise in both financial structuring and value creation.
Opportunity Review Process. As soon as BCP Credit identifies an attractive and actionable investment opportunity, the Adviser initiates its standard review process which includes a high-level credit analysis and in-depth assessment of actionability and may also include a preliminary set of deal terms and proposed potential structure which, along with any findings from initial diligence, are presented to and discussed with the Investment Committee. If the assessment is positive, the BCP Credit team proceeds to a detailed fundamental credit analysis and an absolute and relative risk-reward assessment. A private equity style fundamental analysis of the opportunity is performed to allow the BCP Credit team to assess the target’s intrinsic and future value. Depending on what type of opportunity is being reviewed, this stage of the process may include a more detailed assessment of the deal situation, management team, business fundamentals, legal documentation analysis and market positioning, along with updated valuations and return projections. Upon completion of the additional due diligence, a more formal analysis is presented to the Investment Committee, and upon approval, the BCP Credit team will proceed to execute the investment.
Structure of Investments
When structuring our investments, the Investment Team seeks to establish downside protection by securing our loans with direct liens on the portfolio company’s assets or cash flows. On occasion our debt investments may be structured such that following our investment they may convert into equity or additional debt securities and/or allow for the deferment of interest payments. In some cases, we may collateralize our debt investments through the use of subordinated liens on the borrower’s assets. We expect our loan maturities to be three to ten years. As of December 31, 2020, the weighted average loan maturity was approximately five years.
The Investment Team creates bespoke financial structuring solutions so that our investment terms are appropriate to each situation, in order to support and incentivize our portfolio companies’ financial performance while also protecting our investments and managing our risk profile.
In order to establish downside protection, we generally:
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invest higher in the capital structure of our portfolio companies;
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negotiate strong covenants and access to information, which may include board representation, change of control provisions and default penalties as a result of covenant non-compliance, so as to protect our rights and preserve our capital while still providing our portfolio companies with the ability to manage their businesses in a profitable manner; and
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possibly negotiate equity-like features such as warrants or options to purchase minority interests in order to participate in the out-performance at our portfolio companies, with the appropriate protections.
Our intention is to hold our investments to maturity or repayment barring circumstances, such as liquidity events, that may provide an opportunity for an earlier exit to enhance our returns, or impairment of credit quality, where an earlier exit may limit negative impact on our returns.
Engagement with Portfolio Companies
Monitoring. Throughout the investment hold period, the BCP Credit team performs ongoing monitoring to ensure the investment remains on track to achieve its return target. Formalized monitoring processes ensure rigorous discipline around monitoring investments and include portfolio reviews by the Investment Committee on a quarterly basis, continuous assessments of fund-level risk-reward profiles and comprehensive scenario sensitivities. At the investment level, the Investment Team performs frequent assessments of both risk-reward and covenant package compliance as well as continuous stress testing scenarios and maintains an active dialogue with the portfolio company and/or industry participants as appropriate. The Investment Team remains engaged with BCP PE (when appropriate) and other industry experts throughout the life of the investment to remain informed about developments that may impact the investment. BCP Credit believes that active and engaged management of its investments facilitates early identification of potential problems, which could enable BCP Credit to structure constructive solutions.
Managerial Assistance. As appropriate, the BCP Credit team engages with portfolio company management on value-add initiatives, with the support of the BCP PE Operations Team and with access to the intellectual capital of the BC Partners’ Operating Advisor and CEO networks. These initiatives could include helping businesses develop best practices, implementing volume buying or effecting other synergies with the broader BCP PE portfolio, improving management information systems/reporting or delivering agreed business improvements (such as working capital reductions or process changes). In a restructuring or default situation, BCP Credit will generally seek to drive or influence negotiations to maximize recovery.
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 and hedge funds. Many of our competitors are substantially larger and have considerably greater financial, technical, and marketing resources than we do. 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. Further, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a business development company, or to the distribution and other requirements we must satisfy to maintain our RIC status.
Term
If the Board determines that there has been a significant adverse change in the regulatory or tax treatment of the Company or our stockholders that in its judgment makes it inadvisable for the Company to continue in its present form, then the Board will endeavor to restructure or change the form of the Company to preserve (insofar as possible) the overall benefits previously enjoyed by our stockholders as a whole or, if the Board determines it appropriate (and subject to any necessary stockholder approvals and applicable requirements of the 1940 Act), (i) cause the Company to change its form and/or jurisdiction of organization or (ii) wind down and/or liquidate and dissolve the Company.
In the event of our liquidation, dissolution or winding up, subject to any preferential rights of holders of our preferred stock, each share of common stock would be entitled to share ratably in all of our assets that are legally available for distribution after we have paid or otherwise provided for all debts and other liabilities, if any preferred stock is outstanding at such time. For the purposes of this paragraph, a merger or consolidation of the Company with or into any other corporation or other entity, or a sale or conveyance of all or any part of our property or assets will not be deemed to be a dissolution, liquidation or winding up, voluntary or involuntary.
Emerging Growth Company
We are an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and we will take advantage of certain specified reduced disclosure and other requirements that are otherwise generally applicable to public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). In addition, we will take advantage of the extended transition period provided in Section 7(a)(2)(B) of the 1933 Act for complying with new or revised accounting standards.
Human Capital Resources
We do not currently have any employees and do not expect to have any employees in the future. Services necessary for our business are provided by individuals who are employees of the Adviser or its affiliates, pursuant to the terms of the Investment Advisory Agreement and the Administration Agreement. Each of our executive officers is employed by the Adviser or its affiliates. Our day-to-day investment operations are managed by the Adviser. The services necessary for the origination and administration of our investment portfolio will be provided by investment professionals employed by the Adviser or its affiliates. The Investment Team will focus on origination and transaction development and the ongoing monitoring of our investments. In addition, we will reimburse the Adviser (or its affiliates) for an allocable portion of the compensation paid by the Adviser (or its affiliates) to the Company’s chief compliance officer and chief financial officer and their respective staffs (based on the percentage of time such individuals devote, on an estimated basis, to the business and affairs of the Company).
Investment Advisory Agreement
The Adviser provides management services to us pursuant to the Investment Advisory Agreement. Under the terms of the Investment Advisory Agreement, the Adviser is responsible for the following:
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managing our assets in accordance with our investment objective, policies and restrictions;
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determining 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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identifying, evaluating and negotiating the structure of our investments;
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monitoring our investments;
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determining the securities and other assets we will purchase, retain or sell;
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assisting the Board with its valuation of our assets;
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directing investment professionals of the Adviser to provide managerial assistance to our portfolio companies;
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performing due diligence on prospective portfolio companies;
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exercising voting rights in respect of portfolio securities and other investments for us;
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serving on, and exercising observer rights for, boards of directors and similar committees of our portfolio companies; and
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providing us with such other investment advisory, research and related services as we may, from time to time, reasonably require for the investment of capital.
The Adviser’s services under the Investment Advisory Agreement are not exclusive, and it is free to furnish similar services to other entities so long as its services to us are not impaired.
Term
On April 23, 2018, the Company entered into the Investment Advisory Agreement with the Adviser, which was amended on November 7, 2018 and July 9, 2019. On November 6, 2020, the Board unanimously approved the renewal of the Investment Advisory Agreement for a period of twelve months. Unless earlier terminated as described below, the Investment Advisory Agreement will remain in effect for a period of two years from the date it first became effective and will remain in effect from year-to-year thereafter if approved annually by a majority of the Board or by the holders of a majority of the Company’s outstanding shares of common stock, and, in each case, a majority of the independent directors.
The Investment Advisory Agreement will automatically terminate within the meaning of the 1940 Act and related SEC guidance and interpretations in the event of its assignment. In accordance with the 1940 Act, without payment of any penalty, we may terminate the Investment Advisory Agreement with the Adviser upon 60 days’ written notice. The decision to terminate the agreement may be made by a majority of the Board or the stockholders holding a majority of the outstanding shares of our common stock (a “Majority of the Outstanding Shares”). See “Investment Advisory Agreement-Removal of Adviser” below. In addition, without payment of any penalty, the Adviser may generally terminate the Investment Advisory Agreement upon 60 days’ written notice and, in certain circumstances, upon 120 days’ written notice.
Removal of Adviser
The Adviser may be removed by the Board or by the affirmative vote of a Majority of the Outstanding Shares. “Majority of the Outstanding Shares” means the lesser of (1) 67% or more of the outstanding shares of our common stock present at a meeting, if the holders of more than 50% of the outstanding shares of our common stock are present or represented by proxy or (2) a majority of outstanding shares of our common stock.
Compensation of Adviser
We pay the Adviser a fee for its services under the Investment Advisory Agreement 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 the stockholders.
The base management fee is payable quarterly in arrears at an annual rate of 1.00% (1.50% if an exchange listing occurs) of our average gross assets, excluding cash and cash equivalents but including assets purchased with borrowed amounts, at the end of the two most recently completed calendar quarters. The management fee for any partial month or quarter will be appropriately prorated and adjusted for any share issuances or repurchases during the relevant calendar month or quarter. For purposes of the Investment Advisory Agreement, gross assets means our total assets determined on a consolidated basis in accordance with generally accepted accounting principles in the United States, excluding cash and cash equivalents, but including assets purchased with borrowed amounts.
On August 20, 2019, the Company entered into a Letter Agreement with the Adviser pursuant to which, for the period ending December 31, 2019, the Adviser waived 50% of the base management fee paid by the Company under the Investment Advisory Agreement. The waiver was prorated for any partial month or quarter. Management fees waived are not subject to recoupment by the Adviser.
The incentive fee consists of two components that are independent of each other, with the result that one component may be payable even if the other is not. A portion of the incentive fee is based on our income, the income incentive fee, and a portion is based on our capital gains, the capital gains incentive fee, each as described below. The portion of the incentive fee based on income is determined and payable at the end of each quarter in arrears, and equals 100% of the pre-incentive fee net investment income in excess of a 1.50% quarterly preferred return but less than 1.76% (1.818% if an exchange listing occurs), the upper level breakpoint, and 15% (17.50% if an exchange listing occurs) of the amount of pre-incentive fee net investment income that exceeds 1.76% (1.818% if an exchange listing occurs) in any calendar quarter. On an annual basis, the incentive fee equals 15.00% (17.50% if an exchange listing occurs) of income in excess of a 6.00% hurdle rate.
Pre-incentive fee net investment income means dividends (including reinvested dividends), interest and fee income accrued by us during the calendar quarter, minus operating expenses for the quarter (including the management fee, expenses payable under the administration agreement, and any interest expense and dividends 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, debt instruments with payment-in-kind (“PIK”) interest and zero coupon securities), accrued income that we may not have received in cash. The Adviser is not obligated to return the incentive fee it receives on PIK interest that is later determined to be uncollectible in cash. See “Item 1A. Risk Factors- Risks Related to the Adviser and its Affiliates.” Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation.
To determine the income incentive fee, pre-incentive fee net investment income is expressed as a rate of return on the value of our net assets at the end of the immediately preceding calendar quarter. Because of the structure of the incentive fee, it is possible that we may pay an incentive fee in a calendar quarter in which we incur a loss. For example, if we receive pre-incentive fee net investment income in excess of the quarterly hurdle rate, we will pay the applicable incentive fee even if we have incurred a loss in that calendar quarter due to realized capital losses and unrealized capital depreciation. In addition, because the quarterly hurdle rate is calculated based on our net assets, decreases in our net assets due to realized capital losses or unrealized capital depreciation in any given calendar quarter may increase the likelihood that the hurdle
rate is reached and therefore the likelihood of us paying an incentive fee for the subsequent quarter. 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 management fee because gross assets are total assets (including cash received) before deducting liabilities (such as declared dividend payments).
The following is a graphical representation of the calculation of the income-related portion of the incentive fee:
Quarterly Subordinated Incentive Fee on
Pre-Incentive Fee Net Investment Income
(expressed as a percentage of the value of net assets)
0%
1.50%
1.76% (1.818% if an exchange listing occurs)
0%
100%
15%
(17.50% if an exchange listing occurs)
The second component of the incentive fee, the capital gains incentive fee, payable at the end of each calendar year in arrears, equals 15.00% of cumulative realized capital gains from inception through the end of such calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fee for prior periods. We will accrue, but will not pay, a capital gains incentive fee with respect to unrealized appreciation because a capital gains incentive fee would be owed to the Adviser if we were to sell the relevant investment and realize a capital gain. In no event will the capital gains incentive fee payable pursuant to the Investment Advisory Agreement be in excess of the amount permitted by the Investment Advisers Act of 1940, as amended (the “Advisers Act”) including Section 205 thereof.
The fees that are payable under the Investment Advisory Agreement for any partial period will be appropriately prorated.
Limitations of Liability and Indemnification
Under the Investment Advisory Agreement, the Adviser, its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with the Adviser, including without limitation its managing member, will not be liable to us for acts or omissions performed in accordance with and pursuant to the Investment Advisory Agreement, except those resulting from acts constituting criminal conduct, gross negligence, willful misfeasance, 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, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with the Adviser, including without limitation its general partner, and the Administrator from and against any damages, liabilities, costs and expenses, including reasonable legal fees and other expenses reasonably incurred, in or by reason of any pending, threatened or completed action, suit, investigation or other proceeding (including an action or suit by or in the right of the Company or its security holders) arising out of or otherwise based upon the performance of any of the Adviser’s duties or obligations under this Agreement or otherwise as an investment adviser of the Company, except where attributable to criminal conduct, gross negligence, willful misfeasance, bad faith or reckless disregard of such person’s duties under the Investment Advisory Agreement.
Board Approval of the Investment Advisory Agreement
On November 6, 2020, the Board held a meeting to consider and approve the continuation of the Investment Advisory Agreement and related matters for a one-year period commencing November 7, 2020. The Board was provided the information required to consider the Investment Advisory Agreement, including: (a) the nature, quality and extent of the advisory and other services to be provided to us by the Adviser; (b) comparative data with respect to advisory fees or similar expenses paid by other BDCs with similar investment objectives; (c) our projected operating expenses and expense ratio compared to BDCs with similar investment objectives; (d) any existing and potential sources of indirect income to the Adviser from its relationship with us and the profitability of that relationship; (e) information about the services to be performed and the personnel performing such services under the Investment Advisory Agreement; (f) the organizational capability and financial condition of the Adviser and its affiliates; (g) the Adviser’s practices regarding the selection and compensation of brokers that may execute our portfolio transactions and the brokers’ provision of brokerage and research services to the Adviser; and (h) the possibility of obtaining similar services from other third-party service providers or through an internally managed structure.
The Board, including a majority of independent directors, will oversee and monitor our investment performance and will annually review the compensation we pay to the Adviser.
Administration Agreement
Under the terms of the Administration Agreement between the Company and the Administrator, the Administrator performs, or oversees the performance of, required administrative services, which includes providing office space, equipment and office services, maintaining financial records, preparing reports to stockholders and reports filed with the SEC, and managing the payment of expenses and the performance of administrative and professional services rendered by others. We will reimburse the Administrator for services performed for us pursuant to the terms of the Administration Agreement. In addition, pursuant to the terms of the Administration Agreement, the Administrator may delegate its obligations under the Administration Agreement to an affiliate or to a third party and we will reimburse the Administrator for any services performed for us by such affiliate or third party.
Payments under the Administration Agreement are equal to an amount that reimburses the Administrator for its costs and expenses in performing its obligations under the Administration Agreement, including our allocable portion of the compensation paid to our chief compliance officer and chief financial officer and their respective staff who provide services to us. The Board, including the independent directors, will review the general nature of the services provided by the Administrator as well as the related cost to the Company for those services and consider whether the cost is reasonable in light of the services provided.
On March 5, 2020, the Board approved the continuation of the Administration Agreement with the Administrator. Unless earlier terminated as described below, the Administration Agreement will remain in effect year-to-year if approved annually by a majority of the Board or by the holders of a Majority of the Outstanding Shares, and, in each case, a majority of the independent directors.
We may terminate the Administration Agreement, without payment of any penalty, upon 60 days’ written notice. The decision to terminate the agreement may be made by a majority of the Board or the stockholders holding a Majority of the Outstanding Shares. In addition, the Adviser may terminate the Administration Agreement, without payment of any penalty, upon 60 days’ written notice.
Payment of Our Expenses under the Investment Advisory and Administration Agreements
Except as specifically provided below, we anticipate that all investment professionals and staffs of the Adviser, when and to the extent engaged in providing investment advisory and management services to us, and the compensation and routine overhead expenses, of such personnel allocable to such services, will be provided and paid for by the Adviser. We will bear our allocable portion of the compensation paid by the Adviser (or its affiliates) to our chief compliance officer and chief financial officer and their respective staffs (based on a percentage of time such individuals devote, on an estimated basis, to our business affairs). We will also bear all other costs and expenses of our operations, administration and transactions, including, but not limited to (i) investment advisory fees, including management fees and incentive fees, to the Adviser, pursuant to the Investment Advisory Agreement; (ii) our allocable portion of overhead and other expenses incurred by the Adviser (or its affiliates) in performing its administrative obligations under the Investment Advisory Agreement, and (iii) all other expenses of our operations and transactions including, without limitation, those relating to:
•
the cost of our organization and the offering, including reimbursing the Administrator for such costs incurred on our behalf;
•
the cost of calculating our net asset value, including the cost of any third-party valuation services;
•
the cost of effecting any sales and repurchases of our common stock and other securities;
•
fees and expenses payable under any dealer manager or placement agent agreements, if any;
•
administration fees payable under the Administration Agreement and any sub-administration agreements, including related expenses;
•
debt service and other costs of borrowings or other financing arrangements;
•
costs of hedging;
•
expenses, including travel expense, incurred by the Adviser, or members of the investment team, or payable to third parties, performing due diligence on prospective portfolio companies and, if necessary, enforcing our rights;
•
transfer agent and custodial fees;
•
fees and expenses associated with marketing efforts;
•
federal and state registration fees, any stock exchange listing fees and fees payable to rating agencies;
•
federal, state and local taxes;
•
independent directors’ fees and expenses including certain travel expenses;
•
costs of preparing financial statements and maintaining books and records and filing reports or other documents with the SEC (or other regulatory bodies) and other reporting and compliance costs, including registration and listing fees, and the compensation of professionals responsible for the preparation of the foregoing;
•
the costs of any reports, proxy statements or other notices to stockholders (including printing and mailing costs), the costs of any stockholder or director meetings and the compensation of personnel responsible for the preparation of the foregoing and related matters;
•
commissions and other compensation payable to brokers or dealers;
•
research and market data;
•
fidelity bond, directors’ and officers’ errors and omissions liability insurance and other insurance premiums;
•
direct costs and expenses of administration, including printing, mailing, long distance telephone and staff;
•
fees and expenses associated with independent audits, outside legal and consulting costs;
•
costs of winding up our affairs;
•
costs incurred by either the Administrator or us in connection with administering our business, including payments under the Administration Agreement;
•
extraordinary expenses (such as litigation or indemnification); and
•
costs associated with reporting and compliance obligations under the 1940 Act and applicable federal and state securities laws.
We are obligated to reimburse the Adviser for expense payments made by the Adviser to us in connection with the Expense Support Agreement following any calendar quarter in which we have available operating funds. The amount of the reimbursement payment for any calendar quarter will be equal to the lesser of (i) the excess operating funds in such calendar quarter, and (ii) the aggregate amount of all expense payments made by the Adviser to us within three years prior to the last business day of such calendar quarter that have not been previously reimbursed by us to the Adviser.
In addition, we and our Administrator have contracted with U.S. Bank N.A. to provide custodial and various accounting and administrative services, including but not limited to, preparing preliminary financial information for review by the Adviser, maintaining accounting and corporate books and records, processing trade information provided by us and performing testing in respect to RIC compliance.
We expect that our general and administrative expenses will increase in dollar terms during periods of asset growth, but will decline as a percentage of total assets during such periods.
The Private Offering
We have entered into separate subscription agreements with a number of investors providing for the private placement of shares of our common stock pursuant to the Private Offering and may enter into additional subscription agreements from time to time. We completed our Initial Closing on September 26, 2019 and expect subsequent closings of the Private Offering will occur, from time to time, in the Adviser’s sole discretion. Each investor will make a Capital Commitment to purchase shares of our common stock pursuant to the subscription agreement. Investors will be required to make capital contributions to purchase shares of our common stock each time we deliver a drawdown notice, which will be issued based on our anticipated investment activities and capital needs, in an aggregate amount not to exceed each investor’s respective Capital Commitment. We will deliver drawdown requests at least 10 business days prior to the required funding date. All purchases of our common stock will generally be made pro rata in accordance with remaining Capital Commitments of all investors, at a per-share price equal to the net asset value per share of our common stock as of the close of the last quarter preceding the drawdown date, subject to adjustment in certain circumstances. Any adjustments would take into account a determination of changes to net asset value within 48 hours of the sale to assure compliance with Section 23(b) of the 1940 Act. At the earlier of (i) an exchange listing and (ii) the end of the Commitment Period (as defined below), stockholders will be released from any further obligation to fund drawdowns and purchase additional shares of our common stock, subject to certain conditions described in the subscription agreement. The “Commitment Period” will continue until the five year anniversary of the Initial Closing; provided, however, that the Commitment Period for any stockholder that makes its initial Capital Commitment after the two year anniversary of the Initial Closing will extend until the three year anniversary of such stockholder’s initial Capital Commitment. In addition to Capital Commitments, we also may from time to time issue common stock in exchange for in-kind contributions of securities. No investor will be permitted to sell, assign, transfer or otherwise dispose of its shares or Capital Commitment unless the Adviser provides its prior written consent and the transfer is otherwise made in accordance with applicable law, prior to an exchange listing.
While we expect each subscription agreement to reflect the terms and conditions summarized in the preceding paragraph, we reserve the right to enter into subscription agreements that contain terms and conditions not found in the subscription agreements entered into with other investors, subject to applicable law.
Regulation as a Business Development Company
The following discussion is a general summary of the material prohibitions and descriptions governing BDCs generally. It does not purport to be a complete description of all of the laws and regulations affecting BDCs.
Qualifying Assets. Under the 1940 Act, a BDC 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 business are any of the following:
(1)
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. An eligible portfolio company is defined in the 1940 Act as any issuer which:
(a)
is organized under the laws of, and has its principal place of business in, the United States;
(b)
is not an investment company (other than a small business investment company wholly owned by the business development company) or a company that would be an investment company but for certain exclusions under the 1940 Act; and
(c)
satisfies any of the following:
(i)
does not have any class of securities that is traded on a national securities exchange;
(ii)
has a class of securities listed on a national securities exchange, but has an aggregate market value of outstanding voting and non-voting common equity of less than $250 million;
(iii)
is controlled by a business development company or a group of companies including a business development company and the business development company has an affiliated person who is a director of the eligible portfolio company; or
(iv)
is a small and solvent company having total assets of not more than $4 million and capital and surplus of not less than $2 million.
(2)
Securities of any eligible portfolio company controlled by the Company.
(3)
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 thereto, 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.
(4)
Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities and the Company already owns 60% of the outstanding equity of the eligible portfolio company.
(5)
Securities received in exchange for or distributed on or with respect to securities described in (1) through (4) above, or pursuant to the exercise of warrants or rights relating to such securities.
(6)
Cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment.
In addition, a BDC must be operated for the purpose of making investments in the types of securities described in (1), (2) or (3) above.
Significant Managerial Assistance. A BDC must have been organized and have its principal place of business in the United States and must be operated for the purpose of making investments in the types of securities described above. However, in order to count portfolio securities as qualifying assets for the purpose of the 70% test, the BDC must either control the issuer of the securities or must offer to make available to the issuer of the securities (other than small and solvent companies described above) significant managerial assistance; except that, where the BDC purchases such securities in conjunction with one or more other persons acting together, one of the other persons in the group may make available such managerial assistance. Making available significant managerial assistance means, among other things, any arrangement whereby the BDC, through its directors, officers or employees, 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 through monitoring of portfolio company operations, selective participation in board and management meetings, consulting with and advising a portfolio company’s officers or other organizational or financial guidance.
Temporary Investments. Pending investment in other types of qualifying assets, as described above, our investments can consist of cash, cash equivalents, U.S. government securities or high quality debt securities maturing in one year or less from the time of investment, which are referred to herein, collectively, as temporary investments, so that 70% of our assets would be qualifying assets.
Warrants. Under the 1940 Act, a BDC is subject to restrictions on the issuance, terms and amount of warrants, options or rights to purchase shares of capital stock that it may have outstanding at any time. In particular, the amount of capital stock that would result from the conversion or exercise of all outstanding warrants, options or rights to purchase capital stock cannot exceed 25% of the BDC’s total outstanding voting shares of capital stock.
Senior Securities; Coverage Ratio. We are 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, would be equal to at least 150% immediately after each such issuance. In addition, while any senior securities remain outstanding, we will be required to make provisions to prohibit any dividend 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 dividend distribution or repurchase. We will also be permitted to borrow amounts up to 5% of the value of our total assets for temporary purposes, which borrowings would not be considered senior securities.
As of December 31, 2020, our asset coverage ratio was 182.2% See “Item 1. Description of Business-Capital Resources and Borrowings.”
Code of Ethics. We and the Adviser have each adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act and Rule 204A-1 under the Advisers Act, respectively, that establishes procedures for personal investments and restricts certain personal securities transactions. Personnel subject to the code are permitted to 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 the code’s requirements.
We hereby undertake to provide a copy of the codes to any person, without charge, upon request. Requests for a copy of the codes may be made in writing addressed to BC Partners Lending Corporation, Attn: Chief Compliance Officer, 650 Madison Avenue, New York, New York 10022, or by contacting us at (212) 891-2880.
Affiliated Transactions. We may be prohibited under the 1940 Act from conducting certain transactions with our affiliates without the prior approval of our directors who are not interested persons and, in some cases, the prior approval of the SEC. On October 23, 2018, the SEC issued an order granting our application for exemptive relief to co-invest, subject to the satisfaction of certain conditions, in certain private placement transactions, with other funds managed by the Adviser or its affiliates, including BCP Special Opportunities Fund I LP, BCP Special Opportunities Fund II LP, PTMN and any future funds that are advised by the Adviser or its affiliated investment advisers.
Exclusion from CFTC Regulation. Rule 4.5 of the Commodity Futures Trading Commission (“CFTC”) permits investment advisers to BDCs to claim an exclusion from the definition of “commodity pool operator” under the Commodity Exchange Act (the “CEA”) with respect to a fund, provided certain requirements are met. In order to permit our Adviser to claim this exclusion with respect to us, we must limit our transactions in certain futures, options on futures and swaps deemed “commodity interests” under CFTC rules (excluding transactions entered into for “bona fide hedging purposes,” as defined under CFTC regulations) such that either: (i) the aggregate initial margin and premiums required to establish such futures, options on futures and swaps do not exceed 5% of the liquidation value of our portfolio, after taking into account unrealized profits and losses on such positions; or (ii) the aggregate net notional value of such futures, options on futures and swaps does not exceed 100% of the liquidation value of our portfolio, after taking into account unrealized profits and losses on such positions. In addition to meeting one of the foregoing trading limitations, we may not market our self as a commodity pool or otherwise as a vehicle for trading in the futures, options or swaps markets. Accordingly, we are not subject to regulation under the CEA or otherwise regulated by the CFTC. If the Adviser was unable to claim the exclusion with respect to us, the Adviser would become subject to registration and regulation as a commodity pool operator, which would subject the Adviser and us to additional registration and regulatory requirements and increased operating expenses.
Other. We will be periodically examined by the SEC for compliance with the 1940 Act and be subject to the periodic reporting and related requirements of the 1934 Act.
We are also required to provide and maintain a bond issued by a reputable fidelity insurance company to protect against larceny and embezzlement. Furthermore, as a BDC, we are prohibited from protecting any director or officer against any liability to 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 are also required to designate a chief compliance officer and to adopt and implement written policies and procedures reasonably designed to prevent violation of the federal securities laws and to review these policies and procedures annually for their adequacy and the effectiveness of their implementation.
We are not permitted to change the nature of our business so as to cease to be, or to withdraw our election as, a BDC unless approved by a Majority of the Outstanding Shares.
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 forth below. The guidelines will be reviewed periodically by the Adviser and our non-interested directors, and, accordingly, are subject to change.
As an investment adviser registered under the Advisers Act, the Adviser has a fiduciary duty to act solely in the best interests of its clients. As part of this duty, the Adviser recognizes that it must vote client securities in a timely manner free of conflicts of interest and in the best interests of its clients. These policies and procedures for voting proxies for the Adviser’s investment advisory clients are intended to comply with Section 206 of, and Rule 206(4)-6 under, the Advisers Act.
Proxy Policies
The Adviser will vote all proxies relating to our portfolio securities in 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 impact on the portfolio securities held by the Company. Although the Adviser will generally vote against proposals that may have a negative impact on our portfolio securities, the Adviser may vote for such a proposal if there exists compelling long-term reasons to do so. The Adviser will abstain from voting only in unusual circumstances and where there is a compelling reason to do so.
The Adviser’s proxy voting decisions are made by members of the Investment Committee who are responsible for monitoring each of our investments. To ensure that the Adviser’s vote is not the product of a conflict of interest, the Adviser requires that: (i) anyone involved in the decision making process disclose to the Adviser’s 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 (ii) 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.
Proxy Voting Records
You may obtain information about how the Adviser voted proxies by making a written request for proxy voting information to BC Partners Lending Corporation, Attn: Chief Compliance Officer, 650 Madison Avenue, New York, New York 10022.
Privacy Policy
We are committed to maintaining the confidentiality, integrity and security of non-public personal information relating to investors. 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 collect any non-public personal information relating to our investors, other than name, address, and number of shares held by the investor. This information is used only so that we can service your account, send you annual reports, proxy statements, and other information required by law. With regard to this information, we maintain physical, electronic and procedural safeguards designed to protect the non-public personal information of our investors.
We may share information that we collect regarding an investor with certain of our service providers for legitimate business purposes, for example, in order to process trades or mail information to investors. In addition, we may disclose information that we collect regarding an investor as required by law or in connection with regulatory or law enforcement inquiries.
Certain U.S. Federal Income Tax Considerations
The following discussion is a general summary of certain U.S. federal income tax considerations applicable to the Company and the ownership of our common stock. This discussion does not purport to be complete or to deal with all aspects of U.S. federal income taxation that may be relevant to the Company or any particular investor. This discussion is based upon present provisions of the Code, the regulations promulgated thereunder, and judicial and administrative ruling authorities, all of which are subject to change, or differing interpretations (possibly with retroactive effect). Prospective investors should consult their tax advisers with regard to the U.S. federal tax consequences of the purchase, ownership, or disposition of our common stock, as well as the tax consequences arising under the laws of any state, foreign country or other taxing jurisdiction.
Taxation as a Regulated Investment Company
We elected to be treated, and to qualify each taxable year, as a RIC under Subchapter M of the Code.
To qualify under Subchapter M for the favorable tax treatment accorded to RICs, the Company must, among other things: (1) have an election in effect to be treated as a BDC under the 1940 Act at all times during each taxable year; (2) derive in each taxable year at least 90% of its gross income from (a) dividends, interest, payments with respect to certain securities loans, gains from the sale or other disposition of stock, securities or foreign currencies, or other income (including but not limited to gain from options, futures and forward contracts) derived with respect to its business of investing in such stock, securities or foreign currencies and (b) net income derived from interests in certain publicly traded partnerships that are treated as partnerships for U.S. federal income tax purposes and that derive less than 90% of their gross income from the items described in (a) above (each, a “Qualified Publicly Traded Partnership”); and (3) diversify its holdings so that, at the end of each quarter of each taxable year of the Company (a) at least 50% of the value of the Company’s total assets is represented by cash, cash items (including receivables), U.S. government securities, securities of other RICs, and other securities, with these other securities limited, with respect to any one
issuer, to an amount not greater in value than 5% of the value of the Company’s total assets, and to not more than 10% of the outstanding voting securities of such issuer, and (b) not more than 25% of the value of the Company’s total assets is represented by the securities (other than U.S. government securities or securities of other RICs) of (i) any one issuer, (ii) any two or more issuers that the Company controls and that are determined to be engaged in the same or similar trades or businesses or related trades or businesses or (iii) any one or more Qualified Publicly Traded Partnerships.
As a RIC, the Company generally will not be subject to U.S. federal income tax on its investment company taxable income (as that term is defined in the Code, but determined without regard to the deduction for dividends paid) and net capital gain (the excess of net long-term capital gain over net short-term capital loss), if any, that it distributes in each taxable year to its stockholders, provided that it distributes at least 90% of the sum of its investment company taxable income and its net tax-exempt income for such taxable year. The Company intends to distribute to its stockholders, at least annually, substantially all of its investment company taxable income and net capital gain.
Amounts not distributed on a timely basis in accordance with a calendar year distribution requirement are subject to a nondeductible 4% U.S. federal excise tax. To prevent imposition of the excise tax, the Company must distribute during each calendar year an amount at least equal to the sum of (i) 98% of its ordinary income (not taking into account any capital gains or losses) for the calendar year, (ii) 98.2% of its capital gains in excess of its capital losses (adjusted for certain ordinary losses) for the one-year period ending October 31 of the calendar year, and (iii) any ordinary income and capital gains for previous years that were not distributed during those years. For these purposes, the Company will be deemed to have distributed any income or gains on which it paid U.S. federal income tax.
A distribution will be treated as paid on December 31 of any calendar year if it is declared by the Company in October, November or December with a record date in such a month and paid by the Company during January of the following calendar year. Such distributions will be taxable to stockholders in the calendar year in which the distributions are declared, rather than the calendar year in which the distributions are received.
If the Company failed to qualify as a RIC or failed to satisfy the 90% distribution requirement in any taxable year, the Company would be subject to U.S. federal income tax at regular corporate rates on its taxable income (including distributions of net capital gain), even if such income were distributed to its stockholders, and all distributions out of earnings and profits would be taxed to stockholders as ordinary dividend income. Such distributions generally would be eligible (i) to be treated as “qualified dividend income” in the case of individual and other noncorporate stockholders and (ii) for the dividends received deduction in the case of corporate stockholders. In addition, the Company could be required to recognize unrealized appreciation, pay taxes and make distributions (which could be subject to interest charges) before requalifying for taxation as a RIC.
Distributions
Distributions to stockholders by us of ordinary income (including “market discount” realized by us on the sale of debt securities), and of net short-term capital gains, if any, realized by us will generally be taxable to stockholders as ordinary income to the extent such distributions are paid out of our current or accumulated earnings and profits. Distributions, if any, of net capital gains properly reported as “capital gain dividends” will be taxable as long-term capital gains, regardless of the length of time the stockholder has owned our common stock. A distribution of an amount in excess of our current and accumulated earnings and profits (as determined for U.S. federal income tax purposes) will be treated by a stockholder as a return of capital which will be applied against and reduce the stockholder’s basis in his or her common stock. To the extent that the amount of any such distribution exceeds the stockholder’s basis in his or her common stock, the excess will be treated by the stockholder as gain from a sale or exchange of our common stock. Distributions paid by us generally will not be eligible for the dividends received deduction allowed to corporations or for the reduced rates applicable to certain qualified dividend income received by non-corporate stockholders.
Distributions will be treated in the manner described above regardless of whether such distributions are paid in cash or invested in additional common stock pursuant to the dividend reinvestment plan. Stockholders receiving distributions in the form of additional common stock will be treated as receiving a distribution in the amount of cash that they would have received if they had elected to receive the distribution in cash, unless we issue additional common stock with a fair market value equal to or greater than net asset value, in which case, such stockholders will be treated as receiving a distribution in the amount of the fair market value of the distributed common stock. The additional common stock received by a stockholder pursuant to the dividend reinvestment plan will have a new holding period commencing on the day following the day on which the shares of our common stock were credited to the stockholder’s account.
We may elect to retain its net capital gain or a portion thereof for investment and be taxed at corporate rates on the amount retained. In such case, it may designate the retained amount as undistributed capital gains in a notice to its stockholders, who will be treated as if each received a distribution of his pro rata share of such gain, with the result that each stockholder will (i) be required to report its pro rata share of such gain on its tax return as long-term capital gain, (ii) receive a refundable tax credit for its pro rata share of tax paid by us on the gain and (iii) increase the tax basis for its common stock by an amount equal to the deemed distribution less the tax credit.
The Internal Revenue Service currently requires that a RIC that has two or more classes of stock allocate to each such class proportionate amounts of each type of its income (such as ordinary income and capital gains) based upon the percentage of total dividends paid to each class for the tax year. Accordingly, if we issue preferred stock, we intend to allocate capital gain dividends, if any, between its common stock and preferred stock in proportion to the total dividends paid to each class with respect to such tax year. Stockholders will be notified annually as to the U.S. federal tax status of distributions, and stockholders receiving distributions in the form of additional common stock will receive a report as to the net asset value of those shares of common stock.
A “publicly offered regulated investment company” or a “publicly offered RIC” is a RIC whose shares are either (i) continuously offered pursuant to a public offering within the meaning of Section 4 of the 1933 Act, (ii) regularly traded on an established securities market or (iii) held by at least 500 persons at all times during the taxable year. We believe that we currently do not qualify as a publicly offered RIC, although we may qualify as a publicly offered RIC for future years. If we are not a publicly offered RIC for any period, a non-corporate stockholder’s allocable portion of our affected expenses, including our management fees, will be treated as an additional distribution to the stockholder and will be treated as miscellaneous itemized deductions that are deductible only to the extent permitted by applicable law. Under current law, such expenses will not be deductible by any such stockholder for tax years that begin prior to January 1, 2026.
Dividend Reinvestment Plan
We have adopted a dividend reinvestment plan, pursuant to which we will reinvest all cash dividends authorized by the Board on behalf of our stockholders who do not elect to receive their dividends in cash as provided below. As a result, if the Board authorizes, and we declare, a cash dividend or other distribution, then our stockholders who have not opted out of our dividend reinvestment plan will have their cash distributions automatically reinvested in additional shares of our common stock, including fractional shares as necessary and as described below, rather than receiving the cash dividend or other distribution.
The number of shares to be issued to a stockholder under the dividend reinvestment plan will be determined by dividing the total dollar amount of the distribution payable to such stockholder by the net asset value per share of our common stock, as of the last day of our calendar quarter immediately preceding the date such distribution was declared. We intend to use newly issued shares to implement the plan.
No action is required on the part of a registered stockholder to have his, her or its cash dividend or other distribution reinvested in shares of our common stock. A registered stockholder is able to elect to receive an entire cash dividend or other distribution in cash by notifying the Adviser in writing so that such notice is received by the Adviser no later than ten days prior to the record date for distributions to the stockholders.
There are no brokerage charges or other charges to stockholders who participate in the distribution reinvestment plan.
A stockholder who does not opt out of the dividend reinvestment plan will generally be subject to the same U.S. federal, state and local tax consequences as a stockholder who elects to receive its distributions in cash. Because a stockholder that participates in the dividend reinvestment plan will not actually receive any cash, such a stockholder will not have such cash available to pay any applicable taxes on the deemed distribution. A stockholder that participates in the dividend reinvestment plan and thus is treated as having invested in additional shares of our stock will have a basis in such additional shares of stock equal to the total dollar amount treated as a distribution for U.S. federal income tax purposes. The stockholder’s holding period for such stock will commence on the day following the day on which the shares are credited to the stockholder’s account. Stockholders that participate in the dividend reinvestment plan will receive tax information annually for their personal records and to help them prepare their federal income tax return.
The distribution reinvestment plan is terminable by us upon notice in writing mailed to each stockholder of record at least 30 days prior to the effectiveness of such termination.
Investment Portfolio
We seek to pursue a differentiated investment strategy focused on a segment of the middle-market and utilizing a “Core/Core-Plus” approach which BCP Credit believes will result in an opportunity set characterized by higher yields, stronger covenants and greater access for performing due-diligence. The Core/Core-Plus strategy can be described as follows:
Core
Traditional corporate asset and cash flow lending to sponsor-backed companies which provide a more predictable investment pace and where borrowers prioritize speed and certainty of execution. Opportunities will be sourced through private equity sponsors and sourcing relationships.
Core-Plus
Includes lending to family and entrepreneur-owned businesses, asset-based lending, bridge financing and niche verticals as well as proprietary sponsor owned company financings. Opportunities will be sourced through the BC Partners platform, regional banks, industry contacts, and other avenues where BCPL can provide custom capital solutions and borrowers will value the BCP Platform, BCP Credit Team’s experience and operational resources in addition to capital.
Our portfolio is expected to be split approximately 50/50 between the Core/Core-Plus strategies with a typical investment size of approximately 2% of commitments (once fully ramped) that includes primarily debt investments including secured loans and unsecured loans and, to a lesser extent, equity investments in private middle market companies. The average investment size will vary as the size of our capital base varies.
As of December 31, 2020, we had investments with an aggregate fair value of $80.1 million in 38 portfolio companies.
We may also invest in other strategies if we are presented with attractive opportunities. We may invest, to the extent permitted by law, in the securities and instruments of other investment companies and in private funds. We may also co-invest on a concurrent basis with affiliates of ours, subject to compliance with applicable regulations and our allocation procedures. Certain types of negotiated co-investments may be made only in accordance with the terms of the exemptive order we received from the SEC permitting us to do so, as described above. Under the terms of the exemptive order, in order for us to participate in a co-investment transaction a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors must conclude that (i) the terms of the proposed transaction, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching with respect to us or our stockholders on the part of any person concerned, and (ii) the proposed transaction is consistent with the interests of our stockholders and is consistent with our investment objectives and strategies and certain criteria established by the Board.
Investments consisted of the following at December 31, 2020 and 2019:
December 31, 2020
Amortized
Cost
Fair
Value
Net Unrealized
Appreciation
(Depreciation)
Senior Secured Loan
$
71,186,412
$
71,395,401
$
208,989
Structured Note
1,842,332
1,947,769
105,437
Subordinated Structured Note
333,334
270,834
(62,500
)
Junior Secured Loan
990,132
990,000
(132
)
Bond
3,953,597
4,175,000
221,403
Equity/Other
-
-
-
Repurchase Agreement
1,302,082
1,371,838
69,756
Total
$
79,607,889
$
80,150,842
$
542,953
December 31, 2019
Amortized
Cost
Fair
Value
Net Unrealized
Appreciation
(Depreciation)
Senior Secured First Lien Debt
$
32,757,424
$
32,837,653
$
80,229
Subordinated Structured Note
1,330,000
1,330,000
-
Total
$
34,087,424
$
34,167,653
$
80,229
As of December 31, 2020 and 2019, the Company had outstanding unfunded commitments related to existing portfolio companies of $7.86 million and $0.7 million, respectively.
The following tables summarize the industry and geographic composition of our investment portfolio based on fair value as of December 31, 2020 and 2019:
December 31, 2020
Amortized
Percentage of
Fair
Percentage of
Cost
Portfolio
Value
Portfolio
Collateralized Loan Obligation - Debt Class
$
1,842,332
2.3
%
$
1,947,769
2.4
%
Collateralized Loan Obligation - Equity Class
333,334
0.4
%
270,834
0.3
%
Communication Services
3,175,177
4.0
%
3,233,838
4.0
%
Consumer Discretionary
5,624,156
7.1
%
5,662,735
7.1
%
Consumer Staples
5,486,024
6.9
%
5,574,627
7.0
%
Financials
7,795,211
9.8
%
7,779,630
9.7
%
Healthcare
12,082,969
15.2
%
12,147,682
15.2
%
Industrials
16,055,707
20.1
%
16,265,790
20.3
%
Information Technology
27,212,979
34.2
%
27,267,937
34.0
%
Total
$
79,607,889
100.0
%
$
80,150,842
100.0
%
December 31, 2019
Amortized
Percentage of
Fair
Percentage of
Cost
Portfolio
Value
Portfolio
Consumer Discretionary
$
1,748,566
5.1
%
$
1,751,414
5.1
%
Financials
5,331,610
15.6
%
5,353,511
15.7
%
Healthcare
5,945,860
17.4
%
5,983,686
17.5
%
Industrials
6,788,924
19.9
%
6,796,229
19.9
%
Information Technology
11,326,427
33.3
%
11,331,097
33.2
%
Materials
990,006
2.9
%
990,006
2.9
%
Telecommunication Services
1,956,031
5.8
%
1,961,710
5.7
%
Total
$
34,087,424
100.0
%
$
34,167,653
100.0
%
December 31, 2020
Amortized
Percentage of
Fair
Percentage of
Cost
Portfolio
Value
Portfolio
United States
$
77,432,223
97.3
%
$
77,932,239
97.2
%
International
2,175,666
2.7
%
2,218,603
2.8
%
Total
$
79,607,889
100.0
%
$
80,150,842
100.0
%
December 31, 2019
Amortized
Percentage of
Fair
Percentage of
Cost
Portfolio
Value
Portfolio
United States
$
32,757,424
96.1
%
$
32,837,653
96.1
%
International
1,330,000
3.9
%
1,330,000
3.9
%
Total
$
34,087,424
100.0
%
$
34,167,653
100.0
%
Capital Resources and Borrowings
We expect to generate cash primarily from (i) the net proceeds of the Private Offering, (ii) cash flows from our operations, (iii) the financing arrangement we entered into and (iv) any future offerings of our equity or debt securities.
Our debt obligations consisted of the following at December 31, 2020 and 2019:
December 31, 2020
Total
Aggregate
Borrowing
Capacity
Total
Principal
Outstanding
Less
Deferred
Financing
Costs
Amount per
Consolidated
Statements of
Assets and
Liabilities
Credit Facility
$
50,000,000
$
50,000,000
$
(729,942
)
$
49,270,058
Total Debt
$
50,000,000
$
50,000,000
$
(729,942
)
$
49,270,058
December 31, 2019
Total
Aggregate
Borrowing
Capacity
Total
Principal
Outstanding
Less
Deferred
Financing
Costs
Amount per
Consolidated
Statements of
Assets and
Liabilities
Credit Facility
$
50,000,000
$
20,000,000
$
(657,271
)
$
19,342,729
Total Debt
$
50,000,000
$
20,000,000
$
(657,271
)
$
19,342,729
For the periods ended December 31, 2020 and 2019, the components of interest expense were as follows:
For the Year Ended December 31, 2020
For the Period from
October 2, 2019 (commencement of operations)
to December 31, 2019
Interest expense
$
930,287
$
35,367
Amortization of deferred financing costs
82,329
2,891
Total interest expense
$
1,012,616
$
38,258
Average debt outstanding
26,356,948
3,043,478
Weighted average interest rate
3.5
%
4.5
%
Available information.
We file with or submit to the SEC periodic and current reports, proxy statements and other information meeting the informational requirements of the 1934 Act. All such filings, as well as registration statements and related exhibits and schedules, are available to the public on the SEC’s website at www.sec.gov.
We will also provide electronic or paper copies of our filings free of charge upon request.
Risk Factor Summary
The following is only a summary of the principal risks that may materially adversely affect our business, financial condition, results of operations
and cash flows. The following should be read in conjunction with the more complete discussion of the risk factors we face, which are set forth in the section entitled “Risk Factors” in this report.
Risks Related To Our Business And Structure
•
We are a relatively new company, have a limited operating history and may experience fluctuations in our quarterly results.
•
Our Board may change our operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse to our results of operations and financial condition.
•
Price declines in the medium- and large-sized U.S. corporate debt market may adversely affect the fair value of our portfolio, reducing our net asset value through increased net unrealized depreciation.
•
Capital markets may experience periods of disruption and instability. These market conditions could materially adversely affect the Company’s business, financial condition and results of operations.
•
Major public health issues, and specifically the novel coronavirus COVID-19, have and could continue to have an adverse impact on our financial condition and results of operations and other aspects of our business.
•
Our ability to achieve our investment objective depends on the ability of the Adviser to manage and support our investment process and to a significant extent upon relationships with private equity sponsors, investment banks and commercial banks.
•
We may face increasing competition for investment opportunities, and may have difficulty sourcing investment opportunities.
•
As required by the 1940 Act, a significant portion of our investment portfolio is and will be recorded at fair value as determined in good faith by our Board and, as a result, there is and will be uncertainty as to the value of our portfolio investments.
•
There is a risk that investors in our common stock may not receive distributions and the amount of any distributions we may make is uncertain.
•
We have not established any limit on the amount of funds we may use from available sources, to fund distributions.
•
Changes in laws or regulations governing our operations, including U.S. tariff and import/export regulations, may adversely affect our business or our portfolio companies.
•
As a public reporting company, we are subject to regulations not applicable to private companies, and if we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports
•
Any unrealized depreciation we experience on our portfolio may be an indication of future realized losses, which could reduce our income available for distribution.
•
We are dependent on information systems, and systems failures, as well as operating or cybersecurity failures, could significantly disrupt our business.
Risks Related to the Adviser and its Affiliates
•
The Adviser has limited prior experience managing a BDC or a RIC and may face conflicts of interest caused by compensation arrangements with us and our affiliates or related to obligations to other clients.
•
We may be obligated to pay the Adviser incentive compensation, which is determined without independent assessment, even if we incur a net loss due to a decline in the value of our portfolio.
•
The Adviser relies on key personnel, the loss of any of whom could impair its ability to successfully manage us.
•
The Adviser’s influence on conducting our operations gives it the ability to increase its fees, make speculative investments or incur leverage.
Risks Related to Business Development Companies
•
Failure to maintain our status as a BDC would reduce our operating flexibility and regulations governing our operation as a BDC and RIC will affect our ability to raise, and the way in which we raise, additional capital or borrow for investment purposes, which may have a negative effect.
•
Our ability to enter into transactions with our affiliates is restricted.
•
We are uncertain of our sources for funding our future capital needs.
Risks Related to Our Investments
•
Our investments in prospective portfolio companies may be risky and we generally will not control our portfolio companies.
•
To the extent original issue discount constitutes a portion of our income, we will be exposed to risks associated with the deferred receipt of cash representing such income.
•
Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies and our debt investments could be subordinated to claims of other creditors.
•
We may invest through joint ventures, partnerships or other special purpose vehicles and investments through these vehicles may entail greater risks, or risks that we otherwise would not incur, if we otherwise made such investments directly.
•
We will be exposed to risks associated with changes in interest rate, economic recessions and downturns.
•
Second priority liens on collateral securing debt investments that we make to our portfolio companies may be subject to control by senior creditors with first priority liens. If there is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and us.
•
A covenant breach or other defaults by our portfolio companies may adversely affect our operating results.
•
Our investments may be illiquid and we may not realize gains from our equity investments.
•
An investment strategy focused primarily on privately-held companies presents certain challenges, including, but not limited to, the lack of available information about these companies.
•
We may not have the funds or ability to make additional investments in our portfolio companies or to fund our unfunded debt commitments.
•
Prepayments of our debt investments by our portfolio companies could adversely impact our results of operations and reduce our return on equity.
Risks Related to Debt Financing
•
We borrow money, which magnifies the potential for loss on amounts invested in us and may increase the risk of investing in us. We may default under our credit facilities and provisions in a credit facility may limit our investment discretion.
•
Changes in interest rates may affect our cost of capital and net investment income.
Federal Income Tax Risks
•
We will be subject to corporate-level income tax if we are unable to qualify as a RIC under Subchapter M of the Code or to satisfy RIC distribution requirements.
•
We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income.
•
If we do not qualify as a “publicly offered regulated investment company,” as defined in the Code, a non-corporate stockholder will be taxed as though it received a distribution of some of our expenses.
Risks Relating to an Investment in Our Common Stock
•
An investment in our common stock will have limited liquidity and you may not receive a full return of your invested capital if you sell your shares. Until we complete a liquidity event, it is unlikely that you will be able to sell your shares.
•
We may be unable to invest a significant portion of the net proceeds from an offering of our securities on acceptable terms in an acceptable timeframe.
•
A stockholder’s interest in us will be diluted if we issue additional shares of common stock, which could reduce the overall value of an investment in us.
•
The net asset value of our common stock may fluctuate significantly.
•
Certain large stockholders could influence, and may continue to exert influence, over our management and affairs and over most influence votes requiring stockholder approval.

---

ITEM 1A. RISK FACTORS
Item 1A. Risk Factors.
You should carefully consider the risk factors described below, together with all of the other information included in this Annual Report, including our consolidated financial statements and the related notes thereto, before you decide whether to make an investment in our securities. The risks set out below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. If any of the following events occur, our business, financial condition and results of operations could be materially and adversely affected. In such case, the net asset value of our common stock could decline, and you may lose all or part of your investment.
Risks Related To Our Business And Structure
We are a relatively new company and have a limited operating history.
Although the investment professionals of BCP Credit and the Adviser have substantial credit-oriented investment experience generally (including, in certain instances, at their prior firm(s)), the Company and the Adviser have minimal operating history and we have no financial information on which a prospective investor can evaluate an investment in our common stock or our prior performance. The sponsoring of the Company and the BCP Credit platform represents a new business initiative for BC Partners LLP and there can be no assurance that it will be successful. Members of the Investment Team have not previously worked together at BC Partners LLP prior to the formation of the BCP Credit platform. As a result, we are subject to the business risks and uncertainties associated with recently formed businesses, including the risk that we will not achieve our investment objective and the value of a stockholder’s investment could decline substantially or become worthless. While we believe that the past professional experiences, including investment and financial experience of the Investment Team will increase the likelihood that the Adviser will be able to manage the Company successfully, there can be no assurance that this will be the case.
Our Board may change our operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse to our results of operations and financial condition.
Our Board has the authority to modify or waive our current operating policies, investment criteria and strategies without prior notice and without stockholder approval. We cannot predict the effect any changes to our current operating policies, investment criteria and strategies would have on our business, net asset value, operating results and value of our stock. However, the effects might be adverse, which could negatively impact our ability to pay you distributions and cause you to lose all or part of your investment. Moreover, we have significant flexibility in investing our assets and may invest in ways investors may not agree with or in ways other than those previously disclosed or disclosed herein.
Price declines in the medium- and large-sized U.S. corporate debt market may adversely affect the fair value of our portfolio, reducing our net asset value through increased net unrealized depreciation.
Conditions in the medium- and large-sized U.S. corporate debt market may deteriorate, as seen during the global financial crisis from 2007-2009, which may cause pricing levels to similarly decline or be volatile. During the financial crisis, many institutions were forced to raise cash by selling their interests in performing assets in order to satisfy margin requirements or the equivalent of margin requirements imposed by their lenders and/or, in the case of hedge funds and other investment vehicles, to satisfy widespread redemption requests. This resulted in a forced deleveraging cycle of price declines, compulsory sales, and further price declines, with falling underlying credit values, and other constraints resulting from the credit crisis generating further selling pressure. If similar events occurred in the medium- and large-sized U.S. corporate debt market, our net asset value could decline through an increase in unrealized depreciation and incurrence of realized losses in connection with the sale of our investments, which could have a material adverse impact on our business, financial condition and results of operations.
Capital markets may experience periods of disruption and instability. These market conditions could materially adversely affect the Company’s business, financial condition and results of operations.
The U.S. and global capital markets have in the past and may in the future experience periods of volatility and disruption during economic downturns and recessions. While credit markets and the United States economy have experienced relative stability since the global financial crisis from 2007-2009, there can be no assurance that market conditions will remain or improve further in the near future.
For instance, in August 2011, Standard & Poor’s downgraded the U.S. credit rating to AA+ from its top rank of AAA. In 2012, Standard & Poor’s lowered its long-term sovereign credit rating for several European countries. This series of events negatively impacted global markets and economic conditions. Though austerity measures and bailout administration have generally tempered some concerns over the short-term collapse of these countries’ governments and their respective banking systems, the underlying long-term and systemic risks and concerns have not been fully eliminated. These risks and concerns may cause interest rates and borrowing costs to rise, which may adversely affect the Company’s ability to access debt financing on favorable terms and may increase the borrowing costs of the companies in which the Company invests, hampering their ability to repay the Company.
The United Kingdom ceased to be a member state of the European Union on January 31, 2020 commonly referred to as “Brexit,” and the transition period provided for in the withdrawal agreement entered by the United Kingdom and the European Union ended on December 31, 2020. In December 2020, the United Kingdom and the European Union agreed on a trade a cooperation agreement that will apply provisionally after the end of the transition period until it is ratified by the parties to the agreement. On December 31, 2020, the United Kingdom passed legislation giving effect to the trade and cooperation agreement, with the European Union expected to formally adopt the agreement in early 2021. The trade and cooperation agreement covers the general objectives and framework of the relationship between the United Kingdom and the European Union, including as it related to trade, transport, visas, judicial, law enforcement and security matters, and provides for continued participation in community programs and mechanisms for dispute resolution. The longer term economic, legal, political and social framework to
be put in place between the United Kingdom and the European Union remains unclear and may 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.
Such periods of disruption may be accompanied by depressed levels of consumer and commercial spending, a lack of liquidity in debt capital markets, significant write-offs in the financial services sector and the re-pricing of credit risk. The Company and the portfolio companies in which it invests may be adversely affected by these deteriorations in the financial markets and economic conditions throughout the world.
Major public health issues, and specifically the novel coronavirus COVID-19, have and could continue to have an adverse impact on our financial condition and results of operations and other aspects of our business.
We are closely monitoring developments related to the COVID-19 pandemic to assess its impact on our and our portfolio companies’ business; while, due to the evolving and highly uncertain nature of this event, it currently is not possible to estimate its total impact precisely, the COVID-19 pandemic has and could continue to impact our business, financial condition, results of operations, liquidity or prospects and those of our portfolio companies in a number of ways. For instance, our investment portfolio (and, specifically, the valuations of investment assets we hold) has been, and may continue to be, adversely affected as a result of market developments from the COVID-19 pandemic and uncertainty regarding its outcome. Moreover, changes in interest rates, reduced liquidity or a continued slowdown in U.S. or global economic conditions has, and may continue to, adversely affect our business, financial condition, results of operations, liquidity and/or prospects and those of our portfolio companies. Further, extreme market volatility may leave us and our portfolio companies unable to react to market events in a prudent manner consistent with our historical practices in dealing with more orderly markets. Although it is impossible to predict with certainty the potential full magnitude of the business and economic ramifications, COVID-19 has impacted, and may further impact, our business in various ways, including but not limited to:
•
From an operational perspective, our Advisor’s employees, as well as the workforces of our vendors, service providers and counterparties, may also be adversely affected by the COVID-19 pandemic or efforts to mitigate the pandemic, including government-mandated shutdowns, requests or orders for employees to work remotely, and other self-imposed social distancing measures, in the U.S., which could result in an adverse impact on our ability to conduct our business;
•
While the market dislocation caused by COVID-19 may present attractive investment opportunities, due to increased volatility in the financial markets, we may not be able to complete those investments;
•
If the impact of COVID-19 continues as is currently predicted by central banks and the International Monetary Fund, we may have more limited opportunities to successfully exit existing investments, due to, among other reasons, lower valuations, decreased revenues and earnings, or lack of potential buyers with financial resources to pursue an acquisition, resulting in a reduced ability to realize value from such investments;
•
Our portfolio companies are facing or may face in the future increased credit and liquidity risk due to volatility in financial markets, reduced revenue streams, and limited or higher cost of access to preferred sources of funding, which may result in write-down or write-off in the value of our investments. Changes in the debt financing markets are impacting, or, if the volatility in financial market continues, may in the future impact, the ability of our portfolio companies to meet their respective financial obligations;
•
Borrowers of loans, notes and other credit instruments in our portfolio may be unable to meet their principal or interest payment obligations or satisfy financial covenants, resulting in a decrease in value of our investments and lower than expected return. In addition, for variable interest instruments, lower reference rates resulting from government stimulus programs in response to COVID-19 could lead to lower interest income;
•
Many of our portfolio companies operate in industries that are materially impacted by COVID-19, including but not limited to healthcare, travel, entertainment and hospitality. Many of these companies are facing operational and financial hardships resulting from the spread of COVID-19 and related governmental measures, such as the closure of stores, restrictions on travel, quarantines or stay-at-home orders. If the disruptions caused by COVID-19 continue and the restrictions put in place are not lifted, the businesses of these portfolio companies could suffer materially or become insolvent, which would decrease the value of our investments. Even if restrictions are lifted, as is the case in many jurisdictions in the U.S. and worldwide, business levels may not return to pre-pandemic levels and continuing outbreaks of COVID-19 or the availability of effective vaccines could discourage people from resuming normal activities and governments may put restrictions back in place;
•
An extended period of remote working by our Adviser’s employees could strain its technology resources and introduce operational risks, including heightened cybersecurity risk. Remote working environments may be less secure and more susceptible to hacking attacks, including phishing and social engineering attempts that seek to exploit the COVID-19 pandemic; and
•
COVID-19 presents a significant threat to our Adviser’s employees’ well-being and morale. While our Advisor has implemented a business continuity plan to protect the health of its employees and has contingency plans in place for key employees or executive officers who may become sick or otherwise unable to perform their duties for an extended period of time, such plans cannot anticipate all scenarios, and our Adviser may experience potential loss of productivity or a delay in the roll out of certain strategic plans.
We are currently operating in a period of capital markets disruption and economic recession.
The U.S. capital markets have experienced extreme volatility and disruption following the global outbreak of COVID-19 that began in December 2019. Some economists, major investment banks and The World Bank have indicated that current indicators point to a global
recession that started in February 2020. Disruptions in the capital markets have increased the spread between the yields realized on risk-free and higher risk securities, resulting in illiquidity in parts of the capital markets. These and future market disruptions and/or illiquidity have had, and is expected to continue to have an adverse effect on our business, financial condition, results of operations and cash flows. Unfavorable economic conditions also would be expected to 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 have limited and could continue to limit our investment originations, limit our ability to grow and have a material negative impact on our operating results and the fair values of our debt and equity investments.
Our ability to achieve our investment objective depends on the ability of the Adviser to manage and support our investment process. If the Adviser were to lose any members of their respective senior management teams, our ability to achieve our investment objective could be significantly harmed.
Since we have no employees, we depend on the investment expertise, skill and network of business contacts of the broader networks of the Adviser and its affiliates. The Adviser evaluates, negotiates, structures, executes, monitors and services our investments. Our future success depends to a significant extent on the continued service and coordination of the Adviser and its senior management team. The departure of any members of the Adviser’s senior management team could have a material adverse effect on our ability to achieve our investment objective.
Our ability to achieve our investment objective depends on the Adviser’s ability to identify and analyze, and to invest in, finance and monitor companies that meet our investment criteria. The Adviser’s capabilities in structuring the investment process, providing competent, attentive and efficient services to us, and facilitating access to financing on acceptable terms depend on the employment of investment professionals in an adequate number and of adequate sophistication to match the corresponding flow of transactions. To achieve our investment objective, the Adviser may need to hire, train, supervise and manage new investment professionals to participate in our investment selection and monitoring process. The Adviser may not be able to find investment professionals in a timely manner or at all. Failure to support our investment process could have a material adverse effect on our business, financial condition and results of operations.
The Investment Advisory Agreement between the Adviser and us has been approved pursuant to Section 15 of the 1940 Act. In addition, the Investment Advisory Agreement has termination provisions that allow the parties to terminate the agreement. The Investment Advisory Agreement may be terminated at any time, without penalty, by us or by the Adviser, upon 60 days’ notice. If the agreement is terminated, we may not be able to find a new external investment adviser or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 60 days, or at all. If we are unable to do so quickly, our operations are likely to experience a disruption, our financial condition, business and results of operations as well as our ability to pay distributions are likely to be adversely affected.
Because our business model depends to a significant extent upon relationships with private equity sponsors, investment banks and commercial banks, the 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.
The Adviser depends on its broader organization’s relationships with private equity sponsors, investment banks and commercial banks, and we rely to a significant extent upon these relationships to provide us with potential investment opportunities. If the Adviser or its organizations fail to maintain their existing relationships or develop new relationships with other sponsors or sources of investment opportunities, we may not be able to grow our investment portfolio. In addition, individuals with whom the Adviser or its broader organizations have relationships are not obligated to provide us with investment opportunities, and, therefore, there is no assurance that such relationships will generate investment opportunities for us.
We may face increasing competition for investment opportunities, which could delay deployment of our capital, reduce returns and result in losses.
We compete for investments with other BDCs and investment funds (including private equity funds, mezzanine funds and funds that invest in CLOs, structured notes, derivatives and other types of collateralized securities and structured products), as well as traditional financial services companies such as commercial banks and other sources of funding. Moreover, alternative investment vehicles, such as hedge funds, have begun to invest in areas in which they have not traditionally invested, including making investments in small to mid-sized private U.S. companies. As a result of these new entrants, competition for investment opportunities in small and middle-market private U.S. companies may intensify. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, some competitors may have a lower cost of capital and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments than we have. These characteristics could allow our competitors to consider a wider variety of investments, establish more relationships and offer better pricing and more flexible structuring than we are able to do. We may lose investment opportunities if we do not match our competitors’ pricing, terms or structure. If we are forced to match our competitors’ pricing, terms or structure, we may not be able to achieve acceptable returns on our investments or may bear substantial risk of capital loss. A significant part of our competitive advantage stems from the fact that the market for investments in small and middle-market private U.S. companies is underserved by traditional commercial banks and other financial sources. A significant increase in the number and/or the size of our competitors in this target market could force us to accept less attractive investment terms. Furthermore, many of our competitors have greater experience operating under, or are not subject to, the regulatory restrictions that the 1940 Act imposes on us as a BDC.
We may have difficulty sourcing investment opportunities.
We cannot assure investors that we will be able to locate a sufficient number of suitable investment opportunities to allow us to deploy all Capital Commitments successfully. In addition, privately-negotiated investments in loans and illiquid securities of private middle market companies require substantial due diligence and structuring, and we cannot assure investors that we will achieve our anticipated investment pace. As a result, investors will be unable to evaluate any future portfolio company investments prior to purchasing shares of our common stock. Additionally, our Adviser will select our investments, and our stockholders will have no input with respect to such investment decisions. These factors increase the uncertainty, and thus the risk, of investing in shares of our common stock. To the extent we are unable to deploy all Capital Commitments, our investment income and, in turn, our results of operations, will likely be materially adversely affected. There is no assurance that we will be able to consummate investment transactions or that such transactions will be successful. BC Partners, the Company and their affiliates may also face certain conflicts of interests in connection with any transaction, including any warehousing transaction involving an affiliate.
We generally expect to call capital for investment purposes only at the time we identify an investment opportunity, but we may call capital even if we do not have investments identified. Until such time we invest the proceeds of such capital calls in portfolio companies, we may invest these amounts in cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less from the date of investment. We expect these temporary investments to earn yields substantially lower than the income that we expect to receive in respect of investments in secured debt (including senior secured, unitranche and second lien debt) and unsecured debt (including senior unsecured and subordinated debt), as well as related equity securities.
As required by the 1940 Act, a significant portion of our investment portfolio is and will be recorded at fair value as determined in good faith by our Board and, as a result, there is and will be uncertainty as to the value of our portfolio investments.
Under the 1940 Act, we are required to carry our portfolio investments at market value or, if there is no readily available market value, at fair value as determined by our Board. There is not a public market for the securities of the privately-held companies in which we invest. Most of our investments will not be publicly traded or actively traded on a secondary market. As a result, we value these securities quarterly at fair value as determined in good faith by our Board as required by the 1940 Act.
Certain factors that may be considered in determining the fair value of our investments include investment dealer quotes for securities traded on the secondary market for institutional investors, the nature and realizable value of any collateral, the portfolio company’s earnings and its ability to make payments on its indebtedness, the markets in which the portfolio company does business, comparison to comparable publicly-traded companies, discounted cash flow and other relevant factors. As a result, our determinations of fair value may differ materially from the values that would have been used if a ready market for these non-traded securities existed. Due to this uncertainty, our fair value determinations may cause our net asset value on a given date to materially differ from the value that we may ultimately realize upon the sale of one or more of our investments.
There is a risk that investors in our common stock may not receive distributions or that our distributions may not grow over time.
We may not achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. In addition, due to the asset coverage test applicable to us as a BDC, we may be limited in our ability to make distributions.
The amount of any distributions we may make is uncertain. Our distributions may exceed our earnings. Therefore, portions of the distributions that we make may represent a return of capital to you that will lower your tax basis in your common stock and reduce the amount of funds we have for investment in targeted assets.
We may fund our cash distributions to stockholders from any sources of funds available to us, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, dividends or other distributions paid to us on account of preferred and common equity investments in portfolio companies and expense reimbursements from the Adviser, which are subject to recoupment. Our ability to pay distributions might be adversely affected by, among other things, the impact of one or more of the risk factors described in this Annual Report on Form 10-K. In addition, the inability to satisfy the asset coverage test applicable to us as a BDC may limit our ability to pay distributions. All distributions are and will be paid at the discretion of our Board and will depend on our earnings, our financial condition, maintenance of our RIC status, compliance with applicable BDC regulations and Maryland law and such other factors as our Board may deem relevant from time to time. We cannot assure you that we will continue to pay distributions to our stockholders in the future. In the event that we encounter delays in locating suitable investment opportunities, we may pay all or a substantial portion of our distributions from borrowings in anticipation of future cash flow, which may constitute a return of your capital. A return of capital is a return of your investment, rather than a return of earnings or gains derived from our investment activities. A stockholder will not be subject to immediate taxation on the amount of any distribution treated as a return of capital to the extent of the stockholder’s basis in its shares; however, the stockholder’s basis in its shares will be reduced (but not below zero) by the amount of the return of capital, which will result in the stockholder recognizing additional gain (or a lower loss) when the shares are sold. To the extent that the amount of the return of capital exceeds the stockholder’s basis in its shares, such excess amount will be treated as gain from the sale of the stockholder’s shares. Distributions from borrowings also could reduce the amount of capital we ultimately invest in our portfolio companies.
We have not established any limit on the amount of funds we may use from available sources, such as borrowings, if any, or proceeds from our Private Offering, to fund distributions (which may reduce the amount of capital we ultimately invest in assets).
Stockholders should understand that any distributions made from sources other than cash flow from operations or that are relying on fee or expense reimbursement waivers from the Adviser or the Administrator are not based on our investment performance, and can only be sustained if we achieve positive investment performance in future periods and/or the Adviser or the Administrator continues to make such expense reimbursements. Stockholders should also understand that our future repayments to the Adviser will reduce the distributions that they would otherwise receive. There can be no assurance that we will achieve such performance in order to sustain these distributions, or be able to pay distributions at all. The Adviser and the Administrator have no obligation to waive fees or receipt of expense reimbursements.
Changes in laws or regulations governing our operations may adversely affect our business or cause us to alter our business strategy.
We and our portfolio companies are subject to regulation at the local, state and federal level. New legislation may be enacted, or new interpretations, rulings or regulations could be adopted, including those governing the types of investments we are permitted to make, any of which could harm us and our stockholders, potentially with retroactive effect.
Additionally, any changes to the laws and regulations governing our operations relating to permitted investments may cause us to alter our investment strategy to avail ourselves of new or different opportunities. Such changes could result in material differences to our strategies and plans and may result in our investment focus shifting from the areas of expertise of the Adviser to other types of investments in which the Adviser may have less expertise or little or no experience. Thus, any such changes, if they occur, could have a material adverse effect on our financial condition and results of operations and the value of your investment.
Changes to U.S. tariff and import/export regulations may have a negative effect on our portfolio companies and, in turn, harm us.
The current United States administration has signaled support for implementing, and in some instances, has already proposed or taken action with respect to, major changes to certain trade policies, such as the imposition of additional tariffs on imported products and the withdrawal from or renegotiation of certain trade agreements, including the North American Free Trade Agreement. Such actions by the United States have resulted in retaliatory actions by U.S. trade partners, including the imposition of tariffs on U.S. goods, and may result in future retaliatory actions. This has created significant uncertainty about the future relationship between the United States and other countries with respect to trade policies, treaties and tariffs.
These developments, or the perception that any of them could occur, may have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global trade and, in particular, trade between the impacted nations and the United States. Any of these factors could depress economic activity and restrict our portfolio companies’ access to suppliers or customers and have a material adverse effect on their business, financial condition and results of operations, which in turn would negatively impact us.
As a public reporting company, we are subject to regulations not applicable to private companies, such as provisions of the Sarbanes-Oxley Act. Efforts to comply with such regulations will involve significant expenditures, and non-compliance with such regulations may adversely affect us.
We incur legal, accounting and other expenses, including costs associated with the periodic reporting requirements applicable to a company whose securities are registered under the 1934 Act, as well as additional corporate governance requirements, including requirements under the Sarbanes-Oxley Act. These requirements may place a strain on our systems and resources. The 1934 Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting, which requires significant resources and management oversight. These activities may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. As discussed below, the systems and resources necessary to comply with public company reporting requirements will increase further once we cease to be an “emerging growth company” under the JOBS Act. We have incurred, and expect to incur in the future, significant additional annual expenses related to these steps, director fees, reporting requirements of the SEC, increased auditing and legal fees and similar expenses associated with being a public reporting company.
If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock (if an exchange listing occurs) may be negatively affected.
As a public reporting company, we are subject to the Sarbanes-Oxley Act, and the related rules and regulations promulgated by the SEC. We are required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls pursuant to Section 404 of the Sarbanes-Oxley Act. We are required to furnish a report by management on the effectiveness of our internal control over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act. However, as an emerging growth company, our independent registered public accounting firm will not be required to express an opinion as to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of the year following our first annual report on Form 10-K or the date we are no longer an emerging growth company. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. As a relatively new company, developing and maintaining an effective system of internal controls may require significant expenditures, which may negatively impact our financial performance and our ability to make distributions. This process also will result in a diversion of our management’s time and attention. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or to assert that our internal control over financial reporting is effective or if our independent registered public accounting firm, when required, is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock (if an exchange listing occurs) could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities.
The impact of financial reform legislation on us is uncertain.
The Company and the portfolio companies in which it invests are subject to laws and regulations at the U.S. federal, state and local levels and, in some cases, foreign levels. These laws and regulations, as well as their interpretation, may change from time to time, and new laws, regulations and interpretations may come into effect. Accordingly, any change in law and regulations, changes in administration or control of U.S. Congress, changes in interpretations, or newly enacted laws or regulations could have a material adverse effect on the Company’s business or the business of the portfolio companies in which the Company invests.
There is significant uncertainty regarding recently enacted legislation in the United States, including the Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, signed into law in July 2010. The Dodd-Frank Act instituted a wide range of reforms impacting all financial institutions. The full impact that such legislation will ultimately have on us and the markets in which we trade and invest is not fully known. Such uncertainty and any resulting confusion may itself be detrimental to the efficient functioning of the markets and the success of certain investment strategies.
Over the past several years, there also has been increasing regulatory attention to the extension of credit outside of the traditional banking sector, raising the possibility that some portion of the non-bank financial sector may be subject to new regulation. While it cannot be known at this time whether any regulation will be implemented or what form it will take, increased regulation of non-bank lending could be materially adverse to the Company’s business, financial conditions and results of operation. We may experience fluctuations in our quarterly results.
We may experience fluctuations in our quarterly results.
We could experience fluctuations in our quarterly operating results due to a number of factors, including our ability or inability to make investments in companies that meet our investment criteria, the interest rate payable on the loans or other debt securities we originate or acquire, the level of our expenses (including our borrowing costs), variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any previous 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 will be and we will remain an “emerging growth company” as defined in the JOBS Act until the earlier of (a) the last day of the fiscal year (i) in which we have total annual gross revenue of at least $1.07 billion, or (ii) 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 date of our most recently completed second fiscal quarter, and (b) the date on which we have issued more than $1 billion in non-convertible debt during the prior three-year period. While we remain an “emerging growth company,” (1) we are not required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, (2) we are exempt from any rules that may be adopted by the PCAOB requiring mandatory audit firm rotations or a supplement to the auditor’s report on financial statements, (3) we are subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and (4) we are not required to hold nonbinding advisory votes on executive compensation or stockholder approval of any golden parachute payments not previously approved.
In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the 1933 Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We will take advantage of the extended transition period for complying with new or revised accounting standards, which may make it more difficult for investors and securities analysts to evaluate us since our consolidated financial statements may not be comparable to companies that comply with public company effective dates and may result in less investor confidence.
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 capital. 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 capital, our financial condition and results of operations may be materially and adversely affected.
Any unrealized depreciation we experience on our portfolio may be an indication of future realized losses, which could reduce our income available for distribution.
As a BDC, we are required to carry our investments at market value or, if no market value is ascertainable, at the fair value as determined in good faith by our Board. Decreases in the market value or fair value of our investments relative to amortized cost will be recorded as unrealized depreciation. Any unrealized depreciation in our portfolio could be an indication of a portfolio company’s inability to meet its repayment obligations to us with respect to the affected loans. This could result in realized losses in the future and ultimately in reductions of our income available for distribution in future periods. In addition, decreases in the market value or fair value of our investments will reduce our net asset value.
Recent legislation permits the Company to incur additional leverage.
Prior to the Small Business Credit Availability Act being signed into law, a BDC generally was not permitted to incur indebtedness unless immediately after such borrowing it had an asset coverage for total borrowings of at least 200% (i.e., a 1:1 leverage-to-equity ratio). The Small Business Credit Availability Act, signed into law on March 23, 2018, contains a provision that grants a BDC the option, subject to certain conditions and disclosure obligations, to increase the leverage of its portfolio to a maximum of 2:1. Our initial stockholder has approved our ability to utilize the increased leverage limit, which requires asset coverage of at least 150%. As a result, we are permitted to incur additional indebtedness, and, therefore, the risk of an investment in our common stock may increase.
We are dependent on information systems, and systems failures, as well as operating failures, could significantly disrupt our business, which may, in turn, negatively affect our liquidity, financial condition or results of operations.
Our business is dependent on our and third parties’ communications and information systems. Any failure or interruption of those systems, including as a result of the termination of an agreement with any third-party service providers, could cause delays or other problems in our activities. Our financial, accounting, data processing, backup or other operating systems and facilities may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control and adversely affect our business. There could be:
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sudden electrical or telecommunications outages;
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natural disasters such as earthquakes, tornadoes and hurricanes;
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disease pandemics;
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events arising from local or larger scale political or social matters, including terrorist acts; and
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cyber-attacks.
In addition to our dependence on information systems, poor operating performance by our service providers could adversely impact us.
These events, in turn, could have a material adverse effect on our operating results and negatively affect the market price of our securities and our ability to pay distributions to our stockholders.
Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information and/or damage to our business relationships, all of which could negatively impact our business, financial condition and operating results.
Cyber security incidents and cyber-attacks have been occurring globally at a more frequent and severe level and will likely continue to increase in frequency in the future. The Adviser, our and each of their and our affiliates and portfolio companies’ and service providers’ information and technology systems may be vulnerable to damage or interruption from cyber security breaches, computer viruses or other malicious code, network failures, computer and telecommunication failures, infiltration by unauthorized persons and other security breaches, or usage errors by their respective professionals or service providers. If unauthorized parties gain access to such information and technology systems, they may be able to steal, publish, delete or modify private and sensitive information, including non-public personal information related to stockholders (and their beneficial owners) and material non-public information. Although the Adviser implemented, and portfolio companies and service providers may implement, various measures to manage risks relating to these types of events, such systems could prove to be inadequate and, if compromised, could become inoperable for extended periods of time, cease to function properly or fail to adequately secure private information. The Adviser does not control the cyber security plans and systems put in place by third-party service providers, and such third-party service providers may have limited indemnification obligations to the Adviser, their affiliates, the Company, the stockholders and/or a portfolio company, each of which could be negatively impacted as a result. Breaches, such as those involving covertly introduced malware, impersonation of authorized users, “phishing” attacks and industrial or other espionage may not be identified even with sophisticated prevention and detection systems, potentially resulting in further harm and preventing them from being addressed appropriately. The failure of these systems and/or of disaster recovery plans for any reason could cause significant interruptions in the Adviser, its affiliates’, the Company’s and/or a portfolio company’s operations and result in a failure to maintain the security, confidentiality or privacy of sensitive data, including personal information relating to stockholders (and their beneficial owners), material non-public information and the intellectual property and trade secrets and other sensitive information of the Adviser, us and/or portfolio companies. The Adviser, the Company and/or a portfolio company could be required to make a significant investment to remedy the effects of any such failures, harm to their reputations, legal claims that they and their respective affiliates may be subjected to, regulatory action or enforcement arising out of applicable privacy and other laws, adverse publicity, and other events that may affect their business and financial performance.
Risks Related to the Adviser and its Affiliates
The Adviser has limited prior experience managing a BDC or a RIC.
The Adviser has limited experience managing a BDC or a RIC and may not be able to successfully operate our business or achieve our investment objective. As a result, an investment in our shares of common stock may entail more risk than the shares of common stock of a comparable company with a substantial operating history.
The 1940 Act and the Code impose numerous constraints on the operations of BDCs and RICs that do not apply to the other types of investment vehicles previously managed by the Adviser’s management team. For example, under the 1940 Act, BDCs are required to invest at least 70% of their total assets primarily in securities of qualifying U.S. private or thinly-traded public companies. Moreover, qualification for RIC tax treatment under Subchapter M of the Code requires, among other things, satisfaction of source-of-income and other requirements. The failure to comply with these provisions in a timely manner could prevent us from qualifying as a BDC or RIC or could force us to pay unexpected taxes and penalties, which could be material. The Adviser’s limited experience in managing a portfolio of assets under such constraints may hinder its ability to take advantage of attractive investment opportunities and, as a result, achieve our investment objective.
The Adviser and its affiliates, including our officers and some of our directors, face conflicts of interest caused by compensation arrangements with us and our affiliates, which could result in actions that are not in the best interests of our stockholders.
The Adviser and its affiliates will receive substantial fees from us in return for their services, including certain incentive fees based on the performance of our investments. These fees could influence the advice provided to us. Generally, the more equity we sell in private offerings and the greater the risk assumed by us with respect to our investments, the greater the potential for growth in our assets and profits, and, correlatively, the fees payable by us to our Adviser. These compensation arrangements could affect our Adviser’s or its affiliates’ judgment with respect to private offerings of equity and investments made by us, which allow our Adviser to earn increased asset management fees.
Additionally, we pay to the Adviser an incentive fee that is based on the performance of our portfolio and an annual base management fee that is based on the average value of our gross assets, excluding cash and cash equivalents but including assets purchased with borrowed amounts, at the end of the two most recently completed calendar quarters. Because the incentive fee is based on the performance of our portfolio, the Adviser may be incentivized to make investments on our behalf that are riskier or more speculative than would be the case in the absence of such compensation arrangement. The way in which the incentive fee is determined may also encourage the Adviser to use leverage to increase the return on our investments. In addition, because the base management fee is based on the average value of our gross assets at the end of the two most recently completed calendar quarters, which includes any borrowings for investment purposes, the Adviser may be incentivized to recommend the use of leverage or the issuance of additional equity to make additional investments and increase the average value of our gross assets at the end of the two most recently completed calendar quarters. Under certain circumstances, the use of leverage may increase the likelihood of default, which could disfavor our stockholders. Our compensation arrangements could therefore result in our making riskier or more speculative investments, or relying more on leverage to make investments, than would otherwise be the case. This could result in higher investment losses, particularly during cyclical economic downturns.
We may be obligated to pay the Adviser incentive compensation even if we incur a net loss due to a decline in the value of our portfolio.
Our Investment Advisory Agreement entitles the Adviser to receive incentive compensation on income regardless of any capital losses. In such case, 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 if we incur a net loss for that quarter.
Any incentive fee payable by us that relates to our net investment income may be computed and paid on income that may include interest that has been accrued, but not yet received, including original issue discount, which may arise if we receive fees in connection with the origination of a loan or possibly in other circumstances, or contractual “payment-in-kind,” or PIK, interest, which represents contractual interest added to the loan balance and due at the end of the loan term. To the extent we do not distribute accrued PIK interest, the deferral of PIK interest has the simultaneous effects of increasing the assets under management and increasing the base management fee at a compounding rate, while generating investment income and increasing the incentive fee at a compounding rate. In addition, the deferral of PIK interest would also increase the loan-to-value ratio at a compounding rate if the issuer’s assets do not increase in value, and investments with a deferred interest feature, such as PIK interest, may represent a higher credit risk than loans on which interest must be paid in full in cash on a regular basis.
For example, if a portfolio company defaults on a loan that is structured to provide accrued interest, it is possible that accrued interest previously included in the calculation of the incentive fee will become uncollectible. The Adviser is not under any obligation to reimburse us for any part of the incentive fee it received that was based on accrued income that we never received as a result of a default by an entity on the obligation that resulted in the accrual of such income, and such circumstances would result in our paying an incentive fee on income we never received.
There may be conflicts of interest related to obligations that the Adviser’s senior management and Investment Team has to other clients.
The members of the senior management and Investment Team of the Adviser serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as we do, or of investment funds managed by the same personnel. In serving in these multiple capacities, they may have obligations to other clients or investors in those entities, the fulfilment of which may not be in our best interests or in the best interest of our stockholders. Our investment objective may overlap with the investment objectives of such investment funds, accounts or other investment vehicles. In particular, we rely on the Adviser to manage our day-to-day activities and to implement our investment strategy. The Adviser and certain of its affiliates are presently, and plan in the future to continue to be, involved with activities that are unrelated to us. As a result of these activities, the Adviser, its officers and employees and certain of its affiliates will have conflicts of interest in allocating their time between us and other activities in which they are or may become involved, including the management of its affiliated funds. The Adviser and its officers and employees will devote only as much of its or their time to our business as the Adviser and its officers and employees, in their judgment, determine is reasonably required, which may be substantially less than their full time.
We rely, in part, on the Adviser to assist with identifying and executing upon investment opportunities and on the Board to review and approve the terms of our participation in co-investment transactions with the Adviser and its affiliates. The Adviser and its affiliates are not restricted from forming additional investment funds, entering into other investment advisory relationships or engaging in other business activities. These activities could be viewed as creating a conflict of interest in that the time and effort of the members of the Adviser, its affiliates and their officers and employees will not be devoted exclusively to our business but will be allocated between us and such other business activities of the Adviser and its affiliates in a manner that the Adviser deems necessary and appropriate.
In April 2019, an affiliate of the Adviser became the external manager of PTMN pursuant to a stock purchase and transaction agreement and stockholder approval by PTMN. Certain of our executive officers and directors, and certain members of our Adviser, serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as we do or of investment funds managed by our affiliates. PTMN invests in debt and equity of privately-held middle market companies, similar to those we target for investment. Therefore, there may be certain investment opportunities that satisfy the investment criteria for PTMN and us. PTMN operates as a distinct and separate company and any investment in our common stock will not be an investment in PTMN. In addition, all of our executive officers currently serve in substantially similar capacities for PTMN and three of our independent directors serve as independent directors of PTMN.
The time and resources that individuals employed by the Adviser devote to us may be diverted and we may face additional competition due to the fact that individuals employed by the Adviser are not prohibited from raising money for or managing other entities that make the same types of investments that we target.
Neither the Adviser nor individuals employed by the Adviser are generally prohibited from raising capital for and managing other investment entities that make the same types of investments as those we target. As a result, the time and resources that these individuals may devote to us may be diverted. In addition, we may compete with any such investment entity for the same investors and investment opportunities. On October 23, 2018, the SEC issued an order granting the Company’s application for exemptive relief to co-invest, subject to the satisfaction of certain conditions, in certain private placement transactions, with other funds managed by the Adviser or its affiliates, including BCP Special Opportunities Fund I LP, BCP Special Opportunities Fund II LP, Portman Ridge Finance Corporation and any future funds that are advised by the Adviser or its affiliated investment advisers. Affiliates of the Adviser, whose primary business includes the origination of investments, engage in investment advisory business with accounts that compete with us.
Our base management and incentive fees may induce the Adviser to make speculative investments or to incur leverage.
The incentive fee payable by us to the Adviser may create an incentive for our Adviser to make investments on our behalf that are risky or more speculative than would be the case in the absence of such compensation arrangement. The way in which the incentive fee payable to the Adviser is determined may encourage our Adviser to use leverage to increase the leveraged return on our investment portfolio. The part of the management and incentive fees payable to the Adviser that relates to our net investment income is computed and paid on income that may include interest income that has been accrued but not yet received in cash, such as market discount, debt instruments with PIK interest, preferred stock with PIK dividends and zero coupon securities. This fee structure may be considered to involve a conflict of interest for the Adviser to the extent that it may encourage the Adviser to favor debt financings that provide for deferred interest, rather than current cash payments of interest.
In addition, the fact that our base management fee is payable based upon our gross assets, which would include any borrowings for investment purposes, may encourage the Adviser to use leverage to make additional investments. Under certain circumstances, the use of leverage may increase the likelihood of defaulting on our borrowings, which would disfavor holders of our common stock. Such a practice could result in our investing in more speculative securities than would otherwise be in our best interests, which could result in higher investment losses, particularly during cyclical economic downturns.
Shares of our common stock may be purchased by the Adviser or its affiliates.
The Adviser and its affiliates may purchase shares of our common stock for any reason deemed appropriate; provided, however, that it is intended that neither the Adviser nor its respective affiliates will hold 5% or more of our outstanding shares of common stock. The Adviser and its affiliates will not acquire any shares of our common stock with the intention to resell or re-distribute such shares. The purchase of common stock by the Adviser and its affiliates could create certain risks, including, but not limited to, the following:
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the Adviser and its affiliates may have an interest in disposing of our assets at an earlier date so as to recover their investment in our common stock; and
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substantial purchases of shares by the Adviser and its affiliates may limit the Adviser’s ability to fulfill any financial obligations that it may have to us or incurred on our behalf.
The Adviser relies on key personnel, the loss of any of whom could impair its ability to successfully manage us.
Our future success depends, to a significant extent, on the continued services of the officers and employees of the Adviser or its affiliates. The loss of services of one or more members of the Adviser’s management team, including members of our Investment Committee, could adversely affect our financial condition, business and results of operations.
The Adviser may retain additional consultants, advisers and/or operating partners to provide services to the Company, and such additional personnel will perform similar functions and duties for other organizations which may give rise to conflicts of interest.
BC Partners LLP may work with or alongside one or more consultants, advisers (including senior advisers and CEOs) and/or operating partners who are retained by BC Partners LLP on a consultancy or retainer or other basis, to provide services to the Company and other entities sponsored by BC Partners LLP including the sourcing of investments and other investment-related and support services. The functions undertaken by such persons with respect to the Company and any of its investments will not be exclusive and such persons may perform similar functions and duties for other organizations which may give rise to conflicts of interest. Such persons may also be appointed to the board of directors of companies and have other business interests which give rise to conflicts of interest with the interests of the Company or a portfolio entity of the Company. Stockholders should note that such persons may retain compensation that will not offset the base management fee payable to the Adviser, including that: (i) such persons are permitted to retain all directors’ fees, monitoring fees and other compensation received by them in respect of acting as a director or officer of, or providing other services to, a portfolio entity and such amounts shall not be credited against the base management fee; and (ii) certain of such persons may be paid a deal fee, a consultancy fee or other compensation where they are involved in a specific project relating to the Company, which fee will be paid either by the Company or, if applicable, the relevant portfolio entity.
The compensation we pay to the Adviser was determined without independent assessment on our behalf, and these terms may be less advantageous to us than if such terms had been the subject of arm’s-length negotiations.
The compensation we pay to the Adviser was not entered into on an arm’s-length basis with an unaffiliated third party. As a result, the form and amount of such compensation may be less favorable to us than they might have been had these been entered into through arm’s-length transactions with an unaffiliated third party.
The Adviser’s influence on conducting our operations gives it the ability to increase its fees, which may reduce the amount of cash flow available for distribution to our stockholders.
The Adviser is paid a base management fee calculated as a percentage of our gross assets and unrelated to net income or any other performance base or measure. The Adviser may advise us to consummate transactions or conduct our operations in a manner that, in the Adviser’s reasonable discretion, is in the best interests of our stockholders. These transactions, however, may increase the amount of fees paid to the Adviser. The Adviser’s ability to influence the base management fee paid to it by us could reduce the amount of cash flow available for distribution to our stockholders.
Risks Related to Business Development Companies
The requirement that we invest a sufficient portion of our assets in qualifying assets could preclude us from investing in accordance with our current business strategy; conversely, the failure to invest a sufficient portion of our assets in qualifying assets could result in our failure to maintain our status as a BDC.
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. Therefore, we may be precluded from investing in what we believe are attractive investments if such investments are not qualifying assets. Conversely, if we fail to invest a sufficient portion of our assets in qualifying assets, we could lose our status as a BDC, which would have a material adverse effect on our business, financial condition and results of operations. Similarly, these rules could prevent us from making additional investments in existing portfolio companies, which could result in the dilution of our position, or could require us to dispose of investments at an inopportune time to comply with the 1940 Act. If we were forced to sell non-qualifying investments in the portfolio for compliance purposes, the proceeds from such sale could be significantly less than the current value of such investments.
Failure to maintain our status as a BDC would reduce our operating flexibility.
If we do not remain a BDC, we might be regulated as a registered closed-end investment company under the 1940 Act, which would subject us to substantially more regulatory restrictions under the 1940 Act and correspondingly decrease our operating flexibility.
Regulations governing our operation as a BDC and RIC will affect our ability to raise, and the way in which we raise, additional capital or borrow for investment purposes, which may have a negative effect on our growth.
As a result of the annual distribution requirement to qualify as a RIC, we may need to periodically access the capital markets to raise cash to fund new investments. We may issue “senior securities,” as defined under the 1940 Act, including borrowing money from banks or other financial institutions only in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 150% after such incurrence or issuance. Our ability to issue different types of securities is also limited. Compliance with these requirements may unfavorably limit our investment opportunities and reduce our ability in comparison to other companies to profit from favorable spreads between the rates at which we can borrow and the rates at which we can lend. As a BDC, therefore, we intend to continuously issue equity at a rate more frequent than our privately owned competitors, which may lead to greater stockholder dilution.
We expect to borrow for investment purposes. If the value of our assets declines, we may be unable to satisfy the asset coverage requirement, which would prohibit us from paying distributions and could prevent us from qualifying as a RIC. If we cannot satisfy the asset coverage requirement, we may be required to sell a portion of our investments and, depending on the nature of our debt financing, repay a portion of our indebtedness at a time when such sales may be disadvantageous.
Under the 1940 Act, we generally are prohibited from issuing or selling our common stock at a price per share, after deducting selling commissions and dealer manager fees, that is below our net asset value per share, which may be a disadvantage as compared with other public companies. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the current net asset value of our common stock if our Board, including our independent directors, determines that such sale is in our best interests and the best interests of our stockholders, and our stockholders, as well as those stockholders that are not affiliated with us, 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 that, in the determination of our Board, closely approximates the fair value of such securities.
Our ability to enter into transactions with our affiliates is restricted.
We are prohibited under the 1940 Act from participating in certain transactions with certain of our affiliates without the prior approval of a majority of the independent members of our Board and, in some cases, the SEC. Any person that owns, directly or indirectly, 5% or more of our outstanding voting securities will be our affiliate for purposes of the 1940 Act and generally we will be prohibited from buying or selling any securities from or to such affiliate, absent the prior approval of our Board.
The 1940 Act also prohibits certain “joint” transactions with certain of our affiliates, which could include investments in the same portfolio company (whether at the same or closely related times), without prior approval of our Board and, in some cases, the SEC. If a person acquires more than 25% of our voting securities, we will be prohibited from buying or selling any security from or to such person or certain of that person’s affiliates, or entering into prohibited joint transactions with such persons, absent the prior approval of the SEC. Similar restrictions limit our ability to transact business with our officers, directors, investment advisers, sub-advisers or their affiliates. As a result of these restrictions, we may be prohibited from buying or selling any security from or to any fund or any portfolio company of a fund managed by the Adviser, or entering into joint arrangements such as certain co-investments with these companies or funds without the prior approval of the SEC, which may limit the scope of investment opportunities that would otherwise be available to us. On October 23, 2018, the SEC issued an order granting the Company’s application for exemptive relief to co-invest, subject to the satisfaction of certain conditions, in certain private placement transactions, with other funds managed by the Adviser or its affiliates, including BCP Special Opportunities Fund I LP and any future funds that are advised by the Adviser or its affiliated investment advisers. Further, certain of our affiliates may be regulated entities, and regulatory restrictions applicable to such affiliates may restrict certain of our activities.
We are uncertain of our sources for funding our future capital needs; if we cannot obtain debt or equity financing on acceptable terms, our ability to acquire investments and to expand our operations will be adversely affected.
The net proceeds from the sale of common stock will be used for our investment opportunities, operating expenses and for payment of various fees and expenses such as base management fees, incentive fees and other expenses. Any working capital reserves we maintain may not be sufficient for investment purposes, and we may require debt or equity financing to operate. Accordingly, in the event that we develop a need for additional capital in the future for investments or for any other reason, these sources of funding may not be available to us. Consequently, if we cannot obtain debt or equity financing on acceptable terms, our ability to acquire investments and to expand our operations will be adversely affected. As a result, we would be less able to create and maintain a broad portfolio of investments and achieve our investment objective, which may negatively impact our results of operations and reduce our ability to make distributions to our stockholders.
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. Under the 1940 Act, a “diversified” investment company is required to invest at least 75% of the value of its total assets in cash and cash items, government securities, securities of other investment companies and other securities limited in respect of any one issuer to an amount not greater than 5% of the value of the total assets of such company and no more than 10% of the outstanding voting securities of such issuer. As a non-diversified investment company, we are not subject to this requirement, and beyond the diversification requirements applicable to RICs under Subchapter M of 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 within a particular industry, 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 or to a general downturn in the economy.
Risks Related to Our Investments
Our investments in prospective portfolio companies may be risky, and we could lose all or part of our investment.
Our strategy focuses primarily on originating and making loans to, and making debt and equity investments in, U.S. middle market companies, with a focus on originated transactions sourced through the networks of our Adviser.
First Lien Loans and Second Lien Loans. When we invest in senior secured term debt, including first lien loans and second lien loans, we generally take a security interest in the available assets of these portfolio companies, including the equity interests of their subsidiaries. We expect this security interest to help mitigate the risk that we will not be repaid. However, there is a risk that the collateral securing our loans may decrease in value over time or lose its entire value, may be difficult to sell in a timely manner, may be difficult to appraise and may fluctuate in value based upon the success of the business and market conditions, including as a result of the inability of the portfolio company to raise additional capital. Also, in some circumstances, our security interest could be subordinated to claims of other creditors. In addition, deterioration in a portfolio company’s financial condition and prospects, including its inability to raise additional capital, may be accompanied by deterioration in the value of the collateral for the loan. Consequently, the fact that a loan is secured does not guarantee that we will receive principal and interest payments according to the loan’s terms, or at all, or that we will be able to collect on the loan should we be forced to enforce our remedies. Further, in connection with any “last out” first-lien loans in which we may invest, we enter into agreements among lenders. Under these agreements, our interest in the collateral of the first-lien loans may rank junior to those of other lenders in the loan under certain circumstances. This may result in greater risk and loss of principal on these loans.
Unitranche Loans. We also invest in unitranche loans, which are loans that combine both senior and subordinated financing, generally in a first-lien position. Unitranche loans provide all of the debt needed to finance a leveraged buyout or other corporate transaction, both senior and subordinated, but generally in a first lien position, while the borrower generally pays a blended, uniform interest rate rather than different rates for different tranches. Unitranche debt generally requires payments of both principal and interest throughout the life of the loan. Unitranche debt generally has contractual maturities of five to six years and interest is typically paid quarterly. Generally, we expect these securities to carry a blended yield that is between senior secured and subordinated debt interest rates. Unitranche loans provide a number of advantages for borrowers, including the following: simplified documentation, greater certainty of execution and reduced decision-making complexity throughout the life of the loan. In addition, we may receive additional returns from any warrants we may receive in connection with these investments. In some cases, a portion of the total interest may accrue or be paid in kind. Because unitranche loans combine characteristics of senior and subordinated financing, unitranche loans have risks similar to the risks associated with senior secured debt, including first lien loans and second lien loans, and subordinated debt in varying degrees according to the combination of loan characteristics of the unitranche loan.
Unsecured Debt. Our unsecured debt, including corporate bonds and subordinated, or mezzanine, investments generally rank junior in priority of payment to senior debt. This may result in a heightened level of risk and volatility or a loss of principal, which could lead to the loss of the entire investment. These investments may involve additional risks that could adversely affect our investment returns. To the extent interest payments associated with such debt are deferred, such debt may be subject to greater fluctuations in valuations, and such debt could subject us and our stockholders to non-cash income, including PIK interest and original issue discount. Loans structured with these features may represent a higher level of credit risk than loans that require interest to be paid in cash at regular intervals during the term of the loan. Since we generally will not receive any principal repayments prior to the maturity of some of our unsecured debt investments, such investments will have greater risk and may result in loss of principal.
Equity Investments. To a limited extent, we make selected equity investments. In addition, when we invest in senior secured debt, including first lien loans and second lien loans, or unsecured debt, we may acquire warrants to purchase equity securities. Our goal is ultimately to dispose of these equity interests and realize gains upon our disposition of such interests. However, the equity interests we receive may not
appreciate in value and, in fact, may decline in value. Accordingly, 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.
Collateralized Securities, Structured Products and Other. To a limited extent, we invest in collateralized securities, structured products and other similar securities, which may include CDOs, CBOs, CLOs, structured notes and credit-linked notes. Investments in such securities and products involve risks, including, without limitation, credit risk and market risk. Certain of these securities and products may be thinly traded or have a limited trading market. Where our investments in collateralized securities, structured products and other similar securities are based upon the movement of one or more factors, including currency exchange rates, interest rates, reference bonds (or loans) and stock indices, depending on the factor used and the use of multipliers or deflators, changes in interest rates and movement of any factor may cause significant price fluctuations. Additionally, changes in the reference instrument or security may cause the interest rate on such a security or product to be reduced to zero, and any further changes in the reference instrument may then reduce the principal amount payable on maturity of the security or product. Collateralized securities, structured products and other similar securities may be less liquid than other types of securities and more volatile than the reference instrument or security underlying the product.
Non-U.S. Securities. We may invest in non-U.S. securities, which may include securities denominated in U.S. dollars or in non-U.S. currencies, to the extent permitted by the 1940 Act. Because evidence of ownership of such securities usually are held outside the United States, we would be subject to additional risks if we invested in non-U.S. securities, which include possible adverse political and economic developments, seizure or nationalization of foreign deposits and adoption of governmental restrictions which might adversely affect or restrict the payment of principal and interest on the non-U.S. securities to investors located outside the country of the issuer, whether from currency blockage or otherwise. Since non-U.S. securities may be purchased with and payable in foreign currencies, the value of these assets as measured in U.S. dollars may be affected unfavorably by changes in current rates and exchange control regulations.
In addition, we invest in debt securities that are rated below investment grade by rating agencies or that would be rated below investment grade if they were rated. Debt securities rated below investment grade quality are generally regarded as having predominantly speculative characteristics and may carry a greater risk with respect to a borrower’s capacity to pay interest and repay principal. They may also be difficult to value and illiquid.
To the extent original issue discount constitutes a portion of our income, we will be exposed to risks associated with the deferred receipt of cash representing such income.
Our investments may include original issue discount instruments. To the extent original issue discount constitutes a portion of our income, we will be exposed to typical risks associated with such income being required to be included in taxable and accounting income prior to receipt of cash, including the following:
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Original issue discount instruments may have unreliable valuations because the accruals require judgments about collectability.
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Original issue discount instruments may create heightened credit risks because the inducement to trade higher rates for the deferral of cash payments typically represents, to some extent, speculation on the part of the borrower.
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For accounting purposes, cash distributions to you representing original issue discount income do not come from paid-in capital, although they may be paid from the offering proceeds. Thus, although a distribution of original issue discount income comes from the cash invested by you, the 1940 Act does not require that you be given notice of this fact.
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In the case of PIK “toggle” debt, the PIK election has the simultaneous effects of increasing the assets under management, thus increasing the base management fee, and increasing the investment income, thus increasing the potential for incentive fees.
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Since original issue discount will be included in our investment company taxable income for the year of the accrual, we may be required to make a distribution to our stockholders in order to satisfy the annual distribution requirement applicable to RICs, even if we will not have received any corresponding cash amount. As a result, we may have difficulty meeting such annual distribution requirement necessary to obtain and maintain RIC tax treatment under the Code. If we are not able to obtain cash from other sources, and do not make a qualifying share distribution, we may fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax.
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Original issue discount creates risk of non-refundable cash payments to the adviser based on non-cash accruals that may never be realized.
Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies.
Our primary investments may include senior secured debt, such as first lien loans, second lien loans and unitranche loans of private and thinly traded U.S. middle market companies. Our portfolio companies may have, or may be permitted to incur, other debt that ranks equally with, or senior to, the debt in which we invest. By their terms, such debt instruments may entitle the holders to receive payment of interest or principal on or before the dates on which we are entitled to receive payments with respect to the debt instruments 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 payment or distribution. After repaying such senior creditors, such portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of debt ranking equally with debt instruments in which we invest, we would have to share on an equal basis any payments or distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.
Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies.
Our primary investments may include senior secured debt, such as first lien loans, second lien loans and unitranche loans of private and thinly traded U.S. middle-market companies. Our portfolio companies may have, or may be permitted to incur, other debt that ranks equally with, or senior to, the debt in which we invest. By their terms, such debt instruments may entitle the holders to receive payment of interest or principal on or before the dates on which we are entitled to receive payments with respect to the debt instruments 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 payment or distribution. After repaying such senior creditors, such portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of debt ranking equally with debt instruments in which we invest, we would have to share on an equal basis any payments or distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.
Investment in private and middle market companies involves a number of significant risks including:
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such companies may have limited financial resources and may be unable to meet their obligations under their debt securities that we hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of us realizing any guarantees we may have obtained in connection with its investment;
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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 to general economic downturns;
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such 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 the portfolio company and, in turn, on us;
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such companies generally have less predictable operating results, 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;
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debt investments in such companies generally may have a significant portion of principal due at the maturity of the investment, which would result in a substantial loss to us if such borrowers are unable to refinance or repay their debt at maturity;
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our executive officers, directors and the Adviser may, in the ordinary course of business, be named as defendants in litigation arising from our investments in such companies;
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such companies generally have less publicly available information about their businesses, operations and financial condition and, if we are unable to uncover all material information about these companies, we may not make a fully informed investment decision; and
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such companies may have difficulty accessing the capital markets to meet future capital needs, which may limit their ability to grow or to repay their outstanding indebtedness upon maturity.
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 file for bankruptcy, depending on the facts and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might recharacterize our debt investment and subordinate all or a portion of our claim to that of other creditors. We may also be subject to lender liability claims for actions taken by us with respect to a borrower’s business or instances where we exercise control over the borrower.
We generally will not control our portfolio companies.
We do not expect to control most of our portfolio companies, even though we may have board representation or board observation rights, and our debt agreements with such portfolio companies may contain certain restrictive covenants. As a result, we are subject to the risk that a portfolio company in which we invest may make business decisions with which we disagree and the management of such company, as representatives of the holders of the company’s common equity, may take risks or otherwise act in ways that do not serve our interests. Due to the lack of liquidity for our investments in non-traded companies, we may not be able to dispose of our interests in our portfolio companies as readily as we would like or at an appropriate valuation in the event we disagree with the actions of a portfolio company. As a result, a portfolio company may make decisions that could decrease the value of our portfolio holdings.
We may invest through joint ventures, partnerships or other special purpose vehicles and investments through these vehicles may entail greater risks, or risks that we otherwise would not incur, if we otherwise made such investments directly.
We may co-invest with third parties through funds, joint ventures or other entities. Such investments may involve risks not present in investments where a third party is not involved, including the possibility that our co-venturer or partner may at any time have other business interests and investments other than the joint venture with us, or may have different economic or business goals. In addition, we may be liable for actions of our co-venturers or partners. Our ability to exercise control or significant influence over management in these cooperative efforts will depend upon the nature of the joint venture arrangement. In addition, such arrangements are likely to involve restrictions on the resale of our interest in the company.
We will be exposed to risks associated with changes in interest rates.
We are subject to financial market risks, including changes in interest rates. General interest rate fluctuations may have a substantial negative impact on our investments and investment opportunities and, accordingly, have a material adverse effect on our ability to achieve our investment objective and our target rate of return on invested capital. In addition, an increase in interest rates would make it more expensive to use debt for our financing needs, if any.
The interest rates of some of our term loans to our portfolio companies may be priced using a spread over LIBOR, which may be phased out in the future.
On July 27, 2017, the Financial Conduct Authority (“FCA”) announced that it would phase out the London Interbank Offered Rate (“LIBOR”) as a benchmark by the end of 2021. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021 and has indicated that market participants should not rely on LIBOR being available after 2021. As an alternative to LIBOR, for example, 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. Abandonment of or modifications to LIBOR could have adverse impacts on newly issued financial instruments and our existing financial instruments which reference LIBOR. While some instruments may contemplate a scenario where LIBOR is no longer available by providing for an alternative rate setting methodology, not all instruments may have such provisions and there is significant uncertainty regarding the effectiveness of any such alternative methodologies. Abandonment of or modifications to LIBOR could lead to significant short-term and long-term uncertainty and market instability. If LIBOR ceases to exist, we and our portfolio companies may need to amend or restructure our existing LIBOR-based debt instruments and any related hedging arrangements that extend beyond 2021, which may be difficult, costly and time consuming. In addition, from time to time we invest in floating rate loans and investment securities whose interest rates are indexed to LIBOR. Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR, or any changes announced with respect to such reforms, may result in a sudden or prolonged increase or decrease in the reported LIBOR rates and the value of LIBOR-based loans and securities, including those of other issuers we or our funds currently own or may in the future own. It remains uncertain how such changes would be implemented and the effects such changes would have on us, issuers of instruments in which we invest and financial markets generally.
The expected discontinuation of LIBOR could have a significant impact on our business. The dollar amount of our outstanding debt investments and borrowings that are linked to LIBOR with maturity dates after the anticipated discontinuation date of 2021 is material. We anticipate significant operational challenges for the transition away from LIBOR including, but not limited to, amending existing loan agreements with borrowers on investments that may have not been modified with fallback language and adding effective fallback language to new agreements in the event that LIBOR is discontinued before maturity. Beyond these challenges, we anticipate there may be additional risks to our current processes and information systems that will need to be identified and evaluated by us. Due to the uncertainty of the replacement for LIBOR, the potential effect of any such event on our cost of capital and net investment income cannot yet be determined. In addition, the cessation of LIBOR could:
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Adversely impact the pricing, liquidity, value of, return on and trading for a broad array of financial products, including any LIBOR-linked securities, loans and derivatives that are included in our assets and liabilities;
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Require extensive changes to documentation that governs or references LIBOR or LIBOR-based products, including, for example, pursuant to time-consuming renegotiations of existing documentation to modify the terms of outstanding investments;
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Result in inquiries or other actions from regulators in respect of our preparation and readiness for the replacement of LIBOR with one or more alternative reference rates;
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Result in disputes, litigation or other actions with portfolio companies, or other counterparties, regarding the interpretation and enforceability of provisions in our LIBOR-based investments, such as fallback language or other related provisions, including, in the case of fallbacks to the alternative reference rates, any economic, legal, operational or other impact resulting from the fundamental differences between LIBOR and the various alternative reference rates;
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Require the transition and/or development of appropriate systems and analytics to effectively transition our risk management processes from LIBOR-based products to those based on one or more alternative reference rates, which may prove challenging given the limited history of the proposed alternative reference rates; and
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Cause us to incur additional costs in relation to any of the above factors.
There is no guarantee that a transition from LIBOR to an alternative will not result in financial market disruptions, significant increases in benchmark rates, or borrowing costs to borrowers, any of which could have a material adverse effect on our business, result of operations, financial condition, and unit price.
International investments create additional risks.
We expect to make investments in portfolio companies that are domiciled outside of the United States. We anticipate that up to 30% of our investments may be in assets located in jurisdictions outside the United States. Our investments in foreign portfolio companies are deemed “non-qualifying assets,” which means, as required by the 1940 Act, they may not constitute more than 30% of our total assets at the time of our acquisition of any asset, after giving effect to the acquisition. Notwithstanding that limitation on our ownership of foreign portfolio companies, those investments subject us to many of the same risks as our domestic investments, as well as certain additional risks including the following:
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foreign governmental laws, rules and policies, including those restricting the ownership of assets in the foreign country or the repatriation of profits from the foreign country to the United States;
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foreign currency devaluations that reduce the value of and returns on our foreign investments;
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adverse changes in the availability, cost and terms of investments due to the varying economic policies of a foreign country in which we invest;
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adverse changes in tax rates, the tax treatment of transaction structures and other changes in operating expenses of a particular foreign country in which we invest;
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the assessment of foreign-country taxes (including withholding taxes, transfer taxes and value added taxes, any or all of which could be significant) on income or gains from our investments in the foreign country;
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adverse changes in foreign-country laws, including those relating to taxation, bankruptcy and ownership of assets;
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changes that adversely affect the social, political and/or economic stability of a foreign country in which we invest;
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high inflation in the foreign countries in which we invest, which could increase the costs to us of investing in those countries;
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deflationary periods in the foreign countries in which we invest, which could reduce demand for our assets in those countries and diminish the value of such investments and the related investment returns to us; and
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legal and logistical barriers in the foreign countries in which we invest that materially and adversely limit our ability to enforce our contractual rights with respect to those investments.
In addition, we may make investments in countries whose governments or economies may prove unstable. Certain of the countries in which we may invest may have political, economic and legal systems that are unpredictable, unreliable or otherwise inadequate with respect to the implementation, interpretation and enforcement of laws protecting asset ownership and economic interests. In some of the countries in which we may invest, there may be a risk of nationalization, expropriation or confiscatory taxation, which may have an adverse effect on our portfolio companies in those countries and the rates of return we are able to achieve on such investments. We may also lose the total value of any investment which is nationalized, expropriated or confiscated. The financial results and investment opportunities available to us, particularly in developing countries and emerging markets, may be materially and adversely affected by any or all of these political, economic and legal risks.
We may acquire various structured financial instruments for purposes of “hedging” or reducing our risks, which may be costly and ineffective and could reduce the cash available to service our debt or for distribution to our stockholders.
We may seek to hedge against interest rate and currency exchange rate fluctuations and credit risk by using structured financial instruments such as futures, options, swaps and forward contracts, subject to the requirements of the 1940 Act. These financial instruments may be purchased on exchanges or may be individually negotiated and traded in over-the-counter markets. Use of structured financial instruments for hedging purposes may present significant risks, including the risk of loss of the amounts invested. Defaults by the other party to a hedging transaction can result in losses in the hedging transaction. Hedging activities also involve the risk of an imperfect correlation between the hedging instrument and the asset being hedged, which could result in losses both on the hedging transaction and on the instrument being hedged. Use of hedging activities may not prevent significant losses and could increase our losses. Further, hedging transactions may reduce cash available to service our debt or pay distributions to our stockholders.
We may acquire various financial instruments for purposes of “hedging” or reducing our risks, which may be costly and ineffective and could reduce our cash available for distribution to our shareholders.
We may seek to hedge against interest rate and currency exchange rate fluctuations and credit risk by using financial instruments such as futures, options, swaps and forward contracts, subject to the requirements of the 1940 Act. These financial instruments may be purchased on exchanges or may be individually negotiated and traded in over-the-counter markets. Use of such financial instruments for hedging purposes may present significant risks, including the risk of loss of the amounts invested. Defaults by the other party to a hedging transaction can result in losses in the hedging transaction. Hedging activities also involve the risk of an imperfect correlation between the hedging instrument and the asset being hedged, which could result in losses both on the hedging transaction and on the instrument being hedged. Use of hedging activities may not prevent significant losses and could increase our losses. Further, hedging transactions may reduce cash available to pay distributions to our shareholders.
A derivative transaction is also subject to the risk that a counterparty will default on its payment obligations thereunder or that we will not be able to meet our obligations to the counterparty. In some cases, we may post collateral to secure our obligations to the counterparty, and we may be required to post additional collateral upon the occurrence of certain events such as a decrease in the value of the reference security or other asset. In some cases, the counterparty may not collateralize any of its obligations to us. Derivative investments effectively add leverage to a portfolio by providing investment exposure to a security or market without owning or taking physical custody of such security or investing directly in such market. In addition to the risks described above, such arrangements are subject to risks similar to those associated with the use of leverage. See “Risk Factors- Risks Related to Debt Financing.”
Second priority liens on collateral securing debt investments that we make to our portfolio companies may be subject to control by senior creditors with first priority liens. If there is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and us.
Certain debt investments that we make to portfolio companies may be secured on a second priority basis by the same collateral securing first priority 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 company under the agreements governing the debt. The holders of obligations secured by the first priority liens on the collateral will generally control the liquidation of and be entitled to receive proceeds from any realization of the collateral to repay their obligations in full before us. In addition, the value of the collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from the sale or sales of all of the collateral would be sufficient to satisfy the debt obligations secured by the second priority liens after payment in full of all obligations secured by the first priority liens on the collateral. If such proceeds are not sufficient to repay amounts outstanding under the debt 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 company’s remaining assets, if any.
The rights we may have with respect to the collateral securing the debt investments we make to our portfolio companies with senior debt outstanding may also be limited pursuant to the terms of one or more intercreditor agreements that we enter into with the holders of senior debt. Under such an intercreditor agreement, at any time that obligations that have the benefit of the first priority liens are outstanding, any of the following actions that may be taken in respect of the collateral will be at the direction of the holders of the obligations secured by the first priority liens: the ability to cause the commencement of enforcement proceedings against the collateral; the ability to control the conduct of such proceedings; the approval of amendments to collateral documents; releases of liens on the collateral; and waivers of past defaults under collateral documents. We may not have the ability to control or direct such actions, even if our rights are adversely affected.
Economic recessions or downturns could impair our portfolio companies and adversely affect our operating results.
Many of our portfolio companies may be susceptible to economic recessions or downturns and may be unable to repay our debt investments during these periods. Therefore, our non-performing assets are likely to increase, and the value of our portfolio is likely to decrease during these periods. Adverse economic conditions may also decrease the value of any collateral securing our secured debt. A prolonged recession may further decrease the value of such collateral and result in losses of value in our portfolio and a decrease in our revenues, net income and net asset value. 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 on terms we deem acceptable. These events could prevent us from increasing investments and adversely affect our operating results.
A covenant breach or other defaults by our portfolio companies may adversely affect 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 secured assets, which could trigger cross-defaults under other agreements and jeopardize a portfolio company’s ability to meet its obligations under the 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.
We may not realize gains from our equity investments.
Certain investments that we may make could include warrants or other equity securities. In addition, we may make direct equity investments in portfolio companies. Our goal is ultimately to realize gains upon our disposition of such equity interests. However, the equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, 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. We also may be unable to realize any value if a portfolio company does not have a liquidity event, such as a sale of the business, recapitalization or public offering, which would allow us to sell the underlying equity interests. We intend to seek puts or similar rights to give us the right to sell our equity securities back to the portfolio company issuer. We may be unable to exercise these put rights for the consideration provided in our investment documents if the issuer is in financial distress.
An investment strategy focused primarily on privately-held companies presents certain challenges, including, but not limited to, the lack of available information about these companies.
We intend to invest primarily in privately-held companies. Investments in private companies pose significantly greater risks than investments in public companies. First, private companies have reduced access to the capital markets, resulting in diminished capital resources and the ability to withstand financial distress. Second, the depth and breadth of experience of management in private companies tend to be less than that at public companies, which makes such companies more likely to depend on the management talents and efforts of a smaller group of persons and/or persons with less depth and breadth of experience. Therefore, the decisions made by such management teams and/or the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on our investments and, in turn, on us. Third, the investments themselves tend to be less liquid. As such, we may have difficulty exiting an investment promptly or at a desired price prior to maturity or outside of a normal amortization schedule. As a result, the relative lack of liquidity and the potential diminished capital resources of our target portfolio companies may affect our investment returns. Fourth, little public information generally exists about private companies. Further, these companies may not have third-party debt ratings or audited financial statements. We must therefore rely on the ability of the Adviser to obtain adequate information through due diligence to evaluate the creditworthiness and potential returns from investing in these companies. These companies and their financial information will generally not be subject to the Sarbanes-Oxley Act and other rules that govern public companies. If we are unable to uncover all material information about these companies, we may not make a fully informed investment decision, and we may lose money on our investments.
A lack of liquidity in certain of our investments may adversely affect our business.
We intend to invest in certain companies whose securities are not publicly traded or actively traded on the secondary market, and whose securities are subject to legal and other restrictions on resale or will otherwise be less liquid than publicly-traded securities. The illiquidity of certain of our investments may make it difficult for us to sell these investments when desired. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recorded these investments. The reduced liquidity of our investments may make it difficult for us to dispose of them at a favorable price, and, as a result, we may suffer losses.
We may not have the funds or ability to make additional investments in our portfolio companies or to fund our unfunded debt commitments.
After our initial investment in a portfolio company, we may be called upon from time to time to provide additional funds to such company or have the opportunity to increase our investment through the exercise of a warrant to purchase common stock. There is no assurance that we will make, or will have sufficient funds to make, follow-on investments. Any decisions not to make a follow-on investment or any inability on our part to make such an investment may have a negative impact on a portfolio company in need of such an investment, may result in a missed opportunity for us to increase our participation in a successful operation or may reduce the expected return on the investment.
Prepayments of our debt investments by our portfolio companies could adversely impact our results of operations and reduce our return on equity.
We are subject to the risk that the investments we make in our portfolio companies may be repaid prior to maturity. When this occurs, we will generally reinvest these proceeds in temporary investments, pending their future investment in new portfolio companies. 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 in a new portfolio company 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 elect to prepay amounts owed to us. Additionally, prepayments, net of prepayment fees, could negatively impact our return on equity.
Risks Related to Debt Financing
We borrow money, which magnifies the potential for loss on amounts invested in us and may increase the risk of investing in us. Borrowed money may also adversely affect the return on our assets, reduce cash available for distribution to our stockholders, and result in losses.
The use of borrowings, also known as leverage, increases the volatility of investments by magnifying the potential for loss on invested equity capital. When we use leverage to partially finance our investments, through borrowing from banks and other lenders, you will experience increased risks of investing in our common stock. 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. Similarly, any decrease in our income would cause net income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to make distributions to our stockholders. In addition, our 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 management or incentive fees payable to the Adviser.
We may use leverage to finance our investments. The amount of leverage that we employ will depend on the Adviser’s and our Board’s assessment of market and other factors at the time of any proposed borrowing. There can be no assurance that leveraged financing will be available to us on favorable terms or at all. However, to the extent that we use leverage to finance our assets, our financing costs will reduce cash available for distributions to stockholders. Moreover, we may not be able to meet our financing obligations and, to the extent that we cannot, we risk the loss of some or all of our assets to liquidation or sale to satisfy the obligations. In such an event, we may be forced to sell assets at significantly depressed prices due to market conditions or otherwise, which may result in losses.
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 150%. If this ratio declines below 150%, we cannot incur additional debt and could be required to sell a portion of our investments to repay some debt when it is disadvantageous to do so. This could have a material adverse effect on our operations and investment activities. Moreover, our ability to make distributions to our stockholders may be significantly restricted or we may not be able to make any such distributions whatsoever. The amount of leverage that we will employ will be subject to oversight by our Board, a majority of whom are independent directors with no material interests in such transactions.
We may default under our credit facilities.
In the event we default under our credit facilities or other borrowings, our business could be adversely affected as we may be forced to sell a portion of our investments quickly and prematurely at what may be disadvantageous prices to us in order to meet our outstanding payment obligations and/or support working capital requirements under such 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 such 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.
Provisions in a credit facility may limit our investment discretion.
A credit facility may be backed by all or a portion of our loans and securities on which the lenders will 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 connection with one or more credit facilities entered into by the Company, distributions to stockholders may be subordinated to payments required in connection with any indebtedness contemplated thereby.
In addition, any security interests and/or negative covenants required by a credit 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 a credit facility were to decrease, we may be required to secure additional assets in an amount sufficient to cure 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 a credit 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 distributions.
In addition, we may 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 a credit 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 liquidity and cash flow and impair our ability to grow our business.
Changes in interest rates may affect our cost of capital and net investment income.
Since we intend to use debt to finance a portion of our 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 will not have a material adverse effect on our net investment income. In periods of rising interest rates when we have debt outstanding, our cost of funds will increase, which could reduce our net investment income. We expect that our long-term fixed or floating-rate investments will be financed primarily with equity and long-term debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. These techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. These activities may limit our ability to participate in the benefits of lower interest rates with respect to the hedged portfolio. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations. Also, we have limited experience in entering into hedging transactions, and we will initially have to purchase or develop such expertise.
A rise in the general level of interest rates can be expected to lead to higher interest rates applicable to our debt investments. Accordingly, an increase in interest rates would make it easier for us to meet or exceed the incentive fee hurdle rate and may result in a substantial increase in the amount of incentive fees payable to the Adviser with respect to pre-incentive fee net investment income.
Federal Income Tax Risks
We will be subject to corporate-level income tax if we are unable to qualify as a RIC under Subchapter M of the Code or to satisfy RIC distribution requirements.
To obtain and maintain RIC tax treatment under Subchapter M of the Code, we must, among other things, meet annual distribution, income source and asset diversification requirements. See “Item 1. Description of Business-Certain U.S. Federal Income Tax Considerations.”
Because we use debt financing, we are subject to an asset coverage ratio requirement under the Investment Company Act, and we are subject to certain covenants contained in our credit agreements and other debt financing agreements. This asset coverage ratio requirement and these covenants could, under certain circumstances, restrict us from making distributions to our stockholders that are necessary for us to satisfy the distribution requirement. If we are unable to obtain cash from other sources, and thus are unable to make sufficient distributions to our stockholders, we could fail to maintain our RIC status and thus become subject to corporate-level U.S. federal income tax (and any applicable U.S. state and local taxes).
If we fail to qualify for or maintain RIC tax treatment for any reason and are subject to corporate income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions.
We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income.
For federal income tax purposes, we may be required to recognize taxable income in circumstances in which we do not receive a corresponding payment in 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, increasing interest rates or debt instruments that were 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. We may also have to include in income other amounts that we have not yet received in cash, such as deferred loan origination fees that are paid after origination of the loan or are paid in non-cash compensation such as warrants or stock. Furthermore, we may invest in non-U.S. corporations (or other non-U.S. entities treated as corporations for U.S. federal income tax purposes) that could be treated under the Code and U.S. Treasury regulations as “passive foreign investment companies” and/or “controlled foreign corporations.” The rules relating to investment in these types of non-U.S. entities are designed to ensure that U.S. taxpayers are either, in effect, taxed currently (or on an accelerated basis with respect to corporate-level events) or taxed at increased tax rates at distribution or disposition. In certain circumstances this could require us to recognize income where we do not receive a corresponding payment in cash.
Unrealized appreciation on derivatives, such as foreign currency forward contracts, may be included in taxable income while the receipt of cash may occur in a subsequent period when the related contract expires. Any unrealized depreciation on investments that the foreign currency forward contracts are designed to hedge are not currently deductible for tax purposes. This can result in increased taxable income whereby we may not have sufficient cash to pay distributions or we may opt to retain such taxable income and pay a 4% excise tax. In such cases we could still rely upon the “spillback provisions” to maintain RIC tax treatment.
We anticipate that a portion of our income may constitute original issue discount or other income required to be included in taxable income prior to receipt of cash. Further, we may elect to amortize market discount with respect to debt securities acquired in the secondary market and include such amounts in our taxable income in the current year, instead of upon disposition, as an election not to do so would limit our ability to deduct interest expenses for tax purposes. Because any original issue discount or other amounts accrued will be included in our investment company taxable income for the year of the 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. As a result, we may have difficulty meeting the annual distribution requirement necessary to qualify for and maintain RIC tax treatment under the Code. We may have to sell some of our investments at times and/or at prices we would not consider advantageous, raise additional debt or equity capital or forgo new investment opportunities for this purpose. If we are not able to obtain cash from other sources, we may fail to qualify for or maintain RIC tax treatment and thus become subject to corporate-level income tax.
If we do not qualify as a “publicly offered regulated investment company,” as defined in the Code, a non-corporate stockholder will be taxed as though it received a distribution of some of our expenses.
A “publicly offered regulated investment company” or “publicly offered RIC” is a RIC whose shares are either (i) continuously offered pursuant to a public offering within the meaning of Section 4 of the 1933 Act, (ii) regularly traded on an established securities market or (iii) held by at least 500 persons at all times during the taxable year. We believe that we currently do not qualify as a publicly offered RIC immediately after the Private Offering, although we may qualify as a publicly offered RIC for future years. If we are not a publicly offered RIC for any period, a non-corporate stockholder’s allocable portion of our affected expenses, including our management fees, will be treated as an additional distribution to the stockholder and will be treated as miscellaneous itemized deductions that are deductible only to the extent permitted by applicable law. Under current law, such expenses will not be deductible by any such stockholder for tax years that begin prior to January 1, 2026.
Our stockholders may receive shares of our common stock as dividends, which could result in adverse tax consequences to them.
In order to satisfy the annual distribution requirement applicable to RICs, we have the ability to declare a large portion of a dividend in shares of our common stock instead of in cash. As long as a portion of such dividend is paid in cash (which portion may be as low as 20% of such dividend) and certain requirements are met, the entire distribution will be treated as a dividend for U.S. federal income tax purposes. As a result, a stockholder generally would be subject to tax on 100% of the fair market value of the dividend on the date the dividend is received by the stockholder in the same manner as a cash dividend, even though most of the dividend was paid in shares of our common stock. We currently do not intend to pay dividends in shares of our common stock.
Non-U.S. stockholders may be subject to withholding of U.S. federal income tax on dividends we pay.
Distributions of our “investment company taxable income” to a non-U.S. stockholder that are not effectively connected with the non-U.S. stockholder’s conduct of a trade or business within the United States will generally be subject to withholding of U.S. federal income tax at a 30% rate (or lower rate provided by an applicable income tax treaty) to the extent of our current or accumulated earnings and profits.
Certain properly reported dividends are generally exempt from withholding of U.S. federal income tax where they are paid in respect of our (i) “qualified net interest income” (generally, our U.S.-source interest income, other than certain contingent interest and interest from obligations of a corporation or partnership in which we or the non-U.S. stockholder are at least a 10% stockholder, reduced by expenses that are allocable to such income) or (ii) “qualified short-term capital gains” (generally, the excess of our net short-term capital gain over our net long-term capital loss for such taxable year), and certain other requirements are satisfied.
NO ASSURANCE CAN BE GIVEN AS TO WHETHER ANY OF OUR DISTRIBUTIONS WILL BE ELIGIBLE FOR THIS EXEMPTION FROM WITHHOLDING OF U.S. FEDERAL INCOME TAX OR, IF ELIGIBLE, WILL BE REPORTED AS SUCH BY US. IN PARTICULAR, THIS EXEMPTION WILL NOT APPLY TO OUR DISTRIBUTIONS PAID IN RESPECT OF OUR NON-U.S. SOURCE INTEREST INCOME OR OUR DIVIDEND INCOME (OR ANY OTHER TYPE OF INCOME OTHER THAN GENERALLY OUR NON-CONTINGENT U.S. SOURCE INTEREST INCOME RECEIVED FROM UNRELATED OBLIGORS AND OUR QUALIFIED SHORT-TERM CAPITAL GAINS). IN THE CASE OF OUR COMMON STOCK HELD THROUGH AN INTERMEDIARY, THE INTERMEDIARY MAY WITHHOLD U.S. FEDERAL INCOME TAX EVEN IF WE REPORT THE PAYMENT AS QUALIFIED NET INTEREST INCOME OR QUALIFIED SHORT-TERM CAPITAL GAIN.
Risks Relating to an Investment in Our Common Stock
An investment in our common stock will have limited liquidity and you may not receive a full return of your invested capital if you sell your shares. Until we complete a liquidity event, it is unlikely that you will be able to sell your shares.
Our common stock is an illiquid asset for which and there is not expected to be any secondary market, nor is it expected that any will develop in the foreseeable future.
We intend to seek exemptive relief from the SEC to permit us, subject to applicable law, to initiate one or more reorganizations, pursuant to which an investor would have the option to exchange their shares of common stock and any remaining commitment, or a portion of their shares of common stock and any remaining commitment, in us for an interest in a liquidating company that would generally seek to liquidate and distribute the proceeds of its investments, as they are received, to its equity holders over time, such that it would likely substantially complete its liquidation within a reasonable period of time following the date of the reorganization. While no assurances can be provided, the Board expects that a liquidating company will be treated as a BDC. It is anticipated that, if initiated, the first reorganization would occur as soon as reasonably practicable following the end of the fiscal year during which the third anniversary of our Private Offering’s initial closing occurred.
We may not propose a reorganization, even if we receive exemptive relief from the SEC, unless we have been advised by counsel or other advisers that effecting the reorganization will not have material adverse tax or other regulatory consequences for us. We also may not pursue a reorganization if such reorganization would result in our assets or the assets of a liquidating vehicle being deemed “plan assets” under Title I of the Employee Retirement Income Security Act of 1974, as amended. Even if we do receive exemptive relief to pursue a reorganization, we may determine not to proceed with a reorganization if we are not able to meet the conditions of the exemptive relief, the Board determines that it would not be in the best interest of stockholders or there is insufficient stockholder interest in participating in a reorganization. Additionally, there can be no assurance that we will be able to obtain any required exemptive and/or no-action relief from the SEC or that the Board will authorize the Reorganization. If we do not obtain any required exemptive and/or no-action relief, or if we receive the required relief but the Board determines not to proceed with a reorganization, then we will wind down our operations within ten years after the initial closing date unless the Board and/or stockholders determine to take different action, including listing our common stock on a national securities exchange or periodic repurchases or tender offers.
Until we complete a liquidity event, it is unlikely that you will be able to sell your shares. If our common stock is listed, we cannot assure you that a public trading market will develop. Further, even if we complete a liquidity event, you may not receive a return of all of your invested capital.
We may be unable to invest a significant portion of the net proceeds from an offering of our securities on acceptable terms in an acceptable timeframe.
Delays in investing the net proceeds raised in an offering of our securities may impair our performance. 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 of any offering on acceptable terms within the time period that we anticipate or at all, which could adversely affect our financial condition and operating results.
In addition, even if we are able to raise significant proceeds, we will not be permitted to use such proceeds to co-invest with certain entities affiliated with the Adviser in transactions originated by the Adviser or their respective affiliates except pursuant to the exemptive order granted by the SEC or co-invest alongside the Adviser or its respective affiliates in accordance with existing regulatory guidance. However, we will be permitted to and may co-invest in syndicated deals and secondary loan market transactions where price is the only negotiated point. Before making investments, we will invest the net proceeds of this 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 that we expect to achieve when our portfolio is fully invested in securities meeting our investment objective. As a result, any distributions that we pay while our portfolio is not fully invested in securities meeting our investment objective may be lower than the distributions that we may be able to pay when our portfolio is fully invested in securities meeting our investment objective.
A stockholder’s interest in us will be diluted if we issue additional shares of common stock, which could reduce the overall value of an investment in us.
Potential investors will not have preemptive rights to purchase any common stock we issue in the future. Our charter authorizes us to issue 1,000,000,000 shares of common stock. Pursuant to our charter, a majority of our entire Board may amend our charter to increase or decrease the number of authorized shares of common stock without stockholder approval. We intend to sell additional shares of common stock from time to time. To the extent that we issue additional shares of common stock at or below net asset value after an investor purchases shares of our common stock, an investor’s percentage ownership interest in us will be diluted. In addition, depending upon the terms and pricing of any additional offerings and the value of our investments, an investor may also experience dilution in the book value and fair value of his or her shares of common stock.
We have adopted a dividend reinvestment plan pursuant to which we reinvest all cash distributions declared by the Board on behalf of investors who do not elect to receive their distributions in cash. As a result, if the Board declares a cash distribution, then our stockholders who have not opted out of our dividend reinvestment plan will have their cash distributions automatically reinvested in additional shares of our common stock, rather than receiving the cash distribution. As a result, our stockholders that do not participate in our dividend reinvestment plan will experience dilution in their ownership percentage of our common stock over time.
Our Board 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 (the “MGCL”) and our charter, our Board 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, our Board will be required by Maryland law and our charter 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, our Board 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 premium prices for holders of our common stock or otherwise be in their best interest. 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 as a separate class from the holders of common stock on a proposal to cease operations as a BDC. In addition, 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. 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. These effects, among others, could have an adverse effect on your investment in our common stock.
Provisions of the MGCL and our organizational documents could deter takeover attempts and have an adverse impact on the prices of our common stock.
The MGCL and our organizational documents contain provisions that may discourage, delay or make more difficult a change in control of the Company.
The classification of our Board and the limitations on removal of directors described herein as well as the limitations on our stockholders’ right to fill vacancies and newly created directorships and to fix the size of the Board could have the effect of making it more difficult for a third party to acquire the Company, or of discouraging a third party from acquiring or attempting to acquire the Company.
If our Board does not approve a business combination, the Maryland 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 provide that the Maryland Control Share Acquisition Act will not restrict acquisitions of our stock by any person. If we were to 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 will not, however, amend our bylaws to make us subject to the Maryland Control Share Acquisition Act without our Board determining that doing so would not conflict with the 1940 Act and obtaining confirmation from the SEC that it does not object to that determination.
Investing in our common stock involves a high degree of risk.
The investments we make in accordance with our investment objective may result in a higher amount of risk than alternative investment options and volatility or loss of principal. Our investments in portfolio companies may be highly speculative and aggressive and, therefore, an investment in our common stock may not be suitable for someone with lower risk tolerance.
The net asset value of our common stock may fluctuate significantly.
The net asset value and liquidity, if any, 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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changes in regulatory policies or tax guidelines, particularly with respect to RICs or BDCs;
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loss of RIC or BDC status;
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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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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;
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departure of either of our adviser or certain of its respective key personnel;
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general economic trends and other external factors; and
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loss of a major funding source.
Certain large stockholders could influence, and may continue to exert influence, over our management and affairs and over most influence votes requiring stockholder approval.
We have holders that own a significant portion of our common stock. As of December 31, 2020, BC Partners and its affiliates owned 24.4% of our outstanding common stock and Forethought Life Insurance Company owned 24.3% of our outstanding common stock. Therefore, each such holder is able to exert, and may be able to continue to exert, influence over our management and policies and have significant voting influence on most votes requiring stockholder approval. This concentration of ownership may also have the effect of delaying, preventing or deterring a change of control of us and could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of us.
As a condition of our co-investment exemptive relief, as our Adviser, its principals, and any person controlling, controlled by or under common control with our Adviser or its principals own in the aggregate more than 25% of our common stock they are required to vote such shares as directed by an independent third party when voting on the election or removal of directors and any other matter affecting the composition, size or manner of election of our Board.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments.
None.

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ITEM 2. PROPERTIES
Item 2. Properties.
Our corporate headquarters are located at 650 Madison Avenue, 23rd floor, New York, New York 10022 and are provided by the Adviser in accordance with the terms of our Administration Agreement. We believe that our office facilities are suitable and adequate for our business as it is contemplated to be conducted.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings.
We are not currently subject to any material legal proceedings, nor, to our knowledge, are any material legal proceedings threatened against us. From time to time, we may be party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. Our business is also subject to extensive regulation, which may result in regulatory proceedings against us. While the outcome of these legal or regulatory proceedings cannot be predicted with certainty, we do not expect that any these proceedings will have a material effect upon our financial condition or results of operations.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures.
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our outstanding common stock are offered and sold in transactions exempt from registration under the 1933 Act under Section 4(a)(2), Regulation D and Regulation S. Such offerings would cease in the event of an exchange listing. There is no public market for our common stock currently, nor can we give any assurance that one will develop.
Our common stock may not be sold, transferred, assigned, pledged or otherwise disposed of unless (i) if such transfer is prior to an exchange listing, our consent is granted, and (ii) our common stock is registered under applicable securities laws or specifically exempted from registration (in which case the stockholder may, at our option, be required to provide us with a legal opinion, in form and substance satisfactory to us, that registration is not required). Accordingly, an investor must be willing to bear the economic risk of investment in our common stock until we are liquidated. No sale, transfer, assignment, pledge or other disposition, whether voluntary or involuntary, of our common stock may be made except by registration of the transfer on our books. Prior to an exchange listing, each transferee will be required to execute an instrument agreeing to be bound by these restrictions and the other restrictions imposed on our common stock and to execute such other instruments or certifications as are reasonably required by us.
Holders
As of March 8, 2021, there were 60 holders of record of our common stock.
Distributions
On March 11, 2021, the Board declared a quarterly dividend of $0.31 per share for stockholders of record as of March 15, 2021, payable on March 22, 2021. We currently intend to distribute dividends or make distributions to our stockholders on a quarterly basis out of assets legally available for distribution, as determined by our Board in its discretion.
Recent Sales of Unregistered Securities and Use of Proceeds
Except as previously reported by the Company on its current reports on Form 8-K, we did not sell any securities during the period covered by this Annual Report that were not registered under the Securities Act.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Selected Financial Data
This item is no longer required as we have elected to early adopt the changes to Item 301 of Regulation S-K contained in SEC Release No. 33-10890.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The information contained in this section should be read in conjunction with the consolidated financial statements and related notes thereto appearing elsewhere in this Annual Report. This discussion includes forward-looking statements that involve substantial risks and uncertainties and should be read in conjunction with the “Cautionary Statement Regarding Forward-Looking Statements” set forth on page 2 of this Annual Report on Form 10-K for further information regarding forward-looking statements. Except as otherwise indicated, the terms “we,” “us,” “our,” the “Company” and “BCPL” refer to BC Partners Lending Corporation.
Overview
The Company was incorporated under the laws of the State of Maryland on December 22, 2017. We have elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), and elected to be treated as a regulated investment company (“RIC”) for U.S. federal income tax purposes, and to qualify annually as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). As such, we are required to comply with various regulatory requirements, such as the requirement to invest at least 70% of our assets in “qualifying assets,” source of income limitations, asset diversification requirements, and the requirement to distribute annually at least 90% of our investment company taxable income and tax-exempt interest. Qualifying assets include investments in “eligible portfolio companies.” Under the relevant Securities and Exchange Commission (“SEC”) rules, the term “eligible portfolio company” includes most private companies, whose principal place of business is the United States, 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. These rules also permit us to include as qualifying assets certain follow-on investments in companies that were eligible portfolio companies at the time of initial investment but that no longer meet the definition. In addition, we will not invest more than 30% of our total assets in companies whose principal place of business is outside the United States. The Company is an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and the Company is taking advantage of the extended transition period for complying with certain new or revised accounting standards provided for emerging growth companies in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”). Depending on the duration of the novel coronavirus, or COVID-19, pandemic and the extent of its impact on our portfolio companies’ operations and our net investment income, any future distributions to our stockholders may be for amounts less than our historical distributions, may be made less frequently than historical practices, and may be made in part cash and part stock, 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, or 10% subject to temporary relief from the U.S. Internal Revenue Service.
Our investment objective is to make investments that generate current income and, to a lesser extent, capital appreciation. We intend for our investments primarily to take the form of debt investments, which may include secured debt, unsecured debt, other debt and/or equity in private middle-market companies (we define “middle-market companies” as those with annual earnings before interest, taxes, depreciation and amortization (“EBITDA”) between $10 million and $50 million). In addition, to a lesser extent, we may invest in the securities of public companies and in structured products. While our primary focus will be on investments within the United States, we may, on occasion, invest in securities of non-U.S. entities.
We are managed by BC Partners Advisors L.P. (the “Adviser”) and supervised by our board of directors (the “Board”), a majority of whom are not “interested persons” of the Company or the Adviser as defined in the 1940 Act. On April 23, 2018, we entered into an Investment Advisory Agreement which was amended and restated on November 7, 2018 and further amended on July 9, 2019 (the “Investment Advisory Agreement”) with the Adviser. Under the Investment Advisory Agreement, we have agreed to pay the Adviser a base management fee based on average gross assets, excluding cash and cash equivalents but including assets purchased with borrowed amounts, at the end of the two most recently completed calendar quarters and an incentive fee based on our performance. We engaged BC Partners Management LLC (the “Administrator”) to act as our administrator. On April 23, 2018, we entered into an Administration Agreement (the “Administration Agreement”) with the Administrator. Under the Administration Agreement, we have agreed to reimburse the Administrator for certain services performed to enable us to operate.
On October 25, 2019, we formed a wholly-owned subsidiary, Great Lakes BCPL Funding Ltd. (“BCPL Funding”), a Cayman Islands exempted company, which holds certain of our portfolio loan investments. On December 16, 2019, we, through BCPL Funding, entered into a debt financing facility, pursuant to which up to $50 million is available to us to fund investments and for other general corporate purposes (the “Facility”). See “-Financial Condition, Liquidity and Capital Resources-Debt” below. On January 28, 2020, we formed a wholly-owned subsidiary, BCPL Sub Holdings LLC, a Delaware limited liability company, which holds our equity investment.
Business Environment and Developments/Outlook
The U.S. capital markets are experiencing a period of extreme volatility and disruption. In December 2019, a novel strain of coronavirus (also known as “COVID-19”) surfaced in China and has since been detected in numerous countries, including the United States. COVID-19 has spread quickly and has been identified as a global pandemic by the World Health Organization. In response, governmental authorities have imposed restrictions on travel and the temporary closure of many corporate offices, retail stores, restaurants and manufacturing facilities and factories in affected jurisdictions, including, beginning in March 2020, in the United States.
While we have been carefully monitoring the COVID-19 pandemic and its impact on our business and the business of our portfolio companies, we have continued to fund our existing debt commitments. In addition, we have continued to make, and expect to continue to make, investments in new loans.
We cannot predict the full impact of the COVID-19 pandemic, including its duration in the United States and worldwide and the magnitude of the economic impact of the outbreak, including with respect to the travel restrictions, business closures and other quarantine measures imposed on service providers and other individuals by various local, state, and federal governmental authorities, as well as non-U.S. governmental authorities. As such, we are unable to predict the duration of any business and supply-chain disruptions, the extent to which COVID-19 pandemic will negatively affect our portfolio companies’ operating results or the impact that such disruptions may have on our results of operations and financial condition. Depending on the duration and extent of the disruption to the operations of our portfolio companies, we expect that certain portfolio companies will experience financial distress and possibly default on their financial obligations to us and their other capital providers. It is possible that some of our portfolio companies may significantly curtail business operations, furlough or lay off employees and terminate service providers, and defer capital expenditures if subjected to prolonged and severe financial distress, which would likely impair their business on a permanent basis. These developments would likely result in a decrease in the value of our investment in any such portfolio company.
The pandemic and the resulting economic dislocations have had adverse consequences for the business operations of some of our portfolio companies and have adversely affected, and threaten to continue to adversely affect, our operations, even as certain jurisdictions begin the process of reopening and easing restrictions on social interactions. The operational and financial performance of the portfolio companies in which we make investments depends on future developments, including the duration and spread of the outbreak, and such uncertainty may in turn impact our valuation of the portfolio companies.
The COVID-19 pandemic and the related disruption and financial distress experienced by our portfolio companies may have material adverse effects on our investment income, particularly our interest income received from our investments. In connection with the adverse effects of the COVID-19 pandemic, we may need to restructure our investments in some of our portfolio companies, which could result in reduced interest payments, an increase in the amount of PIK interest we receive, or result in permanent impairments on our investments.
We are required to carry our investments at fair value as determined in good faith by or under the direction of our Board. Decreases in fair values of our investments are recorded as unrealized depreciation. Depending on market conditions, we could incur substantial losses in future periods, which could have a material adverse impact on our business, financial condition and results of operations.
We have had a reduction in our net asset value per share since December 31, 2019 which is primarily the result of the impact of the COVID-19 pandemic. The decrease in net asset value per share as of December 31, 2020 primarily resulted from an increase in the aggregate unrealized depreciation of our investment portfolio resulting from decreases in the fair value of some of our portfolio company investments primarily due to the expected immediate adverse economic effects of the COVID-19 pandemic and the continuing uncertainty surrounding its long-term impact, as well as the re-pricing of credit risk in the market.
We are permitted under the 1940 Act, as a BDC, to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 150% after such borrowing. In addition, our outstanding borrowings contain affirmative and negative covenants and events of default relating to minimum stockholders’ equity, minimum obligors’ net worth, minimum asset coverage, minimum liquidity and maintenance of RIC and BDC status, as well as cross-default provisions relating to other indebtedness.
As of December 31, 2020, we are in compliance with our asset coverage requirements under the 1940 Act and we are in compliance with all of the covenants pertaining to all of our borrowings. However, any continued increase in unrealized depreciation of our investment portfolio or further significant reductions in our net asset value as a result of the effects of the COVID-19 pandemic, or otherwise, increases the risk of breaching the relevant covenants, including those relating to minimum stockholders’ equity, minimum obligor net worth, and minimum asset coverage. If we fail to satisfy the respective covenants in our borrowings, or are unable to cure any event of default or obtain a waiver from the lender, it could result in foreclosure by the lenders under the credit facility, which would accelerate our repayment obligations under the facility and thereby have a material adverse effect on our business, liquidity, financial condition, results of operations and ability to pay distributions to our stockholders.
As of December 31, 2020, our Board approved the fair value of our investment portfolio in good faith in accordance with our valuation procedures, with input from the Adviser based on information available at the time of approval. We believe that the COVID-19 pandemic represents an extraordinary circumstance that has materially impacted the fair value of our investments. In addition, as a result of the COVID-19 pandemic, the fair value of our portfolio investments may be further negatively impacted after December 31, 2020 by circumstances and events that are not yet known.
Subscription Agreement
We are authorized to issue 1,000,000,000 shares of common stock at $0.001 par value per share.
We have entered into subscription agreements (the “Subscription Agreements”) with investors providing for the private placement of shares of our common stock. Under the terms of the Subscription Agreements, investors are required to fund drawdowns to purchase shares of our common stock up to the amount of their respective capital commitment on an as-needed basis each time we deliver a drawdown notice to our investors with a minimum of 10 business days prior notice. Our initial private offering closed on September 26, 2019 (the “Initial Closing Date”).
As of December 31, 2020 and 2019, we had received capital commitments totaling $40.4 million and $27.1 million, respectively.
During the year ended December 31, 2020, we delivered the following capital call notices to investors:
Capital Drawdown Notice Date
Common Share
Issuance Date
Number of
Common
Shares Issued
Aggregate
Offering Price
March 13, 2020
March 27, 2020
291,400
$
6,775,000
June 11, 2020
June 25, 2020
230,833
5,600,000
September 11, 2020
September 25, 2020
264,741
6,600,000
Total
786,974
$
18,975,000
Liquidity
On April 20, 2020, we submitted to the SEC an application for exemptive relief to initiate one or more transactions intended to provide investors with liquidity options with respect to their investments in shares of our common stock (each, a “Reorganization”), pursuant to which an investor would have the option to exchange their shares and any remaining commitment, or a portion of their shares and any remaining commitment, in us for an interest in an entity (a “Liquidating Company”) that generally would seek to liquidate and distribute the proceeds of its investments, as they are received, to its equity holders over time, such that it would likely substantially complete its liquidation within a reasonable period of time following the date of the Reorganization. It is anticipated that, if initiated, the first Reorganization would occur as soon as reasonably practicable following the end of the fiscal year during which the third anniversary of the initial closing date occurs (the “Initial Reorganization”). Immediately following a Reorganization, the applicable Liquidating Company would hold a proportionate share of the assets and liabilities held by the Company immediately prior to the Reorganization based on investor participation levels. The costs of a Reorganization will be borne by the applicable Liquidating Company.
If the SEC grants us the exemptive relief permitting Reorganizations, it is possible that the SEC may impose certain conditions on us and each Reorganization. Our ability to initiate a Reorganization will depend upon applicable legal, tax and other relevant considerations at the time of the Reorganization.
In order to effect the Reorganization and provide stockholders optionality, we expect to, after determining the net asset value per share of our common stock as of the end of the fiscal year in which the third anniversary of the Initial Closing Date occurs, transfer a portion of our assets and liabilities to a Liquidating Company (which may be a wholly-owned subsidiary of the Company), and thereafter provide stockholders the opportunity to own interests in the Liquidating Company in exchange for all or a portion of their shares of common stock and any remaining commitments.
In establishing a Liquidating Company, all (i) assets, (ii) liabilities and (iii) investors’ uncalled capital commitments would be split pro rata between us and the Liquidating Company, and the pro rata portion would be transferred to the Liquidating Company. Assets may include funded commitments to portfolio companies. Liabilities may include unfunded commitments to portfolio companies, subscription-based financing (in the case of a continuous offering) and asset-based financing. We may need to call some or all of our uncalled capital commitments from stockholders, including stockholders not participating in a Reorganization, in order to pay down some or all of our existing debt prior to the Reorganization. While no assurances can be provided, the Board expects that a Liquidating Company will be treated as a BDC that is taxed as a RIC for U.S. federal income tax purposes.
Following the Initial Reorganization, if initiated, we expect to offer additional liquidity opportunities through corporate action, which may include the creation of additional Liquidating Companies at the end of every third fiscal year following the year of the creation of the initial Liquidating Company (if permitted by applicable law and/or the SEC).
Because the Adviser intends to manage the Liquidating Company, to the extent the 1940 Act continues to prohibit entities under common control from engaging in certain transactions at the time of the Reorganization, we may be required to obtain exemptive and/or no-action relief from the SEC in order to transfer assets to a Liquidating Company. If we do not obtain any required exemptive and/or no-action relief, or if it is determined that no such relief is necessary, our Board will make the determination as to if and when it is appropriate us to undertake the Reorganization.
We may not propose a Reorganization, even if we receive exemptive relief, unless we have been advised by tax counsel or other advisers that effecting the Reorganization will not have material adverse tax consequences for the Company. Stockholders that exchange their shares for interests in a Liquidating Company may, however, recognize taxable gain in connection with the exchange, and all stockholders should consult their tax advisers with respect to the tax consequences of any such exchange and the ownership of interests in the Liquidating Company. Even if the Company does receive exemptive relief to pursue a Reorganization, we may determine not to proceed with a Reorganization if the Board determines that it would not be in the best interest of stockholders or there is insufficient Stockholder interest in participating in a Reorganization.
There can be no assurance that we will be able to obtain any required exemptive and/or no-action relief from the SEC or that the Board will authorize the Reorganization. If we do not obtain any required exemptive and/or no-action relief, or if we do receive the required relief but the Board determines not to proceed with a Reorganization, then we will wind down our operations within ten years after the Initial Closing Date unless the Board and/or stockholders determine to take different action, including listing our common stock on a national securities exchange or periodic repurchases or tender offers.
Our Investment Framework
We are a Maryland corporation organized to invest primarily in private middle-market companies in the form of secured debt, unsecured debt, other debt and/or equity securities. Our investment objective is to make investments that generate current income and, to a lesser extent, capital appreciation. We define “middle-market companies” as those with EBITDA between $10 million and $50 million.
As of December 31, 2020 and 2019, the average investment size in each of our portfolio companies was approximately $2.1 million and $1.7 million, respectively, based on fair value.
Key Components of Our Results of Operations
Investments
We focus primarily on the direct origination and syndication of loans to middle-market companies domiciled in the United States.
Our level of investment activity (both the number of investments and the size of each investment) can and does vary substantially from period to period depending on many factors, including the amount of debt and equity capital generally available to middle-market companies, the level of merger and acquisition activity for such companies, the general economic environment and the competitive environment for the types of investments we make.
In addition, as part of our risk strategy on investments, we may reduce certain levels of investments through partial sales or syndication to additional investors.
We may invest up to 30% of the investment portfolio in “non-qualifying” opportunistic investments, including investments in high-yield bonds, debt and equity securities of collateralized loan obligation funds, foreign investments, joint ventures, managed funds, partnerships and distressed debt or debt and equity securities of large cap public companies. At December 31, 2020 and 2019, the total amount of non-qualifying assets to total assets was approximately 4.7% and 2.2%, respectively.
Revenues
The principal measure of our financial performance is net increase or decrease in net assets resulting from operations, which includes net investment income or loss, net realized gain or loss on investments, net realized gain or loss on foreign currency, net change in unrealized appreciation or depreciation on investments, and net change in unrealized appreciation or depreciation on foreign currency. Net investment income or loss is the difference between our income from interest, dividends, fees and other investment income and our operating and other expenses. Net realized gain or loss on investments is the difference between the proceeds received from dispositions of portfolio investments and their amortized cost, including the respective realized gain or loss on foreign currency for any non-U.S. dollar denominated investment transactions. Net realized gain or loss on foreign currency is the portion of realized gain or loss attributable to foreign currency fluctuations. Net change in unrealized appreciation or depreciation on investments is the net change in the fair value of our investment portfolio, including the respective unrealized appreciation or depreciation on foreign currency for any non-U.S. dollar denominated investments. Net change in unrealized appreciation or depreciation on foreign currency is the net change in the value of receivables or accruals due to the impact of foreign currency fluctuations.
We principally generate revenues in the form of interest income on the debt investments we hold. Our debt investments typically have a term of three to ten years, and bear interest at a floating rate usually determined on the basis of a benchmark, such as London Interbank Offered Rate (“LIBOR”), or an alternate base rate, such as the Prime Rate. Interest on debt securities is generally payable quarterly or semi-annually. In addition, some of our investments may provide for PIK interest. Such amounts of accrued PIK interest are added to the cost of the investment on the respective capitalization dates and generally become due at maturity of the investment or upon the investment being called by the issuer. To a lesser extent, we may also generate revenues in the form of dividends and other distributions on the equity or other securities we anticipate holding. In addition, we may generate revenues in the form of non-recurring commitment, closing, origination, structuring or diligence fees, fees for providing managerial assistance, consulting fees, prepayment fees and performance-based fees. Any such fees generated in connection with our investments will be recognized when earned.
Expenses
Our primary operating expenses include the payment of management and incentive fees, if any, and other expenses under the Investment Advisory Agreement, interest expense from financing arrangements, and other expenses necessary for our operations. The management and incentive fees will compensate the Adviser for its work in identifying, evaluating, negotiating, executing, monitoring and servicing our investments. On August 20, 2019, the Company entered into a letter agreement (the “Letter Agreement”) with the Adviser pursuant to which, for the period ending December 31, 2019, the Adviser waived 50% of the base management fee to be paid by the Company under the Investment Advisory Agreement. The waiver was prorated for any partial month or quarter. Management fees waived are not subject to recoupment by the Adviser.
We reimburse the Administrator for expenses necessary to perform services related to our administration and operations, including the Adviser’s portion of the compensation and related expenses for certain personnel who provide administrative services. Such services include, among other things, clerical, bookkeeping and recordkeeping services, investor relations, performing or overseeing the performance of our corporate operations (which includes being responsible for the financial records that we are required to maintain and preparing reports for our stockholders and reports filed with the SEC), assisting us in calculating the net asset value per share, overseeing the preparation and filing of tax returns and the printing and dissemination of reports to our stockholders, and generally overseeing the payment of our expenses and the performance of administrative and professional services rendered to us by others.
We will also bear all other costs and expenses of our operations, administration and transactions, including but not limited to:
•
the cost of our organization and the offering, subject to a cap of 1.50% of the Company’s total capital commitments, and further bound by a time limitation;
•
the cost of calculating our net asset value, including the cost of any third-party valuation services;
•
the cost of effecting any sales and repurchases of our common stock and other securities;
•
fees and expenses payable under any dealer manager or placement agent agreements, if any;
•
administration fees payable under the Administration Agreement and any sub-administration agreements, including related expenses;
•
debt service and other costs of borrowings or other financing arrangements;
•
costs of hedging;
•
expenses, including travel expense, incurred by the Adviser, or members of the investment team, or payable to third parties, performing due diligence on prospective portfolio companies and, if necessary, enforcing our rights;
•
transfer agent and custodial fees;
•
fees and expenses associated with marketing efforts;
•
federal and state registration fees, any stock exchange listing fees and fees payable to rating agencies;
•
federal, state and local taxes;
•
independent directors’ fees and expenses including certain travel expenses;
•
costs of preparing financial statements and maintaining books and records and filing reports or other documents with the SEC (or other regulatory bodies) and other reporting and compliance costs, including registration and listing fees, and the compensation of professionals responsible for the preparation of the foregoing;
•
the costs of any reports, proxy statements or other notices to stockholders (including printing and mailing costs), the costs of any stockholder or director meetings and the compensation of personnel responsible for the preparation of the foregoing and related matters;
•
commissions and other compensation payable to brokers or dealers;
•
research and market data;
•
fidelity bond, directors’ and officers’ errors and omissions liability insurance and other insurance premiums;
•
direct costs and expenses of administration, including printing, mailing, long distance telephone and staff;
•
fees and expenses associated with independent audits, outside legal and consulting costs;
•
costs of winding up our affairs;
•
costs incurred by either the Administrator or us in connection with administering our business, including payments under the Administration Agreement;
•
extraordinary expenses (such as litigation or indemnification); and
•
costs associated with reporting and compliance obligations under the 1940 Act and applicable federal and state securities laws.
We are obligated to reimburse the Adviser for expense payments made by the Adviser to us in connection with the Expense Support Agreement following any calendar quarter in which we have available operating funds. The amount of the reimbursement payment for any calendar quarter will be equal to the lesser of (i) the excess operating funds in such calendar quarter, and (ii) the aggregate amount of all expense payments made by the Adviser to us within three years prior to the last business day of such calendar quarter that have not been previously reimbursed by us to the Adviser.
In addition, we and our Administrator have contracted with U.S. Bank N.A. to provide custodial and various accounting and administrative services, including but not limited to, preparing preliminary financial information for review by the Adviser, maintaining accounting and corporate books and records, processing trade information provided by us and performing testing in respect to RIC compliance.
We expect that our general and administrative expenses will increase in dollar terms during periods of asset growth, but will decline as a percentage of total assets during such periods.
Leverage
The amount of leverage we intend to use in any period depends on a number of factors, including cash on-hand available for investing, the cost of financing and general economic and market conditions. Prior to the Small Business Credit Availability Act being signed into law, a BDC generally was not permitted to incur indebtedness unless immediately after such borrowing it has an asset coverage for total borrowings of at least 200%. The Small Business Credit Availability Act, signed into law on March 23, 2018, contains a provision that grants a BDC the option, subject to certain conditions and disclosure obligations, to reduce the asset coverage requirement to 150%. Our Board and initial stockholder have approved the decreased asset coverage ratio.
Portfolio and Investment Activity
As of December 31, 2020 we had investments in 38 portfolio companies with an aggregate fair value of $80.1 million. For the year ended December 31, 2020, we invested $89.4 million in 45 new and existing portfolio companies and received principal repayments of $45.0 million. As of December 31, 2020, our portfolio was invested 89.3% in first-lien investments and 10.7% in other investments. As of December 31, 2020, the average investment size in each of our portfolio companies was approximately $2.1 million based on fair value.
In October 2019, the Company closed on its first portfolio company investments. For the period ended December 31, 2019, we invested $35.7 million in 21 portfolio companies and received principal repayments of $1.6 million. As of December 31, 2019, our portfolio was invested 96.1% in first-lien investments and 3.9% in other investments. As of December 31, 2019, the average investment size in each of our portfolio companies was approximately $1.7 million based on fair value.
Our investment activity for the periods ended December 31, 2020 and 2019 was as follows (information presented herein is at par value unless otherwise indicated):
For the Year Ended December 31, 2020
For the Period from
October 2, 2019
(commencement of operations)
to December 31, 2019
Investments made in portfolio companies
$
103,347,002
$
36,054,333
Investments sold
(41,543,865
)
(1,627,951
)
Net investment activity before investments repaid
61,803,137
34,426,382
Investments repaid
(8,067,497
)
-
Net investment activity
$
53,735,640
$
34,426,382
Portfolio companies at beginning of period
-
New portfolio companies
Exited portfolio companies
(17
)
(1
)
Portfolio companies at end of period
Number of investments made in existing portfolio companies
-
Percentage of investment commitments at floating rates
87.9
%
100.0
%
Percentage of investment commitments at fixed rates
12.1
%
0.0
%
Weighted average contractual interest rate of investment commitments based on par
5.6
%
7.1
%
As of December 31, 2020 and 2019, our investments consisted of the following:
December 31, 2020
December 31, 2019
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Senior Secured Loan
$
71,186,412
$
71,395,401
$
32,757,424
$
32,837,653
Structured Note
1,842,332
1,947,769
1,330,000
1,330,000
Subordinated Structured Note
333,334
270,834
-
-
Junior Secured Loan
990,132
990,000
-
-
Bond
3,953,597
4,175,000
-
-
Equity/Other
-
-
-
-
Repurchase Agreement
1,302,082
1,371,838
-
-
Total
$
79,607,889
$
80,150,842
$
34,087,424
$
34,167,653
The following table shows the fair value of our performing and non-accrual investments as of December 31, 2020 and 2019:
December 31, 2020
December 31, 2019
Fair Value
Percentage
Fair Value
Percentage
Performing
$
80,150,842
100.0
%
$
34,167,653
100.0
%
Non-accrual
-
-
-
-
Total
$
80,150,842
100.0
%
$
34,167,653
100.0
%
Results of Operations
Our operating results for the year or period ended December 31, 2020 and 2019 were as follows:
For the Year Ended December 31, 2020
For the Period from October 2, 2019
(Commencement of Operations)
to December 31, 2019
Investment income
$
4,227,302
$
206,339
Net expenses
2,917,775
197,873
Net investment income
1,309,527
8,466
Net realized and unrealized gain
1,273,609
89,518
Net increase in net assets resulting from operations
$
2,583,136
$
97,984
Net investment income per share - basic and diluted
$
1.03
$
0.01
Net increase in net assets resulting from operations per share - basic and diluted
$
2.04
$
0.14
Investment Income
We generate revenue in the form of interest income on the debt securities that we own, dividend income on any common or preferred stock that we own, and fees generated from the structuring of new deals. Our investments in debt securities will typically have loan maturities of three to ten years and bear interest at a fixed or floating rate.
As of December 31, 2020, our portfolio, based on fair value, consisted of 89.2% first-lien debt investments and 10.8% other investments. As of December 31, 2019, our portfolio, based on fair value, consisted of 96.1% first-lien debt investments and 3.9% other investments. As of December 31, 2020, we had investments in 38 portfolio companies, with an average investment size of approximately $2.1 million based on fair value. As of December 31, 2019, we had investments in 20 portfolio companies, with an average investment size of approximately $1.7 million based on fair value. As of December 31, 2020 and 2019, the largest single investment based on fair value represented 5.2% and 8.8%, respectively, of our total investment portfolio. As of December 31, 2020 and 2019, 87.9% and 100.0%, respectively, of the debt investments based on fair value in our portfolio were at floating rates indexed to LIBOR or Prime.
On July 27, 2017, the Financial Conduct Authority (“FCA”) announced that it would phase out the LIBOR as a benchmark by the end of 2021 and the FCA has indicated that market participants should not rely on LIBOR being available after 2021. As an alternative to LIBOR, for example, 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. Abandonment of or modifications to LIBOR could have adverse impacts on newly issued financial instruments and our existing financial instruments which reference LIBOR. Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR, or any changes announced with respect to such reforms, may result in a sudden or prolonged increase or decrease in the reported LIBOR rates and the value of LIBOR-based loans and securities, including those of other issuers we or our funds currently own or may in the future own. It remains uncertain how such changes would be implemented and the effects such changes would have on us, issuers of instruments in which we invest and financial markets generally.
The expected discontinuation of LIBOR could have a significant impact on our business. We anticipate significant operational challenges for the transition away from LIBOR including, but not limited to, amending existing loan agreements with borrowers on investments that may have not been modified with fallback language and adding effective fallback language to new agreements in the event that LIBOR is discontinued before maturity. Beyond these challenges, we anticipate there may be additional risks to our current processes and information systems that will need to be identified and evaluated by us. Due to the uncertainty of the replacement for LIBOR, the potential effect of any such event on our cost of capital and net investment income cannot yet be determined. In addition, any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market value for or value of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us and could have a material adverse effect on our business, financial condition and results of operations.
Investment income for the year or period ended December 31, 2020 and 2019 were as follows:
For the Year Ended December 31, 2020
For the Period from October 2, 2019
(Commencement of Operations)
to December 31, 2019
Interest income
$
3,982,887
$
203,839
Fee and other income
244,415
2,500
Total investment income
$
4,227,302
$
206,339
Weighted average contractual interest rate on income producing debt investments at par
5.6
%
7.1
%
Weighted average contractual interest rate on income producing debt investments (adjusted for non-accrual and partial non-accrual) at par
5.6
%
7.1
%
For the periods ended December 31, 2020 and 2019, we have generated interest income of $4.0 million and $0.2 million, respectively. Such revenues represent cash interest earned as well as non-cash portions relating to accretion of discounts. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized.
The level of interest income we receive is generally related to the principal balance of income-producing investments, multiplied by the contractual interest rates of our investments. Fee income is transaction based, and typically consists of amendment and consent fees, prepayment fees, structuring fees and other non-recurring fees. As such, fee income is generally dependent on new direct origination investments and the occurrence of events at existing portfolio companies resulting in such fees. Any such fees generated will be recognized as earned. We expect the dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases.
Expenses
Expenses for the year or period ended December 31, 2020 and 2019 were as follows:
For the Year Ended December 31, 2020
For the Period from October 2, 2019
(Commencement of Operations)
to December 31, 2019
Organization and offering costs
$
222,375
$
406,708
Expenses reimbursable to Adviser
-
1,163,613
Management fees
577,579
43,501
Incentive fees
290,537
13,428
Administrative fees
511,170
74,386
Interest and debt expenses
1,012,616
38,258
Audit fees
251,730
185,000
Legal fees
191,849
336,574
Professional fees
197,264
38,500
Directors' fees
150,000
37,500
Insurance
265,313
-
Other expenses
280,835
47,465
Total expenses before expense support
3,951,268
2,384,933
Management fees waived
-
(21,751
)
Expense support from related parties
(1,033,493
)
(2,165,309
)
Net expenses
$
2,917,775
$
197,873
Total expenses were $4.0million and $2.4 million for the periods ended December 31, 2020 and 2019, respectively. Management fees were $0.6 million and $21.8 thousand for the periods ended December 31, 2020 and 2019, respectively, net of waiver. All organization and offering costs since inception through December 31, 2020 were funded by the Adviser and we will have no responsibility for such costs until the Adviser submits such costs, or a portion thereof, for reimbursement, subject to a cap of 1.50% of our total commitments and provided further that the Adviser or its affiliates may not be reimbursed for payment of excess organization and offering expenses that were incurred more than three years prior to the proposed reimbursement. For the periods ended December 31, 2020 and 2019, we accrued organization and offering costs of $0.2 million and $0.4 million, respectively. During the periods ended December 31, 2020 and 2019, we incurred $1.0 million and $38 thousand, respectively, of interest and debt expenses related to our facility. For the year ended December 31, 2020, legal fees were reduced by $0.2 million as a result of lower fees agreed between us and our legal counsel.
We expect our operating expenses related to our ongoing operations to increase in the next several quarters because of the anticipated growth in the size of our asset base. We expect operating expenses as a percentage of our total assets to decrease during periods of asset growth.
On August 22, 2019, we entered into an Expense Support Agreement with the Adviser to ensure that no portion of distributions made to our stockholders will be paid from our offering proceeds or borrowings. Commencing with the fourth quarter 2019 and on a quarterly basis thereafter, pursuant to the Expense Support Agreement between us and the Adviser, the Adviser will reimburse us for operating expenses in an amount that is sufficient to ensure that our net investment income and net short-term capital gains are equal to or greater than the cumulative distributions paid to our stockholders in each quarter. This arrangement is designed to ensure that no portion of distributions made to our stockholders will be paid from offering proceeds or borrowings. The specific amount of expenses reimbursed by the Adviser, if any, will be determined at the end of each quarter. During the periods ended December 31, 2020 and 2019, reimbursements from the Adviser totaled $1.0 million and $2.2 million, respectively.
Amounts due to the Adviser for the expected recoveries of organization, offering and operating expenses incurred on behalf of the Company, and amounts due from the Adviser under the Expense Support Agreement for such amounts, are reflected on a net basis in amounts due to/from affiliates on the consolidated statements of assets and liabilities.
Net Realized and Unrealized Gains or Losses
Our investments are generally purchased at a discount to par. We sold and received principal repayments of $45.0 million and $1.6 million, respectively during the periods ended December 31, 2020 and 2019, from which we realized net gains (losses) totaling $0.7 million and $9.3 thousand, respectively. We recognized gains on partial principal repayments we received at par value. For the periods ended December 31, 2020 and 2019, the net change in unrealized appreciation (depreciation) on investments totaled $0.5 million and $80.2 thousand, respectively, which was primarily due to the negative economic impact and the increased uncertainty caused by COVID-19 offset by partial recovery for the year ended December 31, 2020.
Net Increase in Net Assets Resulting from Operations
For the year or period ended December 31, 2020 and 2019, the net increase in net assets resulting from operations was $2.6 million and $98.0 thousand or $2.04 per share and $0.14 per share, respectively.
Financial Condition, Liquidity and Capital Resources
Our liquidity and capital resources are generated from the net proceeds of capital drawdowns of our private placement offerings of shares of our common stock, as well as from proceeds from principal repayments, income earned on investments and cash equivalents, and borrowings from the Facility. We intend to continue to generate cash primarily from future offerings of shares of our common stock, future borrowings and cash flows from operations. We may from time to time enter into additional debt facilities or increase the size of existing facilities to borrow funds to make investments, including before we have fully invested the net proceeds from our private placement offering, to the extent we determine that additional capital would allow us to take advantage of additional investment opportunities, if the market for debt financing presents attractively priced debt financing opportunities, or if our Board determines that leveraging our portfolio would be in our best interests and the best interests of our stockholders. In accordance with the 1940 Act, with certain limited exceptions, we are allowed to incur borrowings, issue debt securities or issue preferred stock if immediately after the borrowing or issuance our ratio of total assets (less total liabilities other than indebtedness) to total indebtedness plus preferred stock, is at least 150%. As of December 31, 2020 and 2019, our asset coverage ratio was 182.2% and 206.3%, respectively. We seek to carefully consider our unfunded commitments for the purpose of planning our capital resources and ongoing liquidity including our financial leverage. Further, we maintain sufficient borrowing capacity within the 150% asset coverage limitation under the 1940 Act and the asset coverage limitation under our credit facility to cover any outstanding unfunded commitments we are required to fund.
The primary uses of cash, including the net proceeds from our issuance and sale of our common stock, are for investments in portfolio companies, repayment of indebtedness, if any, cash distributions to our stockholders, and the cost of operations. As of December 31, 2020, the Adviser and its affiliates have incurred organization and offering costs on our behalf in the amount of $1.4 million. All organization and offering costs, and operating expenses prior to our commencement of operations were funded by the Adviser and we will not have responsibility for such costs until the Adviser submits such costs or a portion thereof for reimbursement, subject to a cap of 1.50% of our total capital commitments for organization and offering costs and provided further that the Adviser or its affiliates may not be reimbursed for payment of excess organization and offering expenses that were incurred more than three years prior to the proposed reimbursement. For the year or period ended December 31, 2020 and 2019, we accrued organization and offering costs of $0.2 million and $0.6 million, respectively.
As of December 31, 2020 and 2019, we had $14.7 million and $24.5 million, respectively, in cash and cash equivalents on hand, plus $0.0 million and $6.1 million, respectively, available to us under our borrowing facility, plus $0.3 million and $0.0 million, respectively in undrawn capital commitments, which is expected to be sufficient for our investing activities and to conduct our operations in the foreseeable future. However, as the impact of the COVID-19 pandemic on the economy and our business evolves, we will continue to assess our liquidity needs. A continued worldwide disruption could materially affect our future access to our sources of liquidity, particularly our cash flows from operations, financial condition, capitalization, and capital investments. In the event of a sustained market deterioration, we may need additional liquidity, which would require us to evaluate available alternatives and take appropriate actions.
Equity
We are authorized to issue 1,000,000,000 shares of common stock at $0.001 par value per share. As of December 31, 2020, we had 1,652.799 shares outstanding.
As of December 31, 2020 and 2019, we had received capital commitments totaling $40.4 million and $27.1 million, respectively. On October 2, 2019, pursuant to the Subscription Agreements, we delivered our first capital drawdown notice to investors relating to the issuance of 842,554 common stock for an aggregate offering price of $21.1 million, of which $10.8 million is from the Adviser and its affiliates, executives and employees of the Adviser, and directors of the Company.
The following tables summarizes the total shares issued and proceeds received related to capital drawdowns delivered pursuant to the Subscription Agreements for the year or period ended December 31, 2020 and 2019:
Capital Drawdown Notice Date
Common Share
Issuance Date
Number of
Common
Shares Issued
Aggregate
Offering Price
March 13, 2020
March 27, 2020
291,400
$
6,775,000
June 11, 2020
June 25, 2020
230,833
5,600,000
September 11, 2020
September 25, 2020
264,741
6,600,000
Total
786,974
$
18,975,000
Capital Drawdown Notice Date
Common Share
Issuance Date
Number of
Common
Shares Issued
Aggregate
Offering Price
October 2, 2019
October 16, 2019
842,554
$
21,063,858
Total
842,554
$
21,063,858
Distributions and Dividend Reinvestment
We have elected to be taxed as a RIC under Subchapter M of the Code. To maintain our RIC status, we must distribute at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, out of the assets legally available for distribution. In order to avoid certain excise taxes imposed on RICs, we currently intend to distribute during each calendar year an amount at least equal to the sum of (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year and (3) any ordinary income and net capital gains for preceding years that were not distributed during such years. In addition, although we currently intend to distribute realized net capital gains (i.e., net long-term capital gains in excess of short-term capital losses), if any, at least annually, out of the assets legally available for such distributions, we may in the future decide to retain such capital gains for investment.
We maintain an “opt out” dividend reinvestment plan for our common stockholders. As a result, if we declare a dividend, then stockholders’ cash dividends will be automatically reinvested in additional shares of our common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash dividends.
We may distribute taxable dividends that are payable in cash or shares of our common stock at the election of each stockholder. 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 published guidance indicating that this rule will apply even where the total amount of cash that may be distributed is limited to no more than 20% of the total distribution. Under this guidance, if too many stockholders elect to receive their distributions in cash, the cash available for distribution must be allocated among the stockholders electing to receive cash (with the balance of the distribution paid in stock). If we decide to make any distributions consistent with this guidance 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, shares of our stock, or a combination thereof) as ordinary income (or as long-term capital gain to the extent such distribution is properly reported 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 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.
We may not be able to achieve operating results that will allow us to make dividends and distributions at a specific level or to increase the amount of these dividends and distributions from time to time. In addition, we may be limited in our ability to make dividends and distributions due to the asset coverage test for borrowings when applicable to us as a business development company under the 1940 Act and due to provisions in future credit facilities. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of our status as a regulated investment company. We cannot assure stockholders that they will receive any dividends and distributions or dividends and distributions at a particular level.
With respect to the dividends paid to stockholders, income from origination, structuring, closing, commitment and other upfront fees associated with investments in portfolio companies was treated as taxable income and accordingly, distributed to stockholders.
We declared our first distribution on December 19, 2019. Subject to the Board’s discretion and applicable legal restrictions, our Board intends to continue to authorize and declare a quarterly distribution amount per share of our common stock. On August 22, 2019, we entered into an Expense Support Agreement with the Adviser to ensure that no portion of distributions made to our stockholders will be paid from our offering proceeds or borrowings.
As described above, we may be prohibited by the 1940 Act from making distributions on our common stock if, at the time of declaration, our asset coverage, as defined in the 1940 Act, is below 150% (subject to any exemptive relief granted to us by the SEC or 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 Section 61(a)(1) of the 1940 Act in order to maintain its status as a RIC under the Code). In any such event, we would be prohibited from making distributions required in order to maintain our status as a RIC unless made in accordance with any such exemptive or no-action relief granted by the SEC.
The following table reflects the distributions declared on shares of our common stock during the year or period ended December 31, 2020 and 2019:
Date Declared
Record Date
Payment Date
Distribution per Share
February 5, 2020
February 18, 2020
March 19, 2020
$
0.31
May 6, 2020
May 20, 2020
June 17, 2020
0.31
August 5, 2020
August 17, 2020
September 15, 2020
0.31
November 6, 2020
November 16, 2020
December 15, 2020
0.31
December 11, 2020
December 28, 2020
January 29, 2021
0.37
Total distributions per share
$
1.61
Date Declared
Record Date
Payment Date
Distribution
per Share
December 19, 2019
December 20, 2019
December 27, 2019
0.01
Total distribution per share
0.01
With respect to distributions, we have adopted an “opt out” dividend reinvestment plan (“DRP”) for common stockholders. As a result, in the event of a declared distribution, each shareholder that has not “opted out” of the DRP will have their dividends or distributions automatically reinvested in additional shares of our common stock rather than receiving cash distributions. Shareholders who receive distributions in the form of shares of common stock will be subject to the same U.S. federal, state and local tax consequences as if they received cash distributions.
The following table reflects the common stock issued pursuant to the dividend reinvestment plan during the year or period ended December 31, 2020 and 2019:
Date Declared
Record Date
Payment Date
Shares
February 5, 2020
February 18, 2020
March 19, 2020
2,507
May 6, 2020
May 20, 2020
June 17, 2020
5,658
August 5, 2020
August 17, 2020
September 15, 2020
5,548
November 6, 2020
November 16, 2020
December 15, 2020
5,479
Total shares issued
19,192
Date Declared
Record Date
Payment Date
Shares
December 19, 2019
December 20, 2019
December 27, 2019
Total shares issued
Debt
On December 16, 2019, we, through BCPL Funding, entered into a debt financing facility with UBS AG, London Branch (“UBS”), pursuant to which up to $50.0 million was be made available to us (the “Facility”). The interest rate applicable to borrowings under the Facility is based on the three-month LIBOR plus a spread of 265 basis points. The maturity date of the Facility is December 19, 2022. The Facility is secured by a security interest in virtually all of our portfolio investments (including cash), subject to certain exceptions. We have provided a make-whole guarantee to the lender in the event that the pledged assets were insufficient to satisfy the repayment of the Facility. The Facility contains covenants and events of default customary for financings of this type. See “Note 5. Borrowings.”
Contractual Obligations
The following table shows the contractual maturities of our debt obligations as of December 31, 2020:
Payments Due by Period
Contractual Obligations
Total
Less than
1 Year
1 to 3
Years
3 to 5
Years
More than
5 Years
Credit Facility
$
50,000,000
-
50,000,000
-
$
-
Total debt obligations
$
50,000,000
$
-
$
50,000,000
$
-
$
-
Related-Party Transactions
We have entered into certain contracts under which we have future commitments with affiliated or related parties. We entered into an Investment Advisory Agreement with the Adviser to provide us with investment advisory services under which we will pay our Adviser an annual base management fee based on our average gross assets, excluding cash and cash equivalents, and an incentive fee based on our performance. We also entered into an administrative agreement with the Administrator to perform (or oversee, or arrange for, the performance of) the administrative services necessary to enable us to operate and under which we will reimburse the Administrator for administrative expenses incurred on our behalf. See “Note 3. Related Party Transactions - Administration Agreement” and “- Investment Advisory Agreement” for a description of our obligations under these agreements. We also entered into an Expense Support Agreement with the Adviser, the purpose of which is to ensure that no portion of distributions made to our stockholders will be paid from our offering proceeds or borrowings. We are obligated to reimburse the Adviser for expense payments made by the Adviser to us in connection with the Expense Support Agreement following any calendar quarter in which we have available operating funds. The amount of the reimbursement payment for any calendar quarter will be equal to the lesser of (i) the excess operating funds in such calendar quarter, and (ii) the aggregate amount of all expense payments made by the Adviser to us within three years prior to the last business day of such calendar quarter that have not been previously reimbursed by us to the Adviser.
Off-Balance Sheet Arrangements
Portfolio Company Commitments
As of December 31, 2020 and 2019, we had the following outstanding commitments to fund investments in current portfolio companies:
Portfolio Company
Investment
December 31, 2020
December 31, 2019
Advantage Capital Holdings LLC
Senior Secured Loan
$
743,163
$
-
AMCP PET HOLDINGS, INC.
Senior Secured Loan
1,500,000
-
Datalink, LLC
Senior Secured Loan
600,000
-
Location Services LLC
Senior Secured Loan
583,333
708,333
MSM Acquisitions, Inc.
Senior Secured Loan
1,176,471
-
STX Financing, LLC
Repurchase Agreement
1,653,428
-
TA/WEG HOLDINGS, LLC
Senior Secured Loan
1,384,167
-
The PromptCare Companies Inc.
Senior Secured Loan
218,182
-
Total Unfunded Portfolio Company Commitments
$
7,858,744
$
708,333
We maintain sufficient borrowing capacity to cover outstanding unfunded portfolio company commitments that we may be required to fund. We seek to carefully consider our unfunded commitments for the purpose of planning our capital resources and ongoing liquidity including our financial leverage. Further, we maintain sufficient borrowing capacity within the 150% asset coverage limitation under the 1940 Act and the asset coverage limitation under our credit facility to cover any outstanding unfunded commitments we are required to fund.
Recent Developments
On March 11, 2021, the Board declared a quarterly dividend of $0.31 per share for our stockholders of record as of March 15, 2021, payable on March 22, 2021.
Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated statements of assets and liabilities. Changes in the economic environment, financial markets, and any other parameters used in determining such estimates could cause actual results to differ. Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods.
Investments at Fair Value
Investments for which market quotations are available are typically valued at those market quotations. To validate market quotations, we utilize a number of factors to determine if the quotations are representative of fair value, including the source and number of the quotations.
Debt that is not publicly traded but for which there are external pricing sources available as of the valuation date is valued using independent broker-dealer, market maker quotations or independent pricing services. The Valuation Committee subjects these quotes to various criteria including, but not limited to, the number and quality of quotes, the deviation among the quotes and information derived from analyzing our own transactions in such investments throughout the reporting period.
Investments that are not publicly traded or whose market prices are not readily available, as is expected to be the case for substantially all of the Company’s investments, are valued at fair value as determined in good faith by the Board, based on, among other things, the input of the Adviser, the Audit Committee and independent third-party valuation firm(s).
The Board undertakes a multi-step valuation process, which includes, among other procedures, the following:
•
The Company’s quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals responsible for the portfolio investment in conjunction with the Company’s portfolio management team. The Company utilizes an independent valuation firm to provide valuation on each material illiquid security at least once every trailing 12-month period;
•
Preliminary valuations are reviewed and discussed with management of the Adviser and investment professionals. Agreed upon valuation recommendations will be presented to the Audit Committee;
•
The Audit Committee will review the valuations presented and recommend values for each investment to the Board; and
•
The Board will review the recommended valuations and determine the fair value of each investment. Valuations that are not based on readily available market quotations will be valued in good faith based on, among other things, the input of the Adviser, the Audit Committee and, where applicable, other third parties.
As part of the valuation process, we may consider other information and may use valuation methods including but not limited to (i) market quotes for similar investments, (ii) recent trading activity, (iii) discounting forecasted cash flows of the investment, (iv) models that consider the implied yields from comparable debt, (v) third party appraisal, (vi) sale negotiations and purchase offers received from independent parties and (vii) estimated value of underlying assets to be received in liquidation or restructuring.
Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period. Additionally, the fair value of such investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that may ultimately be realized. Further, such investments are generally less liquid than publicly traded securities and may be subject to contractual and other restrictions on resale. If the Company were required to liquidate a portfolio investment in a forced or liquidation sale, it could realize amounts that are different from the amounts presented and such 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 than the unrealized gains or losses reflected herein.
We classify the inputs used to measure these fair values into the following hierarchy as defined by current accounting guidance:
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible to the Company.
Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.
Level 3: Significant inputs that are unobservable inputs for an asset or liability.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Revenue Recognition
We record interest income on an accrual basis to the extent that we expect to collect such amounts. For loans and debt securities with contractual PIK interest, which represents contractual interest accrued and added to the loan balance that generally becomes due at maturity, we will not accrue PIK interest if management determines that the PIK interest is not collectible. We do not accrue as a receivable interest on loans and debt securities if we have reason to doubt our ability to collect such interest. Loan origination fees, original issue discount, and market discount are capitalized and then we amortize such amounts as interest income. Upon the prepayment of a loan or debt security, any unamortized loan origination fees are recorded as interest income. We further record prepayment premiums on loans and debt securities as interest income when we receive such amounts.
Income Taxes
We have elected to be treated for U.S. federal income tax purposes, and to qualify annually, as a RIC under the Code. To qualify for and maintain qualification as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements, and make minimum distributions to stockholders. We will be subject to a 4% nondeductible U.S. federal excise tax on undistributed income. See “Note 2. Significant Accounting Policies - Income Taxes.”

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are subject to financial market risks, including valuation risk, interest rate risk, and currency risk. Generally, a rise in the general level of interest rates can be expected to lead to higher interest rates applicable to any variable rate investments we may hold and to declines in the value of any fixed rate investments we may hold. However, for those variable rate investments we may hold that provide for an interest rate floor, our interest income will not decrease below a threshold amount. To the extent that a substantial portion of our investments may be in variable rate investments, an increase in interest rates beyond this threshold would make it easier for us to meet or exceed the hurdle rate applicable to the upper level breakpoint of the pre-incentive fee net investment income incentive fee, and may result in a substantial increase in our net investment income and to the amount of incentive fees payable to the Adviser with respect to our increased pre-incentive fee net investment income. Conversely, a decline in the general level of interest rates, including the current environment, can be expected to lead to lower interest rates applicable to any variable rate investments we may hold and to increases in the value of any fixed rate investments we may hold. Such a decrease would make it more difficult for us to meet or exceed the hurdle rate applicable to the upper level breakpoint of the pre-incentive fee net investment income incentive fee, and may result in a substantial decrease in our net investment income and to the amount of incentive fees payable to the Adviser with respect to our decreased pre-incentive fee net investment income.
In addition, we borrow funds in order to make additional 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 will be subject to risks relating to changes in market interest rates. In periods of rising interest rates when we or any future subsidiaries have debt outstanding or financing arrangements in effect, our interest expense will increase, which could reduce our net investment income, especially to the extent we hold fixed rate investments.
We expect that our long-term investments will be financed primarily with equity and debt. If deemed prudent, we may use interest rate risk management techniques in an effort to minimize our exposure to interest rate fluctuations. These techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations.
We invest primarily in illiquid debt of private companies. Most of our investments will not have a readily available market price, and we value these investments at fair value as determined in good faith by our Board, based on, among other things, the input of the Adviser, our Audit Committee and independent third-party valuation firm(s) engaged at the direction of the Board, and in accordance with our valuation policy. There is no single technique for determining fair value. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make. If, in the future, we are required to liquidate a portfolio investment in a forced or liquidation sale, we may realize amounts that are different from the amounts presented and such differences could be material.
Valuation Risk
We have invested, and plan to continue to invest, primarily in illiquid debt and equity securities of private companies. Most of our investments do not have a readily available market price, and we value these investments at fair value as determined in good faith by the Board in accordance with our valuation policy. There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we may realize amounts that are different from the amounts presented and such differences could be material.
Interest Rate Risk
Interest rate sensitivity refers to the change in earnings that may result from changes in the level of interest rates. We intend to continue to fund portions of our investments with borrowings, and at such time, our net investment income will be affected by the difference between the rate at which we invest and the rate at which we borrow. Accordingly, we cannot assure you that a significant change in market interest rates will not have a material adverse effect on our net investment income.
As of December 31, 2020, 87.9% of the debt investments based on fair value in our portfolio were at floating rates indexed to LIBOR or Prime, as was our outstanding debt.
The following table shows the estimated annualized impact on net investment income based on hypothetical base rate changes in interest rates on our loan portfolio and outstanding debt as of December 31, 2020, assuming there are no changes in our investment and borrowing structure.
Interest
Interest
Net
Basis Point Change
Income
Expense
Investment Income
Up 300 basis points
$
2,203,556
$
1,500,000
$
703,556
Up 200 basis points
1,469,037
1,000,000
469,037
Up 100 basis points
734,519
500,000
234,519
Down 100 basis points
(734,519
)
(500,000
)
(234,519
)
Down 200 basis points
(1,469,037
)
(1,000,000
)
(469,037
)
Down 300 basis points
(2,203,556
)
(1,500,000
)
(703,556
)
Although we believe that this analysis is indicative of our existing sensitivity to interest rate changes, it does not adjust for changes in the credit market, credit quality, the size and composition of the assets in our portfolio and other business developments that could affect our net income. Accordingly, we cannot assure you that actual results would not differ materially from the analysis above.
Currency Risk
From time to time, we may make investments that are denominated in a foreign currency. These investments are translated into U.S. dollars at each balance sheet date, exposing us to movements in foreign exchange rates. We may employ hedging techniques to minimize these risks, but we cannot assure you that such strategies will be effective or without risk to us. We may seek to utilize instruments such as, but not limited to, forward contracts to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates. As of December 31, 2020, we had no assets or liabilities denominated in currencies other than U.S. dollars.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Consolidated Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm
Financial Statements:
Consolidated Statements of Assets and Liabilities as of December 31, 2020 and December 31, 2019
Consolidated Statements of Operations for the year ended December 31, 2020 and for the period from October 2, 2019 (Commencement of Operations) to December 31, 2019
Consolidated Statements of Changes in Net Assets for the year ended December 31, 2020 and for the period from October 2, 2019 (Commencement of Operations) to December 31, 2019
Consolidated Statements of Cash Flows for the year ended December 31, 2020 and for the period from October 2, 2019 (Commencement of Operations) to December 31, 2019
Consolidated Schedules of Investments as of December 31, 2020 and December 31, 2019
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
BC Partners Lending Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of assets and liabilities of BC Partners Lending Corporation and subsidiaries (the Company), including the consolidated schedules of investments, as of December 31, 2020 and 2019, the related consolidated statements of operations, changes in net assets, and cash flows for the year ended December 31, 2020 and for the period from October 2, 2019 (commencement of operations) through December 31, 2019, and the related notes, including the senior securities information for the year ended December 31, 2020 and for period from October 2, 2019 (commencement of operations) through December 31, 2019 in Note 12 (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, the results of its operations, changes in net assets and its cash flows for the year ended December 31, 2020 and for the period from October 2, 2019 (commencement of operations) through December 31, 2019, and the senior securities information for the year ended December 31, 2020 and for the period from October 2, 2019 (commencement of operations) through December 31, 2019, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. 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 the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits 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 consolidated 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 audits, 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 audits included performing procedures to assess the risks of material misstatement of the consolidated 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 consolidated financial statements. Such procedures also included confirmation of investments owned as of December 31, 2020 and 2019, by correspondence with custodians, portfolio companies, or agents, or by other appropriate auditing procedures. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2018.
New York, New York
March 11, 2021
BC Partners Lending Corporation
Consolidated Statements of Assets and Liabilities
December 31,
December 31,
Assets
Investments, at fair value:
Non-control/non-affiliate investments (amortized cost of $79,607,889 and $34,087,424,
respectively)
$
80,150,842
$
34,167,653
Forward contracts, at fair value (cost of $0 and $0, respectively)
119,317
-
Cash
599,344
2,814,003
Restricted cash
14,103,379
21,685,442
Receivable for unsettled trades
4,975,000
-
Interest and dividends receivable
298,569
49,833
Due from affiliate
-
581,560
Prepaid expenses and other asset
75,220
37,503
Total assets
$
100,321,671
$
59,335,994
Liabilities
Credit facility (net of deferred financing costs of $729,942 and $657,271, respectively)
$
49,270,058
$
19,342,729
Payable for unsettled trades
7,397,500
17,276,182
Due to affiliate, net
445,585
353,860
Management fees payable
189,490
21,751
Incentive fees payable
261,513
13,428
Interest expense payable
227,376
35,367
Financing costs payable
-
584,877
Accounts payable and accrued expenses
802,078
452,394
Distribution payable
609,508
-
Total liabilities
59,203,108
38,080,588
Commitments and contingencies (Note 11)
Net Assets
Common stock, $0.001 par value, 1,000,000,000 shares authorized; 1,652,799 and 846,633
shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively
1,653
Additional paid-in capital
40,607,337
21,165,041
Total distributable earnings (loss)
509,573
89,518
Total net assets
41,118,563
21,255,406
Total liabilities and net assets
$
100,321,671
$
59,335,994
Net asset value per share
$
24.88
$
25.11
See notes to consolidated financial statements.
BC Partners Lending Corporation
Consolidated Statements of Operations
For the Year Ended December 31, 2020
For the Period from
October 2, 2019
(commencement
of operations)
to December 31, 2019
Investment income:
Interest income:
Non-control/non-affiliate investments
$
3,982,887
$
203,839
Fee and other income
244,415
2,500
Total investment income
4,227,302
206,339
Operating expenses:
Organization and offering costs
222,375
406,708
Expenses reimbursable to Adviser
-
1,163,613
Management fees
577,579
43,501
Incentive fees
290,537
13,428
Administrative fees
511,170
74,386
Interest and debt expenses
1,012,616
38,258
Audit fees
251,730
185,000
Legal fees
191,849
336,574
Professional fees
197,264
38,500
Directors' fees
150,000
37,500
Insurance
265,313
-
Other expenses
280,835
47,465
Total expenses before expense support
3,951,268
2,384,933
Management fees waived
-
(21,751
)
Expense support from related parties
(1,033,493
)
(2,165,309
)
Net expenses
2,917,775
197,873
Net investment income
1,309,527
8,466
Realized and unrealized gain (loss):
Net realized gain on investments
691,568
9,289
Net change in unrealized appreciation on investments
462,724
80,229
Net change in unrealized appreciation on derivatives
119,317
-
Net realized and unrealized gain
1,273,609
89,518
Net increase in net assets resulting from operations
$
2,583,136
$
97,984
Net investment income per share - basic and diluted
$
1.03
$
0.01
Net increase in net assets resulting from operations per share -
basic and diluted
$
2.04
$
0.14
Weighted average shares outstanding - basic and diluted
1,266,059
709,185
See notes to consolidated financial statements.
BC Partners Lending Corporation
Consolidated Statements of Changes in Net Assets
Common Stock
Number of shares
Par Value
Additional paid in
capital
Total distributable
earnings
Total net assets
Balance as of October 2, 2019
(commencement of operations)
4,000
$
$
99,996
$
-
$
100,000
Net investment income
-
-
-
8,466
8,466
Net realized gain on investments
-
-
-
9,289
9,289
Net change in unrealized appreciation
-
-
-
80,229
80,229
Issuance of common shares
842,554
21,063,015
-
21,063,858
Distributions to stockholders
-
-
-
(8,466
)
(8,466
)
Reinvested dividends
-
2,030
-
2,030
Balance as of December 31, 2019
846,633
21,165,041
89,518
21,255,406
Net investment income
-
-
-
1,309,527
1,309,527
Net realized gain (loss)
-
-
-
691,568
691,568
Net change in unrealized appreciation (depreciation)
-
-
582,041
582,041
Issuance of common shares
786,974
18,974,213
-
18,975,000
Distributions to stockholders
-
-
-
(2,163,081
)
(2,163,081
)
Reinvested dividends
19,192
468,083
-
468,102
Balances at December 31, 2020
1,652,799
$
1,653
$
40,607,337
$
509,573
$
41,118,563
See notes to consolidated financial statements.
BC Partners Lending Corporation
Consolidated Statements of Cash Flows
For the Year Ended December 31, 2020
For the Period from
October 2, 2019
(commencement of
operations)
to December 31, 2019
Operating activities:
Net increase in net assets resulting from operations
$
2,583,136
$
97,984
Adjustments to reconcile net increase in net assets from operations
to net cash used in operating activities:
Net realized gain from investments
(691,568
)
(9,289
)
Net change in unrealized appreciation on investments
(462,724
)
(80,229
)
Net change in unrealized appreciation on derivatives
(119,317
)
-
Net accretion of discount on investments
(324,595
)
(4,837
)
Amortization of deferred financing costs
82,329
2,891
Payment-in-kind interest income
(77,621
)
-
Sales and repayments of investments
44,965,136
1,623,188
Purchases of investments
(89,391,817
)
(35,696,486
)
(Increase) decrease in operating assets:
Receivable for unsettled trades
(4,975,000
)
-
Interest and dividends receivable
(248,736
)
(49,833
)
Due from affiliate
581,560
(581,560
)
Prepaid expenses and other asset
(37,717
)
(37,503
)
Increase (decrease) in operating liabilities:
Payable for unsettled trades
(9,878,682
)
17,276,182
Due to affiliate
91,725
353,860
Management fees payable
167,739
21,751
Incentive fees payable
248,085
13,428
Interest expense payable
192,009
35,367
Accounts payable and accrued expenses
349,684
452,394
Net cash used in operating activities
(56,946,374
)
(16,582,692
)
Financing activities:
Proceeds from issuance of shares of common stock
18,975,000
21,063,858
Stockholder distributions paid
(1,085,471
)
(6,436
)
Proceeds from debt
30,000,000
20,000,000
Payments of financing costs
(739,877
)
(75,285
)
Net cash provided by financing activities
47,149,652
40,982,137
Net increase in restricted and unrestricted cash
(9,796,722
)
24,399,445
Cash and restricted cash at beginning of year
24,499,445
100,000
Cash and restricted cash at end of year
$
14,702,723
$
24,499,445
Reconciliation of cash and restricted cash
Cash
599,344
2,814,003
Restricted cash
14,103,379
21,685,442
Total cash and restricted cash
$
14,702,723
$
24,499,445
Supplemental information:
Interest paid during the year
$
738,278
$
-
Supplemental disclosure of non-cash information:
Reinvestment of dividends
$
468,102
$
2,030
See notes to consolidated financial statements.
BC Partners Lending Corporation
Consolidated Schedule of Investments
December 31, 2020
Portfolio Company (1) (2) (3)
Investment Type
Initial
Acquisition
Date
Maturity
Date
Spread
Above
Index (4)
Interest
Rate
Par / Units
Amortized
Cost (12) (13)
Fair
Value
% of
Net Assets
Non-control/Non-affiliate Investments
- United States
Debt Investments
Collateralized Loan Obligation - Debt Class
Churchill Middle Market CLO IV Ltd., Class E-2 Notes (14)
Structured Note
12/12/2019
1/23/2032
3M L+9.25%
9.48
%
1,400,000
1,330,000
1,311,519
3.2
%
Halsey Point CLO II Ltd., Class D (9) (14)
Structured Note
7/7/2020
7/1/2031
3M L+3.00%
3.22
%
333,333
279,800
325,000
0.8
%
Halsey Point CLO II Ltd., Class E (9) (14)
Structured Note
7/7/2020
7/1/2031
3M L+3.00%
3.22
%
333,333
232,532
311,250
0.8
%
Collateralized Loan Obligation - Debt Class Total
1,842,332
1,947,769
4.8
%
Communication Services
Asurion, LLC (5) (9)
Senior Secured Loan
12/18/2020
12/23/2026
1M L+3.25%
3.40
%
1,000,000
987,499
991,250
2.4
%
Wonder Love Inc (7) (9)
Senior Secured Loan
11/18/2019
11/18/2024
3M L+5.00%
6.00
%
900,000
885,596
870,750
2.1
%
Communication Services Total
1,873,095
1,862,000
4.5
%
Consumer Discretionary
Colibri Group, LLC (7) (9) (15)
Senior Secured Loan
3/31/2020
5/1/2025
3M L+8.05%
9.04
%
1,508,498
1,497,184
1,508,498
3.7
%
Colibri Group, LLC, Second Amendment Term Loan (7) (9) (15)
Senior Secured Loan
3/31/2020
5/1/2025
3M L+8.05%
9.04
%
172,602
171,307
172,601
0.4
%
Colibri Group, LLC (Delayed Draw) (7) (9) (15)
Senior Secured Loan
3/31/2020
5/1/2025
3M L+8.05%
9.04
%
233,246
231,496
233,246
0.6
%
Location Services LLC
(Revolver) (7) (8) (9)
Senior Secured Loan
11/7/2019
5/6/2021
1M L+6.75%
7.75
%
916,667
893,571
879,167
2.1
%
Nasco Healthcare Inc. (7) (9)
Senior Secured Loan
5/22/2020
6/30/2021
3M L+4.50%
5.50
%
1,984,252
1,847,318
1,885,634
4.6
%
TLE Holdings, LLC (7) (9)
Senior Secured Loan
10/22/2019
6/28/2024
6M L+6.00%
7.00
%
987,342
983,280
983,589
2.4
%
Consumer Discretionary Total
5,624,156
5,662,735
13.8
%
Consumer Staples
AMCP PET HOLDINGS, INC. (8) (9)
Senior Secured Loan
12/9/2020
10/6/2026
N/A
1.00
%
-
(19,857
)
(20,000
)
0.0
%
AMCP PET HOLDINGS, INC. (8) (9)
Senior Secured Loan
12/9/2020
10/6/2026
N/A
0.50
%
-
(9,924
)
(10,000
)
0.0
%
AMCP PET HOLDINGS, INC. (9)
Senior Secured Loan
12/9/2020
10/6/2026
3M L+6.25%
7.25
%
2,000,000
1,960,261
1,960,000
4.8
%
C. J. FOODS, INC. (7)
Senior Secured Loan
9/17/2020
3/16/2026
1M L+6.00%
7.00
%
2,751,957
2,625,781
2,683,158
6.5
%
Florida Food Products, LLC (7) (9)
Senior Secured Loan
8/7/2020
9/6/2025
3M L+7.25%
8.25
%
995,000
929,763
961,469
2.3
%
Consumer Staples Total
5,486,024
5,574,627
13.6
%
Financials
Advantage Capital Holdings LLC (9) (17)
Senior Secured Loan
1/29/2020
1/9/2025
8.00% PIK, 5.00% Cash
13.00
%
1,737,631
1,737,631
1,739,890
4.2
%
Advantage Capital Holdings LLC (Delayed Draw) (8) (9) (17)
Senior Secured Loan
1/29/2020
1/9/2025
8.00% PIK, 5.00% Cash
13.00
%
1,239,556
1,239,556
1,242,133
3.0
%
Alera Group Intermediate Holdings, Inc. (7) (9)
Senior Secured Loan
12/18/2019
8/1/2025
1M L+4.00%
4.50
%
1,974,836
1,995,616
1,969,899
4.8
%
RIVERSIDE FUND V, L.P. (9)
Senior Secured Loan
12/2/2020
3/2/2021
9.45%
9.45
%
2,500,000
2,482,516
2,475,000
6.0
%
TA/WEG HOLDINGS, LLC (8)
Senior Secured Loan
12/11/2020
12/11/2025
6M L+5.75%
6.75
%
365,833
339,892
352,708
0.9
%
Financials Total
7,795,211
7,779,630
18.9
%
Healthcare
Datalink, LLC (Delayed Draw) (8) (9)
Senior Secured Loan
11/23/2020
11/23/2026
N/A
1.00
%
-
-
(16,500
)
0.0
%
Datalink, LLC (9)
Senior Secured Loan
11/23/2020
11/23/2026
3M L+6.25%
7.25
%
3,400,000
3,307,691
3,307,183
8.0
%
Pharmalogic Holdings Corp. (7)
Senior Secured Loan
10/22/2019
6/12/2023
P+3.00%
6.25
%
987,342
986,530
945,380
2.3
%
Premier Imaging, LLC (7)
Senior Secured Loan
10/22/2019
1/2/2025
1M L+5.50%
6.50
%
987,406
980,850
986,023
2.4
%
Premier Imaging, LLC (7)
Senior Secured Loan
11/25/2019
1/2/2025
1M L+5.50%
6.50
%
987,500
979,337
986,118
2.4
%
The PromptCare Companies Inc. (Delayed Draw) (7) (9)
Senior Secured Loan
2/20/2020
12/30/2025
1M L+5.25%
6.25
%
216,000
214,065
214,380
0.5
%
The PromptCare Companies Inc. (Delayed Draw) (8) (9) (11)
Senior Secured Loan
2/20/2020
12/30/2025
N/A
1.00
%
-
(958
)
(1,091
)
0.0
%
The PromptCare Companies Inc. (7) (9)
Senior Secured Loan
2/28/2020
12/30/2025
1M L+5.25%
6.25
%
1,548,000
1,533,955
1,536,390
3.7
%
Radiology Partners, Inc., Term B Loan (5) (7) (9)
Senior Secured Loan
10/18/2019
7/9/2025
12M L+4.25%
4.81
%
4,250,000
4,081,499
4,189,799
10.2
%
Healthcare Total
12,082,969
12,147,682
29.5
%
Industrials
C.P. Converters, Inc., Seventh Amendment Acquisition Loan (7) (9)
Senior Secured Loan
6/24/2020
6/18/2023
1M L+6.50%
7.50
%
1,975,000
1,933,132
1,945,375
4.7
%
Deliver Buyer, Inc. (7) (9)
Senior Secured Loan
7/1/2020
5/1/2024
3M L+6.25%
7.25
%
1,995,000
1,941,242
1,981,235
4.8
%
GI Revelation Acquisition LLC (9)
Senior Secured Loan
10/7/2020
4/16/2025
1M L+5.00%
5.15
%
2,992,327
2,912,694
2,783,164
6.8
%
MAG DS CORP. (7) (9)
Senior Secured Loan
9/21/2020
4/1/2027
3M L+5.50%
6.50
%
2,992,500
2,848,902
2,852,451
6.9
%
META SPECIAL AEROSPACE LLC
Senior Secured Loan
11/3/2020
11/16/2022
P+4.00%
7.25
%
1,500,000
1,485,000
1,485,000
3.6
%
Mileage Plus Holdings LLC (5) (7)
Bond
6/25/2020
6/20/2027
N/A
6.50
%
4,000,000
3,953,597
4,175,000
10.2
%
Mileage Plus Holdings LLC (5) (7)
Senior Secured Loan
6/25/2020
6/21/2027
3M L+5.25%
6.25
%
1,000,000
981,140
1,043,565
2.5
%
Industrials Total
16,055,707
16,265,790
39.5
%
Information Technology
Allied Universal Holdco LLC (5) (7) (9)
Senior Secured Loan
12/20/2019
7/10/2026
1M L+4.25%
4.40
%
2,177,866
2,104,266
2,171,866
5.3
%
Barracuda Networks, Inc.
Junior Secured Loan
10/22/2020
10/30/2028
3M L+6.75%
7.50
%
1,000,000
990,132
990,000
2.4
%
Barracuda Networks, Inc. (5)
Senior Secured Loan
10/22/2020
2/12/2025
3M L+3.75%
4.50
%
997,500
991,206
987,525
2.4
%
Drilling Info Holdings, Inc., 2020 Term Loan (7) (9)
Senior Secured Loan
2/10/2020
7/30/2025
1M L+4.50%
4.65
%
1,985,000
1,976,637
1,895,675
4.6
%
Drilling Info Holdings, Inc., Initial Term Loan (5) (7) (9)
Senior Secured Loan
10/22/2019
7/30/2025
1M L+4.25%
4.40
%
987,378
985,431
958,581
2.3
%
Help/Systems Holdings, Inc. (5) (7)
Senior Secured Loan
12/18/2019
11/19/2026
3M L+4.75%
5.75
%
2,977,500
2,970,592
2,972,542
7.2
%
Idera, Inc. (7) (9)
Senior Secured Loan
12/18/2019
6/28/2024
6M L+4.00%
5.00
%
2,831,147
2,762,395
2,758,103
6.7
%
Ivanti Software, Inc.
Senior Secured Loan
10/30/2020
12/1/2028
3M L+8.50%
9.50
%
4,000,000
3,880,333
3,880,000
9.4
%
Monotype Imaging Holdings Corp., Incremental Tranche A-3 Term Loan (5) (7) (9)
Senior Secured Loan
11/12/2019
10/9/2026
3M L+5.50%
6.50
%
981,250
928,630
930,554
2.3
%
MSM Acquisitions, Inc. (8) (9)
Senior Secured Loan
12/31/2020
6/9/2022
N/A
N/A
-
2,940
2,941
0.0
%
MSM Acquisitions, Inc. (9)
Senior Secured Loan
12/31/2020
12/9/2026
1M L+6.00%
7.00
%
2,823,529
2,788,240
2,788,235
6.7
%
San Vicente Capital LLC (7) (9)
Senior Secured Loan
6/10/2020
6/10/2025
3M L+8.00%
9.50
%
2,000,000
1,973,008
2,002,599
4.9
%
1A Smart Start LLC (5) (7) (9)
Senior Secured Loan
8/14/2020
8/19/2027
3M L+4.75%
5.75
%
2,992,500
2,964,287
3,003,108
7.3
%
Smartronix, Inc, (7) (9)
Senior Secured Loan
5/1/2020
12/19/2025
3M L+6.00%
7.50
%
1,984,962
1,894,882
1,926,208
4.7
%
Information Technology Total
27,212,979
27,267,937
66.2
%
Total Debt Investments
77,972,473
78,508,170
190.8
%
Collateralized Loan Obligation - Equity Class
Halsey Point CLO II Ltd., Class Subordinated Notes (9) (14) (16)
Subordinated Structured Note
7/7/2020
7/20/2031
N/A
0.00
%
333,334
333,334
270,834
0.7
%
Collateralized Loan Obligation - Equity Class Investments Total
333,334
270,834
0.7
%
Equity Investments
Advantage Capital Holdings LLC (6) (9) (10)
Common Equity - Class A Units
3/31/2020
-
-
0.0
%
Total Equity Investments
-
-
0.0
%
Repurchase Agreements
Advantage Capital Holdings LLC, 12%, dated 9/17/2020, repurchase price at 12% IRR, collateralized by STX Financing, LLC 3.19% due 10/7/2021, par $1,371,838 and value $1,371,838 (19)
1,302,082
1,371,838
3.3
%
Total Repurchase Agreements
1,302,082
1,371,838
3.3
%
Total Investments (13)
$
79,607,889
$
80,150,842
194.8
%
Forward contracts (18):
Security
Counterparty
Settlement Date
Par
Unrealized Appreciation (Depreciation)
Halsey Point CLO II, Ltd. Class D
Advantage Capital Holdings, LLC
7/1/2022
333,333
$
19,800
Halsey Point CLO II, Ltd. Class E
Advantage Capital Holdings, LLC
7/1/2022
333,333
27,850
Halsey Point CLO II, Ltd. Class Subordinated Notes
Advantage Capital Holdings, LLC
7/1/2022
333,333
71,667
$
119,317
(1)
All of the Company's investments are issued by eligible portfolio companies, as defined in the Investment Company Act of 1940 (the “1940 Act”), unless otherwise noted. All of the Company's investments are issued by U.S. portfolio companies unless otherwise noted.
(2)
All investments are non-controlled/non-affiliated investments as defined by the 1940 Act. The provisions of the 1940 Act classify investments based on the level of control that the Company maintains in a particular portfolio company.
(3)
Except as otherwise noted, certain of the Company’s portfolio company investments are subject to legal restrictions on sales.
(4)
Variable rate loans bear interest at a rate that may be determined by reference to the London Interbank Offered Rate (“LIBOR” or “L”) or Prime Rate (“P”), which resets monthly, quarterly, or semiannually. For each such investment, the Company has provided the spread and the current contractual interest rate in effect at December 31, 2020. Certain investments may be subject to an interest rate floor, or rate cap.
(5)
Other than the investments noted by this footnote, the fair value of these investments is determined in good faith using significant unobservable inputs by the Company’s board of directors. (See Note 4 in the accompanying notes to the consolidated financial statements).
(6)
Ownership of equity investments may occur through a holding company.
(7)
Security, or a portion thereof, is held through Great Lakes BCPL Funding Ltd., a wholly-owned subsidiary and a bankruptcy remote special purpose entity, and is pledged as collateral supporting the amounts outstanding under the debt financing facility at Great Lakes BCPL Funding Ltd. (See Note 5 in the accompanying consolidated financial statements).
(8)
All or a portion of this commitment was unfunded at December 31, 2020.
(9)
Represents co-investment made with the Company's affiliates in accordance with the terms of the exemptive relief that the Company received from the U.S Securities and Exchange Commission. (See Note 3 in the accompanying consolidated financial statements).
(10)
Non-income producing investment.
(11)
The date disclosed represents the commitment period of the unfunded term loan.
(12)
The amortized cost represents the initial cost adjusted for the accretion of discount or amortization of premium, as applicable, on debt investments using the effective interest method.
(13)
As of December 31, 2020, the estimated cost basis of investments for U.S. federal tax purposes was $79,607,889, resulting in estimated gross unrealized appreciation and depreciation of $1,040,535 and $(477,105), respectively.
(14)
Investments the Company has determined are not qualifying assets under Section 55(a) of the 1940 Act. The status of these assets under the 1940 Act is subject to change. The Company monitors the status of these assets on an ongoing basis. Under the 1940 Act, the Company may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of total assets. Non-qualifying assets represented 4.7% of total assets as of December 31, 2020.
(15)
The Company is entitled to receive additional interest, in addition to the interest earned based on the stated interest rate of this security, as a result of an arrangement with other lenders in the syndication, whereby the “first out” tranche will have priority over the Company’s “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder from the borrower.
(16)
This investment is in the subordinated note of the collateralized loan obligation security, which is entitled to recurring distributions that are generally equal to the excess cash flow generated from the underlying investments after payment of the contractual payments in debt holders and fund expenses. The current estimated yield, calculated using amortized cost, is based on the current projections of this excess cash flow taking into account assumptions made regarding expected prepayments, losses and future reinvestment rates. These assumptions are periodically reviewed and adjusted. Ultimately, the actual yield may be higher or lower than the estimated yield if actual results differ from those used for the assumptions.
(17)
Investment bears interest at 12% per year with such interest to be paid, at the election of the borrower in cash or paid-in kind (“PIK”) interest. To the extent that any portion of interest is in the form of PIK interest, the interest rate is increased to 13% with a minimum of 5% of the total interest in the form of cash interest (i.e., 5% cash interest and 8% PIK interest).
(18)
The Company may sell any of the referenced securities in whole or in part to any third-party prior to the settlement date of the forward contracts without consent of the counterparty. Upon such sale to a third-party, the Company and counterparty shall have no further obligations in respect of that specific amount of referenced security sold.
(19)
The Company may elect to early terminate the agreement at par.
See notes to consolidated financial statements.
Partners Lending Corporation
Consolidated Schedule of Investments
December 31, 2019
Portfolio Company (1) (2) (3)
Investment Type
Initial
Acquisition
Date
Maturity
Date
Spread
Above
Index (4)
Interest
Rate
Principal
Value
Amortized
Cost (12) (13)
Fair
Value
% of
Net Assets (6)
Non-control/Non-affiliate Investments
Non-control/Non-affiliate Investments
- United States
Consumer Discretionary
Location Services LLC
(Revolver) (7) (8) (9)
Senior Secured First Lien Debt
11/7/2019
11/7/2022
L+6.75%
8.53
%
$
791,667
$
756,049
$
765,117
3.6
%
TLE Holdings, LLC
Senior Secured First Lien Debt
10/22/2019
6/28/2024
L+5.50%
7.30
%
997,468
992,517
986,297
4.6
%
Consumer Discretionary Total
1,748,566
1,751,414
8.2
%
Financials
Acrisure, LLC (5) (7) (10)
Senior Secured First Lien Debt
10/18/2019
11/22/2023
L+4.25%
6.19
%
1,994,898
1,981,724
2,003,625
9.4
%
Alera Group Intermediate Holdings,
Inc. (7) (10)
Senior Secured First Lien Debt
12/18/2019
8/1/2025
L+4.50%
6.30
%
1,994,949
2,019,886
2,019,886
9.5
%
Churchill Middle Market CLO IV (14)
Collateralized Securities
12/12/2019
1/23/2032
L+9.27%
11.04
%
1,400,000
1,330,000
1,330,000
6.3
%
Financials Total
5,331,610
5,353,511
25.2
%
Healthcare
Pharmalogic Holdings Corp. (7)
Senior Secured First Lien Debt
12/16/2019
6/12/2023
L+4.00%
5.80
%
997,468
996,296
996,271
4.7
%
Premier Imaging, LLC (7)
Senior Secured First Lien Debt
10/22/2019
1/2/2025
L+5.75%
7.43
%
997,481
989,487
987,506
4.6
%
Premier Imaging, LLC (7)
Senior Secured First Lien Debt
12/5/2019
1/2/2025
L+5.75%
7.43
%
997,500
987,549
987,525
4.7
%
Radiology Partners, Inc. (5) (7) (10)
Senior Secured First Lien Debt
10/18/2019
7/9/2025
L+4.75%
6.62
%
2,992,424
2,972,528
3,012,384
14.2
%
Healthcare Total
5,945,860
5,983,686
28.2
%
Industrials
PHI Group, Inc (7) (10)
Senior Secured First Lien Debt
10/22/2019
7/10/2024
L+7.00%
8.80
%
2,938,410
2,908,047
2,911,964
13.7
%
Syndigo LLC (7) (10)
Senior Secured First Lien Debt
10/25/2019
10/24/2024
L+5.50%
7.30
%
2,992,500
2,932,650
2,932,650
13.8
%
Teneo Holdings LLC (7)
Senior Secured First Lien Debt
10/18/2019
7/11/2025
L+5.25%
6.92
%
997,500
948,227
951,615
4.5
%
Industrials Total
6,788,924
6,796,229
32.0
%
Information Technology
Allied Universal Holdco LLC (7) (10)
Senior Secured First Lien Debt
12/20/2019
7/10/2026
L+4.50%
6.30
%
2,729,730
2,753,615
2,753,615
12.9
%
Allied Universal Holdco LLC
(Delayed Draw) (7) (10) (11)
Senior Secured First Lien Debt
12/20/2019
7/10/2026
L+4.25%
6.05
%
270,270
272,635
272,635
1.3
%
Drilling Info Holdings, Inc. (7)
Senior Secured First Lien Debt
10/22/2019
7/30/2025
L+4.25%
6.05
%
997,475
995,042
994,982
4.7
%
Help/Systems Holdings, Inc. (5) (7) (10)
Senior Secured First Lien Debt
12/18/2019
11/19/2026
L+4.75%
6.55
%
3,000,000
2,992,500
2,987,670
14.0
%
Idera, Inc. (7) (10)
Senior Secured First Lien Debt
12/18/2019
6/28/2024
L+4.50%
6.30
%
1,857,905
1,867,195
1,867,195
8.8
%
Monotype Imaging Holdings
Corp. (7) (9) (10)
Senior Secured First Lien Debt
11/12/2019
10/9/2026
L+5.50%
7.48
%
1,000,000
940,000
940,000
4.4
%
The Dun & Bradstreet Corporation (5) (7)
Senior Secured First Lien Debt
10/18/2019
2/6/2026
L+5.00%
6.79
%
1,500,000
1,505,440
1,515,000
7.1
%
Information Technology Total
11,326,427
11,331,097
53.2
%
Materials
Sepro Corporation (7)
Senior Secured First Lien Debt
10/22/2019
2/7/2025
L+4.50%
6.69
%
997,487
990,006
990,006
4.7
%
Materials Total
990,006
990,006
4.7
%
Telecommunication Services
PTI US Acquisitions, LLC (7)
Senior Secured First Lien Debt
10/22/2019
12/24/2023
L+5.00%
6.94
%
1,000,000
993,997
999,300
4.7
%
Wonder Love Inc (7) (9)
Senior Secured First Lien Debt
11/18/2019
11/18/2024
L+5.00%
6.80
%
981,250
962,034
962,410
4.5
%
Telecommunication Services Total
1,956,031
1,961,710
9.2
%
Total Investments (13)
Total
$
34,087,424
$
34,167,653
160.7
%
(1)
All of the Company's investments are issued by eligible portfolio companies, as defined in the Investment Company Act of 1940 (the “1940 Act”), unless otherwise noted. All of the Company's investments are issued by U.S. portfolio companies unless otherwise noted.
(2)
All investments are non-controlled/non-affiliated investments as defined by the 1940 Act. The provisions of the 1940 Act classify investments based on the level of control that we maintain in a particular portfolio company.
(3)
Except as otherwise noted, certain of the Company’s portfolio company investments are subject to legal restrictions on sales.
(4)
The majority of the investments bear interest at a rate that may be determined by reference to the London Interbank Offered Rate (“LIBOR” or “L”) which resets monthly, quarterly, or semiannually. For each such investment, the Company has provided the spread over LIBOR and the current contractual interest rate in effect at December 31, 2019. Certain investments may be subject to a LIBOR interest rate floor, or rate cap.
(5)
Other than the investments noted by this footnote, the fair value of these investments is determined in good faith using significant unobservable inputs by the Company’s board of directors. (See Note 4 in the accompanying notes to the consolidated financial statements).
(6)
Percentages are based on net assets of $21,255,406 as of December 31, 2019.
(7)
Security is pledged as collateral supporting the amounts outstanding under the debt financing facility at Great Lakes BCPL Funding Ltd. (See Note 5 in the accompanying consolidated financial statements).
(8)
All or a portion of this commitment was unfunded at December 31, 2019.
(9)
Represents co-investment made with the Company's affiliates in accordance with the terms of the exemptive relief that the Company received from the U.S Securities and Exchange Commission. (See Note 3 in the accompanying consolidated financial statements).
(10)
Investment position or portion thereof unsettled as of December 31, 2019.
(11)
The date disclosed represents the commitment period of the unfunded term loan.
(12)
The amortized cost represents the initial cost adjusted for the accretion of discount or amortization of premium, as applicable, on debt investments using the effective interest method.
(13)
As of December 31, 2019, the estimated cost basis of investments for U.S. federal tax purposes was $34,087,424, resulting in estimated gross unrealized appreciation and depreciation of $93,369 and $(13,140), respectively.
(14)
Investments the Company has determined are not qualifying assets under Section 55(a) of the 1940 Act. The status of these assets under the 1940 Act is subject to change. The Company monitors the status of these assets on an ongoing basis. Under the 1940 Act, the Company may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of total assets. Non-qualifying assets represented 2.2% of total assets as of December 31, 2019.
See notes to consolidated financial statements.
BC Partners Lending Corporation
Notes to Financial Statements
Note 1. Organization
BC Partners Lending Corporation (“BCPL” or the “Company”) is a Maryland corporation formed on December 22, 2017. The Company was formed primarily to invest in the U.S. middle-market credit sector. The Company’s investment objective is to make investments that generate current income and, to a lesser extent, capital appreciation. The Company intends to invest primarily in private middle-market companies in the form of secured debt, unsecured debt, other debt and/or equity securities. In addition, to a lesser extent, the Company may invest in securities of public companies and in structured products. The Company 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, the Company has elected to be treated for U.S. federal income tax purposes, and to qualify annually, as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Company is an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and the Company will take advantage of the extended transition period for complying with certain new or revised accounting standards provided for emerging growth companies in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”).
The Company commenced operations on October 2, 2019.
On October 25, 2019, the Company formed a wholly-owned, special-purpose, bankruptcy-remote subsidiary, Great Lakes BCPL Funding Ltd. (“BCPL Funding”), a Cayman Islands exempted company, which holds certain of the Company’s portfolio loan investments that are used as collateral for the debt financing facility at BCPL Funding. On January 28, 2020, the Company formed a wholly-owned, bankruptcy-remote subsidiary, BCPL Sub Holdings LLC, a Delaware limited liability company, which holds the Company’s equity investment.
The Company is managed by BC Partners Advisors L.P. (the “Adviser”), an affiliate of BC Partners LLP (“BC Partners”). BC Partners Management LLC (the “Administrator”), also an affiliate of BC Partners, provides administrative services necessary for the Company to operate.
The Company conducts private offerings (each, a “Private Offering”) of its common stock to accredited investors in reliance on exemptions from the registration requirements of the Securities Act. At the closing of each Private Offering, each investor makes a capital commitment (a “Capital Commitment”) to purchase shares of the Company’s common stock pursuant to a subscription agreement entered into with the Company. Investors are required to fund drawdowns to purchase shares of the Company’s common stock up to the amount of their respective Capital Commitment on an as-needed basis each time the Company delivers a drawdown notice to its investors. The Company’s initial Private Offering closed on September 26, 2019 (the “Initial Closing”).
On April 20, 2020, the Company submitted to the SEC an application for exemptive relief to initiate one or more transactions intended to provide investors with liquidity options with respect to their investments in shares of the Company’s common stock (each, a “Reorganization”), pursuant to which an investor would have the option to exchange their shares and any remaining commitment, or a portion of their shares and any remaining commitment, in the Company for an interest in an entity (a “Liquidating Company”) that generally would seek to liquidate and distribute the proceeds of its investments, as they are received, to its equity holders over time, such that it would likely substantially complete its liquidation within a reasonable period of time following the date of the Reorganization. It is anticipated that, if initiated, the first Reorganization would occur as soon as reasonably practicable following the end of the fiscal year during which the third anniversary of the initial closing date occurs (the “Initial Reorganization”). Immediately following a Reorganization, the applicable Liquidating Company would hold a proportionate share of the assets and liabilities held by the Company immediately prior to the Reorganization based on investor participation levels. The costs of a Reorganization will be borne by the applicable Liquidating Company. There can be no assurance that the Company will be able to obtain any required exemptive and/or no-action relief from the SEC or that the Company’s board of directors (the “Board”) will authorize the Reorganization. If the Company does not obtain any required exemptive and/or no-action relief, or if the Company does receive the required relief but the Board determines not to proceed with a Reorganization, then the Company will wind down its operations within ten years after the Initial Closing unless the Board and/or stockholders determine to take different action, including listing our common stock on a national securities exchange or periodic repurchases or tender offers.
The Company’s fiscal year ends on December 31.
Note 2. Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) pursuant to the requirements for reporting on Form 10-K and Regulation S-X, as appropriate. These consolidated financial statements reflect adjustments that in the opinion of the Company are necessary for the fair presentation of the financial position and results of operations as of and for the periods presented herein. The Company is an investment company under U.S. GAAP and therefore applies the accounting and reporting guidance applicable to investment companies. The Company has evaluated subsequent events through the date of issuance of the consolidated financial statements.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Actual results could differ from those estimates, and such differences could be material.
Consolidation
In accordance with U.S. GAAP guidance on consolidation, 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 accounts of the Company’s wholly-owned subsidiaries in its consolidated financial statements. All significant intercompany balances and transactions have been eliminated in consolidation.
Segments
In accordance with U.S. GAAP guidance on segment reporting, the Company has determined that its operations comprise only a single reporting segment.
Cash and Restricted Cash
Cash consists of deposits held at a custodian bank. Restricted cash consists of deposits pledged as collateral. Cash and restricted cash are held at major financial institutions and, at times, may exceed the insured limits under applicable law.
Investments
Investment transactions are recorded on the trade date. Realized gains or losses on investments are calculated using the specific identification method as the difference between the net proceeds received (excluding prepayment fees, if any) and the amortized cost basis of the investment without regard to unrealized appreciation or depreciation previously recognized, and include investments charged off during the period, net of recoveries. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation when gains or losses are recognized.
Investments for which market quotations are available are typically valued at those market quotations. To validate market quotations, the Company will utilize a number of factors to determine if the quotations are representative of fair value, including the source and number of the quotations.
Debt that is not publicly traded but for which there are external pricing sources available as of the valuation date is valued using independent broker-dealer, market maker quotations or independent pricing services. The valuation committee, comprised of members of the Adviser, (the “Valuation Committee”) subjects these quotes to various criteria including, but not limited to, the number and quality of quotes, the deviation among the quotes and information derived from analyzing the Company’s own transactions in such investments throughout the reporting period. Generally, such investments are categorized in level 2 of the fair value hierarchy, unless the Valuation Committee determines that the quality, quantity or deviation among quotes warrants significant adjustment to the inputs utilized.
Investments that are not publicly traded or whose market prices are not readily available, as is expected to be the case for substantially all of the Company’s investments, are valued at fair value as determined in good faith by the Board, based on, among other things, input of the Adviser, the Audit Committee and independent third-party valuation firm(s) engaged at the direction of the Board.
The Board undertakes a multi-step valuation process, which includes, among other procedures, the following:
•
The Company’s quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals responsible for the portfolio investment in conjunction with the Company’s portfolio management team. The Company utilizes an independent valuation firm to provide valuation on each material illiquid security at least once every trailing 12-month period;
•
Preliminary valuations are reviewed and discussed with management of the Adviser and investment professionals. Agreed upon valuation recommendations will be presented to the Audit Committee;
•
The Audit Committee will review the valuations presented and recommend values for each investment to the Board; and
•
The Board will review the recommended valuations and determine the fair value of each investment. Valuations that are not based on readily available market quotations will be valued in good faith based on, among other things, the input of the Adviser, the Audit Committee and, where applicable, other third parties.
As part of the valuation process, the Company may consider other information and may use valuation methods including but not limited to (i) market quotes for similar investments, (ii) recent trading activity, (iii) discounting forecasted cash flows of the investment, (iv) models that consider the implied yields from comparable debt, (v) third party appraisal, (vi) sale negotiations and purchase offers received from independent parties and (vii) estimated value of underlying assets to be received in liquidation or restructuring.
Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period. Additionally, the fair value of such investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that may ultimately be realized. Further, such investments are generally less liquid than publicly traded securities and may be subject to contractual and other restrictions on resale. If the Company were required to liquidate a portfolio investment in a forced or liquidation sale, it could realize amounts that are different from the amounts presented and such 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 than the unrealized gains or losses reflected herein.
Under existing accounting guidance, fair value is defined as the price that the Company would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment. This accounting guidance emphasizes valuation techniques that maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, 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 the Company. Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances.
The Company classifies the inputs used to measure these fair values into the following hierarchy as defined by current accounting guidance:
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible to the Company.
Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.
Level 3: Significant inputs that are unobservable for an asset or liability.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Investments for which no external pricing sources are available as of the valuation date are included in level 3 of the fair value hierarchy.
Forward Contracts
The Company may enter into forward purchase contracts primarily to manage credit risk. When entering into a forward purchase contract, the Company agrees to deliver a fixed quantity of securities for an agreed-upon price on an agreed future date. Forward contracts entered into by the Company are not designated as hedging instruments, and as a result, the Company presents changes in fair value through net change in unrealized appreciation (depreciation) on derivative instruments in the consolidated statements of operations. Realized and unrealized gains and losses of derivative instruments are included in the consolidated statements of operations. These instruments involve market risk, credit risk, or both kinds of risks. Risks arise from the possible inability of counterparties to meet the terms of their contracts and movements in fair value. The Company attempts to limit counterparty risk by only dealing with well-known counterparties.
Revenue Recognition
Interest income is recorded on an accrual basis and includes the accretion of discounts and amortization of premiums. Discounts from and premiums to par value on debt investments purchased are accreted/amortized into interest income over the life of the respective security using the effective interest method. The amortized cost of debt investments represents the original cost, including origination fees and upfront fees received that are deemed to be an adjustment to yield, adjusted for the accretion of discounts and amortization of premiums, if any.
Loans are generally placed on non-accrual status when there is reasonable doubt that principal or interest will be collected in full. The Company considers many factors relevant to an investment when placing it on or removing it from non-accrual status including, but not limited to, the delinquency status of the investment, economic and business conditions, the overall financial condition of the underlying investment, the value of the underlying collateral, bankruptcy status, if any, and any other facts or circumstances relevant to the investment. Accrued interest is generally reversed when a loan is placed on non-accrual status. Payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability of the outstanding principal and interest. Non-accrual loans may be restored to accrual status when past due principal and interest is paid current and are likely to remain current based on management’s judgment.
Dividend income on preferred equity securities is recorded on the accrual basis to the extent that such amounts are payable by the portfolio company and are expected to be collected. Dividend income on common equity securities is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly-traded portfolio companies.
Loan origination fees, original issue discount and market discount are capitalized, and the Company amortizes such amounts as interest income over the respective term of the loan or security. Upon the prepayment of a loan or security, any unamortized loan origination fees and original issue discount are recorded as interest income. The Company records prepayment premiums on loans and securities as fee income when it receives such amounts.
Payment-in-Kind Interest
Payment-in-kind (“PIK”) interest, computed at the contractual rate specified in each loan agreement, is added to the principal balance of the loan and recorded as interest income and generally becomes due at maturity. To maintain the Company’s status as a RIC, this non-cash source of income must be paid out to stockholders in the form of dividends, even though the Company has not yet collected the cash.
Deferred Financing Costs
Origination and other expenses related to the Company’s borrowings are recorded as deferred financing costs and amortized as part of interest expense using the straight-line method over the stated life of the debt instrument. Unamortized deferred financing costs are presented as a direct deduction to the respective debt instrument.
Organization and Offering Costs
Organization costs include, among other things, the cost of incorporating, including the cost of legal services and other fees pertaining to the Company’s organization. Costs associated with the organization of the Company are expensed as incurred. Offering costs include, among other things, marketing expenses and printing, legal fees, due diligence fees, and other costs in connection with the Company’s offering of shares of its common stock, including the preparation of the Company’s registration statement, and salaries and direct expenses of the Adviser’s personnel, employees of its affiliates and others while engaged in such activities. Offering costs are capitalized as deferred offering expenses and are amortized over twelve months from incurrence.
Earnings per Share
Basic earnings per share is calculated by dividing net income or loss attributable to common stockholders by the weighted average number of common stock outstanding during the period. Diluted earnings per share is calculated in the same manner, with further adjustments to reflect the dilutive effect of common stock equivalents outstanding.
Income Taxes
The Company has elected to be treated for U.S. federal income tax purposes, and to qualify annually, as a RIC under the Code. So long as the Company maintains its status as a RIC, it will generally not pay corporate-level U.S. federal income or excise taxes on any ordinary income or capital gains that it distributes at least annually to its stockholders as dividends. Any tax liability related to income earned and distributed by the Company represents obligations of the Company’s stockholders and will not be reflected in the consolidated financial statements of the Company.
To qualify for and maintain qualification as a RIC, the Company must, among other things, meet certain source-of-income and asset diversification requirements. In addition, to qualify for RIC tax treatment, the Company must distribute to its stockholders, for each taxable year, at least 90% of its “investment company taxable income” for that year, which is generally its ordinary income plus the excess, if any, of its realized net short-term capital gains over its realized net long-term capital losses. In order for the Company not to be subject to U.S. federal excise taxes, it must distribute annually an amount at least equal to the sum of (i) 98% of its net ordinary income (taking into account certain deferrals and elections) for the calendar year, (ii) 98.2% of its capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year, and (iii) any net ordinary income and capital gains in excess of capital losses for preceding years that were not distributed during such years. The Company, at its discretion, may carry forward taxable income in excess of calendar year dividends and pay a 4% nondeductible U.S. federal excise tax on this income.
The Company evaluates tax positions taken or expected to be taken in the course of preparing its consolidated financial statements to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax positions not deemed to meet the “more-likely-than-not” threshold are reserved and recorded as a tax benefit or expense in the current year. All penalties and interest associated with income taxes are included in income tax expense. Conclusions regarding tax positions are subject to review and may be adjusted at a later date based on factors including, but not limited to, on-going analyses of tax laws, regulations and interpretations thereof.
The Company has analyzed the tax positions taken on federal and state income tax returns for all open tax years and has concluded that no provision for income tax for uncertain tax positions is required in the Company’s consolidated financial statements. The Company’s major tax jurisdictions are U.S. federal, New York State, and foreign jurisdictions where the Company makes significant investments. The Company’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.
Dividends to Common Stockholders
Distributions to the Company’s stockholders are recorded on the record date. The amount to be paid out as a dividend is determined by the Board and is generally based upon earnings estimated by the Adviser. Net realized capital gains, if any, would generally be distributed at least annually, although the Company may decide to retain such capital gains.
The Company has adopted an “opt out” distribution reinvestment plan (“DRP”) for its stockholders. As a result, if the Company makes a cash dividend, its stockholders will have their cash dividends reinvested in additional shares of the Company’s common stock, including fractional shares as necessary, unless they specifically “opt out” of the DRP to receive the distribution in cash. Under the DRP, cash distributions to participating stockholders will be reinvested in additional shares of the Company’s common stock at a purchase price equal to the net asset value per share as of the last day of the calendar quarter immediately preceding the date such distribution was declared.
The Company may distribute taxable dividends that are payable in cash or shares of its common stock at the election of each stockholder. 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 published guidance indicating that this rule will apply even where the total amount of cash that may be distributed is limited to no more than 20% of the total distribution. Under this guidance, if too many stockholders elect to receive their distributions in cash, the cash available for distribution must be allocated among the stockholders electing to receive cash (with the balance of the distribution paid in stock). If the Company decides to make any distributions consistent with this guidance that are payable in part in its stock, taxable stockholders receiving such dividends will be required to include the full amount of the dividend (whether received in cash, shares of the Company’s stock, or a combination thereof) as ordinary income (or as long-term capital gain to the extent such distribution is properly reported as a capital gain dividend) to the extent of the Company’s 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 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 the Company’s stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, the Company 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.
Recent Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). The guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transaction, subject to meeting certain criteria, that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The Company expects that the adoption of this guidance will not have a material impact on the Company’s financial position, results of operations or cash flows.
Note 3. Related Party Transactions
Administration Agreement
On April 23, 2018, the Company entered into an Administration Agreement (the “Administration Agreement”) with the Administrator. Under the terms of the Administration Agreement, the Administrator will perform (or oversee, or arrange for, the performance of) the administrative services necessary for the operation of the Company, which includes office facilities, equipment, bookkeeping and recordkeeping services and such other services as the Administrator, subject to review by the Board, shall from time to time determine to be necessary or useful to perform its obligations under this Administration Agreement.
The Company will reimburse the Administrator for services performed under the terms of the Administration Agreement. In addition, pursuant to the Administration Agreement, the Administrator may delegate its obligations under the Administration Agreement to affiliates or third-parties and the Company pays or reimburses the Administrator for certain expenses incurred by any such affiliates or third-parties for work done on its behalf.
The Administration Agreement had an initial term of two years from its effective date and will remain in effect from year-to-year thereafter if approved annually by (i) the vote of the Board, or by the vote of a majority of the outstanding voting securities of the Company, and (ii) the vote of a majority of the Company’s Board who are not parties to the Administration Agreement or “interested persons” of the Company, of the Adviser or of any of their respective affiliates, as defined in the 1940 Act. The Administration Agreement was most recently approved on March 5, 2020. The Administration Agreement may be terminated at any time, without the payment of any penalty, upon 60 days’ written notice, by the vote of a majority of the outstanding voting shares of the Company or by the vote of the Board or by the Administrator.
No person who is an officer, director or employee of the Adviser or its affiliates and who serves as a director of the Company receives any compensation from the Company for his or her services as a director. However, the Company reimburses the Administrator (or its affiliates) for an allocable portion of the compensation paid by the Administrator (or its affiliates) to the Company’s Chief Compliance Officer and Chief Financial Officer and their respective staffs (based on a percentage of time such individuals devote, on an estimated basis, to the business affairs of the Company).
For the year or period ended December 31, 2020 and 2019, the Company incurred administrative fees of $0.5 million and $0.1 million, respectively. As of December 31, 2020 and 2019, such amounts were partially offset against amounts due from the Adviser in connection with the Expense Support and Conditional Reimbursement Agreement (the “Expense Support Agreement”), as described below.
Investment Advisory Agreement
On April 23, 2018, the Company entered into an Investment Advisory Agreement with the Adviser which was amended and restated on November 7, 2018 and further amended on July 9, 2019 (as amended, the “Investment Advisory Agreement”). On November 6, 2020, the Board unanimously approved the renewal of the Investment Advisory Agreement for a period of twelve months. The amendments were each approved at the time by the Company’s sole stockholder. Under the terms of the Investment Advisory Agreement, the Adviser will be responsible for managing the Company’s business and activities, including sourcing investment opportunities, conducting research, performing due diligence on potential investments, structuring its investments, monitoring its portfolio companies and providing managerial assistance to portfolio companies.
Under the terms of the Investment Advisory Agreement, the Company will pay the Adviser a base management fee and may also pay to it certain incentive fees.
The base management fee is payable quarterly in arrears at an annual rate of 1.00% (1.50% if an exchange listing occurs) of the Company’s average gross assets, excluding cash and cash equivalents but including assets purchased with borrowed amounts, at the end of the two most recently completed calendar quarters. The management fee for any partial month or quarter will be appropriately prorated and adjusted for any share issuances or repurchases during the relevant month or quarter.
On August 20, 2019, the Company entered into a letter agreement (the “Letter Agreement”) with the Adviser pursuant to which, for the period ended December 31, 2019, the Adviser waived 50% of the base management fee to be paid by the Company under the Investment Advisory Agreement. The waiver was prorated for any partial month or quarter. Management fees waived are not subject to recoupment by the Adviser.
For the periods ended December 31, 2020 and 2019, the Company incurred management fees of $0.6 million and $21.8 thousand net of waivers, respectively. As of December 31, 2020, such amounts were partially offset against amounts due from the Adviser in connection with the Expense Support Agreement, as described below.
The incentive fee consists of two parts, as follows:
(i)
The first component, the income incentive fee, payable at the end of each quarter in arrears, equals 100% of the pre-incentive fee net investment income in excess of a 1.50% quarterly preferred return but less than 1.76% (1.818% if an exchange listing occurs), the upper level breakpoint, and 15% (17.50% if an exchange listing occurs) of the amount of pre-incentive fee net investment income that exceeds 1.76% (1.818% if an exchange listing occurs) in any calendar quarter. For purposes of determining whether pre-incentive fee net investment income exceeds the hurdle rate, pre-incentive fee net investment income is expressed as a rate of return on the value of the Company’s net assets at the end of the immediately preceding calendar quarter.
(ii)
The second component, the capital gains incentive fee, payable at the end of each calendar year in arrears, equals 15.0% of cumulative realized capital gains from inception through the end of such calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fee for prior periods. The Company accrues, but does not pay, a capital gains incentive fee with respect to unrealized capital appreciation because a capital gains incentive fee would be owed to the Adviser if the Company were to sell the relevant investment and realize a capital gain.
For the year or period ended December 31, 2020 and 2019, the Company incurred incentive fees of $0.3 million and $13.4 thousand, respectively.
The Investment Advisory Agreement will be in effect for a period of two years from its effective date and will remain in effect from year-to-year thereafter if approved annually by (i) the vote of the Board, or by the vote of a majority of the outstanding voting securities of the Company, and (ii) the vote of a majority of the Company’s Board who are not parties to the Investment Advisory Agreement or “interested persons” of the Company, of the Adviser or of any of their respective affiliates, as defined in the 1940 Act. The Investment Advisory Agreement may be terminated at any time, without the payment of any penalty, upon 60 days’ written notice and, in certain circumstances, upon 120 days’ written notice, by the vote of a majority of the outstanding voting shares of the Company or by the vote of the Board or by the Adviser.
The Adviser may, from time to time, pay amounts owed by the Company to third-party providers of goods or services, including the Board, and the Company will subsequently reimburse the Adviser for such amounts paid on its behalf. Amounts payable to the Adviser are settled in the normal course of business without formal payment terms. Prior to the Company’s commencement of operations, the Adviser and its affiliates have incurred operating expenses on behalf of the Company in the amount of $1.2 million, including audit fees of $0.2 million, legal fees of $0.5 million, professional fees of $22.3 thousand, directors’ fees of $0.2 million, insurance of $0.2 million and other expenses of $62.4 thousand. The Company will have no responsibility for such costs until the Adviser submits such costs, or a portion thereof, for reimbursement.
For the period ended December 31, 2019, the Company recognized operating expenses reimbursable to the Adviser of $1.2 million. Amounts incurred by the Adviser subsequent to the Company’s commencement of operations were offset against amounts due from the Adviser in connection with the Expense Support Agreement, as described below. For the periods ended December 31, 2020 and 2019, the Adviser paid operating expenses on behalf of the Company in the amount of $1.7 million and $0.3 million, respectively. As of December 31, 2020, such amounts were partially offset against amounts due from the Adviser in connection with the Expense Support Agreement, as described below.
Co-investment Exemptive Relief
As a BDC, the Company is subject to certain regulatory restrictions in making its investments. For example, BDCs generally are not permitted to co-invest with certain affiliated entities in transactions originated by the BDC or its affiliates in the absence of an exemptive order from the SEC. However, BDCs are permitted to, and may, simultaneously co-invest in transactions where price is the only negotiated term. On October 23, 2018, the SEC issued an order granting the Company’s application for exemptive relief to co-invest, subject to the satisfaction of certain conditions, in certain private placement transactions, with other funds managed by the Adviser or its affiliates, including BCP Special Opportunities Fund I LP, BCP Special Opportunities Fund II LP, Portman Ridge Finance Corporation and any future funds that are advised by the Adviser or its affiliated investment advisers. Under the terms of the exemptive order, in order for the Company to participate in a co-investment transaction a “required majority” (as defined in Section 57(o) of the 1940 Act) of the Company’s independent directors must conclude that (i) the terms of the proposed transaction, including the consideration to be paid, are reasonable and fair to the Company and its stockholders and do not involve overreaching with respect of the Company or its stockholders on the part of any person concerned, and (ii) the proposed transaction is consistent with the interests of the Company’s stockholders and is consistent with the Company’s investment objectives and strategies and certain criteria established by the Board.
Organization and Offering Costs
Under the Investment Advisory Agreement and the Administrative Agreement, the Company, either directly or through reimbursements to the Adviser or its affiliates, is responsible for its organization and offering costs in an amount up to 1.50% of total capital commitments. Prior to the Company’s commencement of operations, the Adviser funded the Company’s organization and offering costs in the amount of $1.4 million. The Company will have no responsibility for such costs until the Adviser submits such costs, or a portion thereof, for reimbursement, subject to a cap of 1.50% of the Company’s total commitments and provided further that the Adviser or its affiliates may not be reimbursed for payment of excess organization and offering expenses that were incurred more than three years prior to the proposed reimbursement. For the year or period ended December 31, 2020 and 2019, the Company accrued organization and offering costs of $0.2 million and $0.4 million, respectively.
Amounts due to the Adviser for the expected recoveries of organization, offering and operating expenses incurred on behalf of the Company, and amounts due from the Adviser under the Expense Support Agreement for such amounts are reflected on a net basis in amounts due to/from affiliates on the consolidated statements of assets and liabilities.
Expense Support Agreement
On August 22, 2019, the Company entered into the Expense Support Agreement with the Adviser, the purpose of which is to ensure that no portion of distributions made to the Company’s stockholders will be paid from the Company’s offering proceeds or borrowings (the “Distribution Objective”).
Commencing with the fourth quarter of 2019 and on a quarterly basis thereafter, the Adviser will reimburse the Company for operating expenses in an amount sufficient to meet the Distribution Objective. Any payment so required to be made by the Adviser is referred to herein as an “Expense Payment.”
The Adviser’s obligation to make an Expense Payment becomes a liability of the Adviser, and the right to such Expense Payment becomes an asset of the Company, no later than the last business day of the applicable calendar quarter. The Expense Payment for any calendar quarter shall, as promptly as possible, be: (i) paid by the Adviser to the Company in any combination of cash or other immediately available funds, and/or (ii) offset against amounts due from the Company to the Adviser.
Pursuant to the Expense Support Agreement, “Available Operating Funds” means the sum of (i) the Company’s net investment company taxable income (including net short-term capital gains reduced by net long-term capital losses), (ii) the Company’s net capital gains (including the excess of net long-term capital gains over net short-term capital losses), and (iii) dividends and other distributions paid to or otherwise earned by the Company on account of investments in portfolio companies (to the extent such amounts listed in clause (iii) are not included under clauses (i) and (ii) above.)
Following any calendar quarter in which Available Operating Funds exceed the cumulative distributions paid to the Company’s stockholders in such calendar quarter (the amount of such excess being hereinafter referred to as “Excess Operating funds”), the Company shall pay such Excess Operating Funds, or a portion thereof in accordance with the stipulation below, as applicable, to the Adviser until such time as all Expense Payments made by the Adviser to the Company within three years prior to the last business day of such calendar quarter have been reimbursed or waived. Any payments required to be made by the Company pursuant to the preceding sentence are referred to herein as a “Reimbursement Payment.”
The amount of the Reimbursement Payment for any calendar quarter will be equal to the lesser of (i) the Excess Operating Funds in such calendar quarter, and (ii) the aggregate amount of all Expense Payments made by the Adviser to the Company within three years prior to the last business day of such calendar quarter that have not been previously reimbursed by the Company to the Adviser.
The Company’s obligation to make a Reimbursement Payment becomes a liability to the Company, and the right to such Reimbursement Payment becomes an asset of the Adviser, no later than the last business day of the applicable calendar quarter. The Reimbursement Payment for any calendar quarter shall, as promptly as possible, be paid by the Company to the Adviser in any combination of cash or other immediately available funds. Any Reimbursement Payments shall be deemed to have reimbursed the Adviser for Expense Payments in chronological order beginning with the oldest Expense Payment eligible for reimbursement.
The Expense Support Agreement may be terminated at any time, without penalty, by the Company or the Adviser, with or without notice. The Expense Support Agreement automatically terminates in the event of (a) the termination by the Company of the Investment Advisory Agreement, or (b) the Board determines to dissolve or liquidate the Company. Upon termination of the Expense Support Agreement, the Company will be required to pay the Adviser an amount equal to all Expense Payments paid by the Adviser to the Company within three years prior to the date of such termination and that have not been previously reimbursed by the Company to the Adviser. Such repayment shall be made to the Adviser no later than 30 days after such date of termination or the date of such event, as applicable.
For the year or period ended December 31, 2020 and 2019, the total Expense Payment provided to the Company by the Adviser was $1.0 million and $2.2 million, respectively, which includes the accrual of $0.2 million and $1.6 million, respectively, of eligible recoveries from the Adviser under the Expense Support Agreement for organization and offering costs and operating expenses paid on behalf of the Company prior to commencement of operations. Management believes that the Reimbursement Payments by the Company to the Adviser are not probable under the terms of the Expense Support Agreement as of December 31, 2020. The following table reflects the Expense Payments that may be subject to reimbursement pursuant to the Expense Support Agreement:
Quarter Ended
Expense Payment
Received from
Adviser (1)
Reimbursement
Payment made to
Adviser
Unreimbursed
Expense Payment (1)
Eligible for Reimbursement
through (1)
December 31, 2019
$
2,165,309
$
131,935
$
2,033,374
December 31, 2022
March 31, 2020
345,503
-
345,503
March 31, 2023
June 30, 2020
752,142
-
752,142
June 30, 2023
September 30, 2020
67,783
-
67,783
September 30, 2023
$
3,330,737
$
131,935
$
3,198,802
(1)
The actual date that the estimated Expense Payment is eligible for reimbursement will be determined when such Expense Payment is actually made by the Adviser.
As of December 31, 2020, due to Adviser includes amounts payable for administrative fee, operating expenses reimbursable and Reimbursement Payment.
Potential Conflicts of Interest
The members of the senior management and investment teams of the Adviser serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as the Company does, or of investment vehicles managed by the same personnel. In serving in these multiple and other capacities, they may have obligations to other clients or investors in those entities, the fulfillment of which may or may not be in the Company’s best interests or in the best interest of the Company’s stockholders. The Company’s investment objectives may overlap with the investment objectives of such investment funds, accounts or other investment vehicles.
Note 4. Investments and Fair Value Measurements
The following table summarizes the composition of the Company’s investment portfolio at amortized cost and fair value as of December 31, 2020:
December 31, 2020
Amortized
Percentage of
Fair
Percentage of
Cost
Portfolio
Value
Portfolio
Senior Secured Loan
$
71,186,412
89.5
%
$
71,395,401
89.2
%
Structured Note
1,842,332
2.3
%
1,947,769
2.4
%
Subordinated Structured Note
333,334
0.4
%
270,834
0.3
%
Junior Secured Loan
990,132
1.2
%
990,000
1.2
%
Bond
3,953,597
5.0
%
4,175,000
5.2
%
Equity/Other
-
0.0
%
-
0.0
%
Repurchase Agreement
1,302,082
1.6
%
1,371,838
1.7
%
Total
$
79,607,889
100.0
%
$
80,150,842
100.0
%
The following table summarizes the composition of the Company’s investment portfolio at amortized cost and fair value as of December 31, 2019:
December 31, 2019
Amortized
Percentage of
Fair
Percentage of
Cost
Portfolio
Value
Portfolio
Senior Secured First Lien Debt
$
32,757,424
96.1
%
$
32,837,653
96.1
%
Subordinated Structured Note
1,330,000
3.9
%
1,330,000
3.9
%
Total
$
34,087,424
100.0
%
$
34,167,653
100.0
%
Generally, under the 1940 Act, the Company would be presumed to “control” a portfolio company if it owned more than 25% of its voting securities or it had the power to exercise control over the management or policies of such portfolio company, and would be an “affiliated person” of a portfolio company if it owned 5% or more of its voting securities. As of December 31, 2020 and 2019, the Company did not “control” and was not an “affiliated person” of any of its portfolio companies, each as defined in the 1940 Act.
The following tables summarize the industry and geographic composition of the Company’s investment portfolio based on amortized cost and fair value as of December 31, 2020:
December 31, 2020
Amortized
Percentage of
Fair
Percentage of
Cost
Portfolio
Value
Portfolio
Collateralized Loan Obligation - Debt Class
$
1,842,332
2.3
%
$
1,947,769
2.4
%
Collateralized Loan Obligation - Equity Class
333,334
0.4
%
270,834
0.3
%
Communication Services
3,175,177
4.0
%
3,233,838
4.0
%
Consumer Discretionary
5,624,156
7.1
%
5,662,735
7.1
%
Consumer Staples
5,486,024
6.9
%
5,574,627
7.0
%
Financials
7,795,211
9.8
%
7,779,630
9.7
%
Healthcare
12,082,969
15.2
%
12,147,682
15.2
%
Industrials
16,055,707
20.1
%
16,265,790
20.3
%
Information Technology
27,212,979
34.2
%
27,267,937
34.0
%
Total
$
79,607,889
100.0
%
$
80,150,842
100.0
%
December 31, 2020
Amortized
Percentage of
Fair
Percentage of
Cost
Portfolio
Value
Portfolio
United States
$
77,432,223
97.3
%
$
77,932,239
97.2
%
International
2,175,666
2.7
%
2,218,603
2.8
%
Total
$
79,607,889
100.0
%
$
80,150,842
100.0
%
The following tables summarize the industry and geographic composition of the Company’s investment portfolio based on amortized cost and fair value as of December 31, 2019:
December 31, 2019
Amortized
Percentage of
Fair
Percentage of
Cost
Portfolio
Value
Portfolio
Consumer Discretionary
$
1,748,566
5.1
%
$
1,751,414
5.1
%
Financials
5,331,610
15.6
%
5,353,511
15.7
%
Healthcare
5,945,860
17.4
%
5,983,686
17.5
%
Industrials
6,788,924
19.9
%
6,796,229
19.9
%
Information Technology
11,326,427
33.3
%
11,331,097
33.2
%
Materials
990,006
2.9
%
990,006
2.9
%
Telecommunication Services
1,956,031
5.8
%
1,961,710
5.7
%
Total
$
34,087,424
100.0
%
$
34,167,653
100.0
%
December 31, 2019
Amortized
Percentage of
Fair
Percentage of
Cost
Portfolio
Value
Portfolio
United States
$
32,757,424
96.1
%
$
32,837,653
96.1
%
International
1,330,000
3.9
%
1,330,000
3.9
%
Total
$
34,087,424
100.0
%
$
34,167,653
100.0
%
The following table summarizes the fair value hierarchy of the Company’s investment portfolio as of December 31, 2020:
Fair Value Measurements
Level 1
Level 2
Level 3
Total
Senior Secured Loan
$
-
$
17,248,790
$
54,146,611
$
71,395,401
Structured Note
-
-
1,947,769
1,947,769
Subordinated Structured Note
-
-
270,834
270,834
Junior Secured Loan
-
-
990,000
990,000
Bond
-
4,175,000
-
4,175,000
Equity/Other
-
-
-
-
Repurchase Agreement
-
-
1,371,838
1,371,838
Total
$
-
$
21,423,790
$
58,727,052
$
80,150,842
Forward contracts
-
-
119,317
119,317
Total
$
-
$
21,423,790
$
58,846,369
$
80,270,159
The following table summarizes the fair value hierarchy of the Company’s investment portfolio as of December 31, 2019:
Fair Value Measurements
Level 1
Level 2
Level 3
Total
Senior Secured First Lien Debt
$
-
$
9,518,679
$
23,318,973
$
32,837,652
Subordinated Structured Note
-
-
1,330,000
1,330,000
Total
$
-
$
9,518,679
$
24,648,973
$
34,167,652
The following is a reconciliation of the Company’s investment portfolio for which level 3 inputs were used in determining fair value for the year ended December 31, 2020:
Senior
Secured
Loan
Senior
Secured
Note
Senior
Unsecured
Note
Structured
Note
Subordinated
Structured
Note
Junior Secured
Bond
Repurchases
Agreement
Total
Investments
Forward
Contracts
Balance as of January 1, 2020
$
23,318,973
$
-
$
-
$
1,330,000
$
-
$
-
$
-
$
-
$
24,648,973
$
-
Purchases of investments
58,944,941
1,500,000
500,000
512,332
333,334
990,000
4,805,718
2,917,666
70,503,991
-
Proceeds from principal
repayments and sales of
investments
(23,671,548
)
(1,513,125
)
(510,625
)
-
-
-
(4,921,868
)
(1,636,586
)
(32,253,752
)
-
Payment in-kind interest
income
77,621
-
-
-
-
-
-
-
77,621
-
Net accretion of discounts
(amortization of premiums)
249,759
-
-
-
-
21,002
271,204
-
Net change in unrealized
depreciation on investments
(59,050
)
-
-
105,437
(62,500
)
(132
)
-
69,756
53,511
119,317
Net realized gain on investments
247,147
13,125
10,625
-
-
-
115,839
-
386,736
-
Transfers into level 3
-
-
-
-
-
-
-
-
-
-
Transfers out of level 3
(4,961,232
)
-
-
-
-
-
-
-
(4,961,232
)
-
Balance as of December 31,
$
54,146,611
$
-
$
-
$
1,947,769
$
270,834
$
990,000
$
-
$
1,371,838
$
58,727,052
$
119,317
Net change in unrealized
depreciation on level 3
investments still held
$
(46,444
)
$
-
$
-
$
105,437
$
(62,500
)
$
(132
)
$
-
$
69,756
$
66,117
$
119,317
The following is a reconciliation of the Company’s investment portfolio for which level 3 inputs were used in determining fair value for the period ended December 31, 2019:
Senior Secured
First Lien Debt
Collateralized
Securities
Total
Investments
Balance as of January 1, 2019
$
-
$
-
$
-
Purchases of investments
24,902,736
1,330,000
26,232,736
Net accretion of discounts
3,802
-
3,802
Proceeds from principal repayments and sales of investments
(1,610,511
)
-
(1,610,511
)
Net change in unrealized appreciation (depreciation) on investments
13,741
-
13,741
Net realized gain on investments
9,205
-
9,205
Balance as of December 31, 2019
$
23,318,973
$
1,330,000
$
24,648,973
Net change in unrealized appreciation on level 3 investments still held
$
13,741
$
-
$
13,741
The valuation techniques and significant unobservable inputs used in the valuation of level 3 investments as of December 31, 2020 were as follows:
Quantitative Information About Level 3 Fair Value Measurements
Asset Category
Fair Value
Valuation
Technique/
Methodology
Unobservable
Input
Range
(Weighted
Average)
Impact to
Valuation
from an Increase
in Input
Senior Secured Loan
$
16,204,567
Recent Transaction
Transaction Price
97.0 - 100.3 (98.0)
Increase
Senior Secured Loan
37,942,044
Discounted Cash Flows
Market Yield
5.1% - 15.9% (8.3%)
Decrease
Structured Note
1,947,769
Discounted Cash Flows
Market Yield
4.8% - 12.8% (10.6%)
Decrease
Junior Secured Loan
990,000
Recent Transaction
Transaction Price
99.0 (99.0)
Increase
Subordinated Structured Note
270,834
Discounted Cash Flows
Discount Rate
12.3% - 12.8% (12.5%)
Decrease
Probability of Default
1.5% - 3.0% (2.3%)
Loss Severity
20.0% - 30.0% (25.0%)
Recovery Rate
70.0% - 80.0% (75.0%)
Prepayment Rate
0.0% - 25.0% (12.5%)
Repurchase Agreement
1,371,838
Recent Transaction
Transaction Price
100.0 (100.0)
Increase
$
58,727,052
Forward Contracts
$
119,317
Option Pricing Model
Expected Volatility
12.1% - 15.3% (13.7%)
Decrease
The valuation techniques and significant unobservable inputs used in the valuation of level 3 investments as of December 31, 2019 were as follows:
Quantitative Information About Level 3 Fair Value Measurements
Asset Category
Fair Value
Valuation
Technique/
Methodology
Unobservable
Input
Range
(Weighted
Average)
Impact to
Valuation
from an Increase
in Input
Senior Secured First Lien Debt
$
15,742,271
Recent Transaction
Transaction Price
94.0% - 101.3% (99.4%)
Increase
Senior Secured First Lien Debt
7,576,702
Discounted Cash Flows
Market Yield
7.1% - 15.0% (9.3%)
Decrease
Collateralized Securities
1,330,000
Recent Transaction
Transaction Price
95.0% - 95.0% (95.0%)
Increase
$
24,648,973
The Company considers the par amounts at December 31, 2020 to be representative of the volume of its derivative activities during the year ended December 31, 2020.
As of December 31, 2020, the Company’s open forward contracts were as follows:
Security
Counterparty
Settlement Date
Par
Unrealized Appreciation (Depreciation)
Halsey Point CLO II, Ltd. Class D
Advantage Capital Holdings, LLC
7/1/2022
333,333
$
19,800
Halsey Point CLO II, Ltd. Class E
Advantage Capital Holdings, LLC
7/1/2022
333,333
27,850
Halsey Point CLO II, Ltd. Class Subordinated Notes
Advantage Capital Holdings, LLC
7/1/2022
333,333
71,667
$
119,317
The Company may sell any of the referenced securities in whole or in part to any third-party prior to the settlement date of the forward contracts without consent of the counterparty. Upon such sale to a third-party, the Company and counterparty shall have no further obligations in respect of that specific amount of referenced security sold.
The following table identifies the fair value amount of the forward contracts included on the consolidated statement of assets and liabilities at December 31, 2020. The following table also identifies the realized and unrealized gain and loss amounts included on the consolidated statement of operations for the year ended December 31, 2020.
Type of Contract
Derivative
Assets
Derivative
Liabilities
Realized
Gain (Loss)
Unrealized Appreciation
Forward contracts - credit risk
$
119,317
$
-
$
-
$
119,317
$
119,317
$
-
$
-
$
119,317
The outbreak of the novel coronavirus, or COVID-19, in many countries continues to adversely impact global commercial activity and has contributed to significant volatility in financial markets. The global impact of the outbreak has been rapidly evolving, and as cases of the virus have continued to be identified in additional countries, many countries have reacted by instituting quarantines, restrictions on travel and other measures to mitigate the impact of this pandemic. While many of these measures have been relaxed, spread of the virus continues and restrictions generally remain in place. Such actions have created disruption in global supply chains, and have adversely impacted a number of industries, including, among others, transportation, hospitality and entertainment. The outbreak could have a continued adverse impact on economic and market conditions and has triggered a period of global economic slowdown and continued volatility. The rapid development and fluidity of this situation precludes any prediction as to the duration and extent of this pandemic and its impact on the Company’s business, financial condition and results of operations, as well as the business, financial condition and results of operations of the Company’s portfolio companies. Nevertheless, the novel coronavirus presents material uncertainty and risk with respect to the Company and the Company’s portfolio companies’ performance and financial results. The Company is actively monitoring developments with respect to this pandemic and its impact as part of the Company’s overall investment objective and strategy. To the extent the Company’s portfolio companies are adversely impacted by the effects of COVID-19, it may have a material adverse impact on the Company’s future net investment income, the fair value of its portfolio investments, its financial condition and the results of operations and financial condition of the Company’s portfolio companies.
Note 5. Borrowings
In accordance with the 1940 Act, with certain limitations, the Company is allowed to borrow amounts such that its asset coverage, as defined in the 1940 Act, is at least 200% (or 150% if certain conditions are met) after such borrowing. Our Board and initial stockholder have approved our ability to utilize the increased leverage limit, which requires asset coverage of at least 150%. As of December 31, 2020 and December 31, 2019, the Company’s asset coverage was 182.2% and 206.3%, respectively.
On December 16, 2019, the Company, through BCPL Funding, entered into a debt financing facility with UBS AG, London Branch (“UBS”), pursuant to which up to $50.0 million will be made available to the Company (the “Facility”).
Pursuant to the Facility, the Company sold certain loans in its portfolio having an aggregate market value of $17.2 million to BCPL Funding (the “Initial Loans”), in consideration for certain Class A Notes (the “Class A Notes”) issued by BCPL Funding. The Initial Loans secure the obligations of BCPL Funding under the Class A Notes, issued pursuant to an indenture between BCPL Funding and U.S. Bank National Association, as trustee (the “Indenture”). Principal on the Class A Notes will be due and payable at maturity on December 16, 2029. The Class A Notes do not provide for interest payments. The Class A Notes are issued in the amount of up to $76.9 million. The Indenture contains events of default customary for similar transactions, including: (a) the failure to make principal payments on the Class A Notes at their stated maturity or redemption date or to make payments with respect to expenses due under the Indenture within three business days of when due; (b) an event of default occurs under the Repurchase Agreement (defined below); and (c) BCPL Funding is required to register as an investment company under the 1940 Act.
The Company, in turn, entered into a confirmation in respect of a repurchase transaction with UBS (the “Confirmation”), which supplements, forms part of, and is subject to the SIFMA/ICMA Global Master Repurchase Agreement (2011 version), dated as of December 12, 2019 and amended on August 14, 2020 (including any annexes thereto, the “GMRA,” and such GMRA, as supplemented and evidenced by the Confirmation, the “Repurchase Agreement”). Pursuant to the Repurchase Agreement, UBS purchased the Class A Notes held by the Company for an initial purchase price of $20.0 million, which price may increase from time to time up to an aggregate purchase price of $50.0 million, in exchange for the purchase by UBS of the increased funded outstanding principal amount of the Class A Notes held by the Company. Such increases in the purchase price under the Repurchase Agreement are conditioned upon the satisfaction of certain criteria with respect to the characteristics and total value of the Portfolio Assets held by BCPL Funding, and composition of the Portfolio Assets, in each case as set forth in the Indenture, among others, which criteria are customary for similar transactions. The scheduled Repurchase Date under the Confirmation is December 19, 2022. The financing fee under the Facility is equal to the three-month LIBOR plus a spread of 2.65% per year for the relevant period. Pursuant to the Repurchase Agreement, the Company has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other requirements customary for similar transactions. In addition to customary events of default included in similar transactions, the Repurchase Agreement also contains the following events of default, among others: (a) the failure to pay the repurchase price upon the applicable payment dates; (b) the failure to make a voluntary contribution of cash to BCPL Funding if the settlement for the commitment the Company made for the voluntary contribution of Portfolio Assets under the Contribution Agreement does not occur, each within the periods as set forth in the Repurchase Agreement, caused by negative changes in the value or composition of the Portfolio Assets that result in a failure to satisfy the criteria with respect thereto set forth in the Indenture; (c) the occurrence of an act by the Company that constitutes fraud or criminal negligence in respect of its investment activity pursuant to the Collateral Management Agreement; and (d) any officer or employee of the Company who has direct responsibility for the management of the Portfolio Assets is indicted for any act constituting fraud or criminal negligence in respect of investment activity and such person fails to be removed from such person’s managing the Portfolio Assets within the period as set forth in the Collateral Management Agreement.
The Company had provided a make-whole guarantee to the lender in the event that the pledged assets were insufficient to satisfy the repayment of the Facility.
Debt obligations consisted of the following as of December 31, 2020:
December 31, 2020
Total
Aggregate
Borrowing
Capacity
Total
Principal
Outstanding
Less
Deferred
Financing
Costs
Amount per
Consolidated
Statements of
Assets and
Liabilities
Credit Facility
$
50,000,000
$
50,000,000
$
(729,942
)
$
49,270,058
Total Debt
$
50,000,000
$
50,000,000
$
(729,942
)
$
49,270,058
Debt obligations consisted of the following as of December 31, 2019:
December 31, 2019
Total
Aggregate
Borrowing
Capacity
Total
Principal
Outstanding
Less
Deferred
Financing
Costs
Amount per
Consolidated
Statements of
Assets and
Liabilities
Credit Facility
$
50,000,000
$
20,000,000
$
(657,271
)
$
19,342,729
Total Debt
$
50,000,000
$
20,000,000
$
(657,271
)
$
19,342,729
Due to the short-term nature of the Facility, the outstanding principal balance approximates fair value. The fair value of the Facility would be categorized as Level 3.
For the periods ended December 31, 2020 and 2019, the components of interest expense were as follows:
For the Year Ended December 31, 2020
For the Period from October 2, 2019
(Commencement of Operations)
to December 31, 2019
Interest expense
$
930,287
$
35,367
Amortization of deferred financing and debt issuance costs
82,329
2,891
Total Interest Expense
$
1,012,616
$
38,258
Average debt outstanding
26,356,948
3,043,478
Weighted average interest rate
3.5
%
4.5
%
Note 6. Share Transactions
The Company is authorized to issue 1,000,000,000 shares of common stock at $0.001 par value per share.
On April 10, 2018, the Company issued 4,000 shares of common stock to an affiliate of the Adviser for aggregate proceeds of $100,000.
The Company has entered into subscription agreements (the “Subscription Agreements”) with investors, including the Adviser and its affiliates, providing for the private placement of shares of the Company’s common stock. Under the terms of the Subscription Agreements, investors are required to fund drawdowns to purchase shares of the Company’s common stock up to the amount of their respective capital commitment on an as-needed basis each time the Company delivers a drawdown notice to its investors with a minimum of 10 business days prior notice. As of December 31, 2020 and December 31, 2019, the Company had received capital commitments totaling $40.4 million and $27.1 million, respectively.
The following table summarizes the total shares issued and proceeds received related to capital drawdowns delivered pursuant to the Subscription Agreements during the periods ended December 31, 2020 and 2019:
Capital Drawdown Notice Date
Common Share
Issuance Date
Number of
Common
Shares Issued
Aggregate
Offering Price
March 13, 2020
March 27, 2020
291,400
$
6,775,000
June 11, 2020
June 25, 2020
230,833
5,600,000
September 11, 2020
September 25, 2020
264,741
6,600,000
Total
786,974
$
18,975,000
Capital Drawdown Notice Date
Common Share
Issuance Date
Number of
Common
Shares Issued
Aggregate
Offering Price
October 2, 2019
October 16, 2019
842,554
$
21,063,858
Total
842,554
$
21,063,858
Distributions
The Company may fund its cash distributions to stockholders from any sources of funds available to it, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, dividends or other distributions paid to the Company on account of preferred and common equity investments in portfolio companies and expense reimbursements from the Adviser, which are subject to recoupment. The Company has not established limits on the amount of funds it may use from available sources to make distributions. During certain periods, the Company’s distributions may exceed its taxable earnings. As a result, it is possible that a portion of the distributions the Company makes may represent a return of capital. A return of capital generally is a return of a stockholder’s investment rather than a return of earnings or gains derived from the Company’s investment activities.
The following table summarizes the distribution declarations for the periods ended December 31, 2020 and 2019:
Date Declared
Record Date
Payment Date
Amount
Per Share
Distributions
Declared
February 5, 2020
February 18, 2020
March 19, 2020
$
0.31
$
262,457
May 6, 2020
May 20, 2020
June 17, 2020
0.31
353,567
August 5, 2020
August 17, 2020
September 15, 2020
0.31
426,880
November 6, 2020
November 16, 2020
December 15, 2020
0.31
510,669
December 11, 2020
December 28, 2020
January 29, 2021
0.37
609,508
Total distributions declared
$
1.61
$
2,163,081
Date Declared
Record Date
Payment Date
Amount
Per Share
Distributions
Declared
December 19, 2019
December 20, 2019
December 27, 2019
$
0.01
$
8,466
Total distributions declared
$
0.01
$
8,466
With respect to distributions, we have adopted an “opt out” dividend reinvestment plan (“DRP”) for common stockholders. As a result, in the event of a declared distribution, each shareholder that has not “opted out” of the DRP will have their dividends or distributions automatically reinvested in additional shares of our common stock rather than receiving cash distributions. Shareholders who receive distributions in the form of shares of common stock will be subject to the same U.S. federal, state and local tax consequences as if they received cash distributions.
The following table reflects the common stock issued pursuant to the dividend reinvestment plan during the periods ended December 31, 2020 and 2019:
Date Declared
Record Date
Payment Date
Shares
February 5, 2020
February 18, 2020
March 19, 2020
2,507
May 6, 2020
May 20, 2020
June 17, 2020
5,658
August 5, 2020
August 17, 2020
September 15, 2020
5,548
November 6, 2020
November 16, 2020
December 15, 2020
5,479
Total shares issued
19,192
Date Declared
Record Date
Payment Date
Shares
December 19, 2019
December 20, 2019
December 27, 2019
Total shares repurchased
Note 7. Income Tax
Taxable income generally differs from increase in net assets from operations due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized gains or losses, as unrealized gains and losses are generally not included in taxable income until they are realized.
The Company may make adjustments to certain components of net assets to reflect permanent differences between financial and tax reporting, which may include differences in book and tax basis of certain assets and liabilities and nondeductible federal taxes or losses, among other items. These reclassifications have no effect on net assets or results of operations. For the year or period ended December 31, 2020 and 2019, there were no adjustments made.
The following table reconciles increase in net assets resulting from operations for the periods ended December 31, 2020 and 2019, to undistributed taxable income at December 31, 2020 and 2019:
For the Year Ended December 31, 2020
For the Period from October 2, 2019
(Commencement of Operations)
to December 31, 2019
Increase in net assets resulting from operations
$
2,583,136
$
97,984
Adjustments:
Net change in unrealized appreciation on investments
(582,041
)
(80,229
)
Other expenses not currently deductible
145,337
-
Other book-tax differences
8,087
-
Taxable Income
$
2,154,519
$
17,755
The tax character of distributions paid during the periods ended December 31, 2020 and 2019 was as follows:
For the Year Ended December 31, 2020
For the Period from October 2, 2019
(Commencement of Operations)
to December 31, 2019
Ordinary Income
$
2,163,081
$
8,466
Capital Gain
-
-
Total
$
2,163,081
$
8,466
As of December 31, 2020 and 2019, the components of distributable earnings on a tax basis were as follows:
December 31, 2020
December 31, 2019
Undistributed net investment income
$
-
$
-
Undistributed net realized gain
9,289
Other expenses not currently deductible
(145,337
)
-
Net change in unrealized appreciation on investments and derivatives
654,183
80,229
Total distributable earnings
$
509,573
$
89,518
As of December 31, 2020, the tax cost of the Company’s investments approximates their amortized cost and net unrealized appreciation of U.S. federal income tax purposes was $79,615,971 and $654,183 (gross unrealized appreciation of $1,110,289 ; gross unrealized depreciation of $(456,106). As of December 31, 2019, the tax cost of the Company’s investments approximates their amortized cost and net unrealized appreciation of U.S. federal income tax purposes was $80,229 (gross unrealized appreciation of $93,369; gross unrealized depreciation of $(13,140).
Note 8. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per common stock for the periods ended December 31, 2020 and 2019:
For the Year Ended December 31, 2020
For the Period from October 2, 2019
(Commencement of Operations)
to December 31, 2019
Increase in net assets resulting from operations per share - basic and diluted
$
2,583,136
$
97,984
Weighted average shares of common stock outstanding - basic and diluted
1,266,059
709,185
Net increase in net assets resulting from operations per share - basic and diluted
$
2.04
$
0.14
Note 9. Financial Highlights
The following is a schedule of financial highlights for the periods ended December 31, 2020 and 2019:
For the Year Ended December 31, 2020
For the Period from October 2, 2019
(Commencement of Operations)
to December 31, 2019
Per share data:
Net asset value, beginning of year or period
$
25.11
$
25.00
Results of operations:
Net investment income (1)
1.03
0.01
Net realized and unrealized gain (6)
0.35
0.13
Net increase in net assets resulting from operations (1)
1.38
0.14
Stockholder distributions: (2)
Distributions from net investment income
(1.61
)
(0.01
)
Net decrease in net assets resulting from stockholder distributions
(1.61
)
(0.01
)
Other (7)
-
(0.02
)
Net asset value, end of year or period
$
24.88
$
25.11
Shares outstanding, end of year or period
1,652,799
846,633
Total return based on net asset value (3)
4.2
%
0.5
%
Ratio/Supplemental Data:
Net assets, end of year or period
$
41,118,563
21,255,406
Ratio of net investment income to average net assets (4)
4.1
%
0.2
%
Ratio of total expenses to average net assets (4)
12.4
%
30.1
%
Ratio of net expenses to average net assets (4)
9.1
%
5.0
%
Average debt outstanding
$
26,356,948
$
3,043,478
Portfolio turnover
83.9
%
9.8
%
Total amount of senior securities outstanding
$
50,000,000
$
20,000,000
Asset coverage per unit (5)
$
1,822
$
2,063
Total committed capital, end of year or period
$
40,438,858
$
27,213,858
Ratio of total contributed capital to total committed capital, end of year or period
99.3
%
77.8
%
(1)
The per share data was derived by using the weighted average shares outstanding during the year or period.
(2)
The per share data for distributions reflects the actual amount of distributions paid during the year or period.
(3)
Total return based on net asset value is calculated as the change in net asset value per share during the year or period, assuming dividends and distributions, if any, are reinvested in accordance with the Company’s dividend reinvestment plan divided by the beginning net asset value per share. Total return is not annualized.
(4)
The computation of average net assets during the year or period is based on averaging net assets for the period reported. Ratio, excluding incentive fees, and nonrecurring expenses, such as organization and offering costs, is annualized.
(5)
Asset coverage per unit is the ratio of the carrying value of the Company’s consolidated total assets, less liabilities and indebtedness not represented by senior securities, 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 and is calculated on a consolidated basis.
(6)
The amount shown at this caption is the balancing figure derived from the other figures in the schedule. The amount shown at this caption is derived from total change in net asset value during the year or period and differs from the amount calculated using average shares because of the timing of issuances of the Company’s shares in relation to changes in net asset value during the year or period.
(7)
Represents the impact of different share amounts used in calculating per share data as a result of calculating certain per share data based on weighted average shares outstanding during the year or period and certain per share data on shares outstanding as of a year or period end or transaction date.
Note 10. Selected Quarterly Financial Data (unaudited)
The following is the quarterly results of operations for the periods ended December 31, 2020 and 2019:
For the Quarter Ended
December 31,
September 30,
June 30,
March 31,
Investment income
$
1,424,523
$
1,174,374
$
927,670
$
700,735
Net expenses
1,157,900
747,494
574,103
438,278
Net investment income
266,623
426,880
353,567
262,457
Net realized and unrealized gain (loss)
703,035
876,341
914,860
(1,220,627
)
Net increase (decrease) in net assets resulting from operations
969,658
1,303,221
1,268,427
(958,170
)
Net asset value per share as of the end of the quarter
$
24.88
$
24.97
$
24.34
$
23.56
Net investment income per share
$
0.16
$
0.31
$
0.31
$
0.31
Net increase (decrease) in net assets resulting from operations per share
$
0.59
$
0.93
$
1.10
$
(1.11
)
For the Quarter Ended
December 31,
September 30,
June 30,
March 31,
Investment income
$
206,339
$
-
$
-
$
-
Net expenses
197,873
-
-
-
Net investment income
8,466
-
-
-
Net realized and unrealized gain
89,518
-
-
-
Net increase in net assets resulting from operations
97,984
-
-
-
Net asset value per share as of the end of the quarter
$
25.11
$
25.00
$
25.00
$
25.00
Net investment income per share
$
0.01
$
-
$
-
$
-
Net increase in net assets resulting from operations per share
$
0.14
$
-
$
-
$
-
Note 11. Commitments and Contingencies
The Company enters into contracts that contain a variety of indemnification provisions. The Company’s maximum exposure under these arrangements is unknown; however, the Company has not had prior claims or losses pursuant to these contracts. The Adviser has reviewed the Company’s existing contracts and expects the risk of loss to the Company to be remote.
From time to time, the Company may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of the Company’s rights under contracts with its portfolio companies. As of December 31, 2020, the Company is not aware of any pending or threatened litigation.
The Adviser and its affiliates have incurred organization and offering costs and operating expenses on behalf of the Company in the amount of approximately $1.4 million and $1.2 million, respectively, from December 22, 2017 (inception) to October 2, 2019 (commencement of operations). The Company will have no responsibility for any organization and offering costs, nor operating expenses funded by the Adviser prior to the commencement of operations until the Adviser submits such costs, or a portion thereof, for reimbursement, subject to a cap of 1.50% of the Company’s total commitments for organization and offering costs and provided further that the Adviser or its affiliates may not be reimbursed for payment of excess organization and offering expenses that were incurred more than three years prior to the proposed reimbursement. For the period from October 2, 2019 (commencement of operations) through December 31, 2020, the Company accrued organization and offering costs of $0.6 million and recognized operating expenses funded by the Advisor prior to the Company’s commencement of operations of $1.2 million.
See Note 3 for a discussion of the Company’s conditional reimbursement to the Adviser under the Expense Support Agreement.
The Company may, from time to time, enter into commitments to fund investments. As of December 31, 2020 and 2019, the Company had the following outstanding commitments to fund investments in current portfolio companies:
Portfolio Company
Investment
December 31, 2020
December 31, 2019
Advantage Capital Holdings LLC
Senior Secured Loan
$
743,163
$
-
AMCP PET HOLDINGS, INC.
Senior Secured Loan
1,500,000
-
Datalink, LLC
Senior Secured Loan
600,000
-
Location Services LLC
Senior Secured Loan
583,333
708,333
MSM Acquisitions, Inc.
Senior Secured Loan
1,176,471
-
STX Financing, LLC
Repurchase Agreement
1,653,428
-
TA/WEG HOLDINGS, LLC
Senior Secured Loan
1,384,167
-
The PromptCare Companies Inc.
Senior Secured Loan
218,182
-
Total Unfunded Portfolio Company Commitments
$
7,858,744
$
708,333
The Company maintains sufficient capacity to cover outstanding unfunded portfolio company commitments that the Company may be required to fund.
Note 12. Senior Securities Asset Coverage
Information about the Company’s senior securities is shown in the table below for the year ended December 31, 2020 and 2019:
Class and Year
Total Amount
Outstanding(1)
Asset
Coverage
Per Unit(2)
Involuntary
Liquidating
Preference
Per Unit(3)
Average
Market
Value
Per Unit(4)
Credit Facility
December 31, 2020
$
50,000,000
1,822
-
N/A
December 31, 2019
20,000,000
2,063
-
N/A
(1)
Total amount of each class of senior securities outstanding at the end of the year or period presented.
(2)
Asset coverage per unit is the ratio of the carrying value of the Company’s consolidated total assets, less all liabilities excluding indebtedness represented by senior securities in this table, 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 and is calculated on a consolidated basis.
(3)
The amount to which such class of senior security would be entitled upon our involuntary liquidation in preference to any security junior to it. The “-” in this column indicates information that the SEC expressly does not require to be disclosed for certain types of senior securities.
(4)
Not applicable because the senior securities are not registered for public trading.
Note 13. Subsequent Events
On March 11, 2021, the Board declared a quarterly dividend of $0.31 per share for Company stockholders of record as of March 15, 2021, payable on March 22, 2021.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures.
Management’s annual report on internal control over financial reporting.
Evaluation of disclosure controls and procedures
As required by Rule 13a-15(b) under the 1934 Act, we evaluated, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the 1934 Act) as of December 31, 2020. Based on the foregoing evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of December 31, 2020, our disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level that we would meet our disclosure obligations.
Management’s annual report on internal control over financial reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 COSO Framework). Based on our evaluation under the framework in Internal Control-Integrated Framework, management concluded that our internal control over financial reporting was effective as of December 31, 2020.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Attestation report of the registered public accounting firm.
The rules of the SEC do not require, and this Annual Report does not include, an attestation report of our independent registered public accounting regarding internal control over financial reporting.
Changes in internal control over financial reporting.
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the 1934 Act) that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information.
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by Item 10 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2021 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of our fiscal year ended December 31, 2020.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation.
The information required by Item 11 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2021 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of our fiscal year ended December 31, 2020.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by Item 12 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2021 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of our fiscal year ended December 31, 2020.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by Item 13 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2021 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of our fiscal year ended December 31, 2020.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services.
The information required by Item 14 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2021 Annual Meeting of Stockholders, to be filed with the SEC within 120 days following the end of our fiscal year ended December 31, 2020.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits, Consolidated Financial Statement Schedules.
The following documents are filed as part of this Annual Report:
(1)
Consolidated Financial Statements - Consolidated Financial statements are included in Item 8. See the Index to the Consolidated Financial Statements on page of this Annual Report on Form 10-K.
(2)
Consolidated Financial Statement Schedules - None. We have omitted consolidated financial statement schedules because they are not required or are not applicable, or the required information is shown in the consolidated financial statements or notes to the consolidated financial statements included in this Annual Report on Form 10-K.
(3)
Exhibits - The following is a list of all exhibits filed as part of this Annual Report on Form 10-K, including those incorporated by reference.
The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC (and are numbered in accordance with Item 601 of Regulation S-K):
Exhibit
Number
Description of Document
3.1
Articles of Amendment and Restatement (incorporated by reference to Exhibit 3.1 to Amendment No. 1 to Form 10 filed on April 23, 2018)
3.2
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to Amendment No. 1 to Form 10 filed on April 23, 2018)
4.1
Form of Subscription Agreement (incorporated by reference to Exhibit 4.1 to the annual report on Form 10-K for the fiscal year ended December 31, 2019)
4.2
Description of Capital Stock (incorporated by reference to Exhibit 4.2 to the annual report on Form 10-K for the fiscal year ended December 31, 2019)
4.3
Indenture, dated as of December 16, 2019, by and between Great Lakes BCPL Funding Ltd. And U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.3 to the annual report on Form 10-K for the fiscal year ended December 31, 2019)
4.4
Rule 144A Global Class A Notes and Regulation S Global Class A Notes (incorporated by reference to Exhibit 4.4 to the annual report on Form 10-K for the fiscal year ended December 31, 2019)
10.1
Amended and Restated Investment Advisory Agreement by and between BC Partners Lending Corporation and BC Partners Advisors L.P., dated November 7, 2018 (incorporated by reference to Exhibit 10.1 to the quarterly report on Form 10-Q for the quarterly period ended September 30, 2018)
10.1.1
First Amendment to Amended and Restated Investment Advisory Agreement dated as of July 9, 2019, by and between BC Partners Lending Corporation and BC Partners Advisors L.P. (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed on July 10, 2019)
10.2
Administration Agreement (incorporated by reference to Exhibit 10.2 to Amendment No. 1 to Form 10 filed on April 23, 2018)
10.3
Dividend Reinvestment Plan (incorporated by reference to Exhibit 10.3 to Amendment No. 1 to Form 10 filed on April 23, 2018)
10.4
Form of Indemnification Agreement (incorporated by reference to Exhibit 10.4 to Amendment No. 1 to Form 10 filed on April 23, 2018)
10.5
Transfer Agency Agreement (incorporated by reference to Exhibit 10.6 to Amendment No. 1 to Form 10 filed on April 23, 2018)
10.6
Letter Agreement by and between BC Partners Lending Corporation and BC Partners Advisers L.P., dated August 20, 2019 (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed on August 23, 2019)
10.7
Expense Support and Conditional Reimbursement Agreement by and between BC Partners Lending Corporation, a Maryland corporation, and BC Partners Advisers L.P., a Delaware limited partnership, dated August 20, 2019 (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed on August 23, 2019)
10.8
Master Participation and Assignment Agreement, dated as of December 16, 2019, between Great Lakes BCPL Funding Ltd. and BC Partners Lending Corporation (incorporated by reference to Exhibit 10.8 to the annual report on Form 10-K for the fiscal year ended December 31, 2019)
10.9
Subscription Agreement, dated as of December 16, 2019, between Great Lakes BCPL Funding Ltd. and BC Partners Lending Corporation (incorporated by reference to Exhibit 10.9 to the annual report on Form 10-K for the fiscal year ended December 31, 2019)
10.10
SIFMA/ICMA Global Master Repurchase Agreement (2011 version), by and between UBS AG, London Branch and BC Partners Lending Corporation, dated December 12, 2019, together with the related Annexes thereto, and the Confirmation thereto, dated as of December 16, 2019 (incorporated by reference to Exhibit 10.10 to the annual report on Form 10-K for the fiscal year ended December 31, 2019)
10.11
Collateral Management Agreement, dated as of December 16, 2019, between Great Lakes BCPL Funding Ltd. and BC Partners Lending Corporation (incorporated by reference to Exhibit 10.11 to the annual report on Form 10-K for the fiscal year ended December 31, 2019)
10.12
Collateral Administration Agreement, dated as of December 16, 2019, between Great Lakes BCPL Funding Ltd., BC Partners Lending Corporation and U.S. Bank National Association as administrator (incorporated by reference to Exhibit 10.12 to the annual report on Form 10-K for the fiscal year ended December 31, 2019)
10.13
Account Control Agreement dated as of December 16, 2019 between Great Lakes BCPL Funding Ltd. and U.S. Bank National Association as trustee and custodian (incorporated by reference to Exhibit 10.13 to the annual report on Form 10-K for the fiscal year ended December 31, 2019)
10.14
Issuer Sale and Contribution Agreement, dated as of December 16, 2019, between Great Lakes BCPL Funding Ltd., BC Partners Lending Corporation and U.S. Bank National Association as trustee (incorporated by reference to Exhibit 10.14 to the annual report on Form 10-K for the fiscal year ended December 31, 2019)
10.15
Letter Agreement regarding Appointment of Valuation Agent, dated as of December 16, 2019, be-tween Great Lakes BCPL Funding Ltd., BC Partners Lending Corporation and UBS AG, London Branch (incorporated by reference to Exhibit 10.15 to the annual report on Form 10-K for the fiscal year ended December 31, 2019)
31.1*
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*
Filed herewith.