UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
 FORM 10-Q
(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from               to
 
Commission file number: 814-00939
________________
HMS Income Fund, Inc.
(Exact Name of Registrant as Specified in its Charter)
Maryland
(State or Other Jurisdiction of Incorporation or Organization)
45-3999996
(I.R.S. Employer Identification No.)
 
 
2800 Post Oak Boulevard, Suite 5000
Houston, Texas
(Address of Principal Executive Offices)
77056-6118
(Zip Code)
 
(888) 220-6121
(Registrant’s telephone number, including area code)

Not applicable
(Former name, former address and formal fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer o 
Accelerated filer o 
Non-accelerated filer þ 
Smaller reporting company o
Emerging growth company o
 
 
(Do not check if a smaller
reporting company)
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The issuer had 80,334,279 shares of common stock outstanding as of November 10, 2017.




TABLE OF CONTENTS
 
PART I — FINANCIAL INFORMATION 
Item 1.
Condensed Consolidated Financial Statements:
 
 
Condensed Consolidated Balance Sheets
 
Condensed Consolidated Statements of Operations
 
Condensed Consolidated Statements of Changes in Net Assets
 
Condensed Consolidated Statements of Cash Flows
 
Condensed Consolidated Schedules of Investments
 
Notes to the Condensed Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
 
 
 
PART II — OTHER INFORMATION 
 
 
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Defaults Upon Senior Securities
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
 
 
 
Signatures
 
Exhibit Index
 
  



PART I — FINANCIAL INFORMATION

Item 1.    Condensed Consolidated Financial Statements

HMS Income Fund, Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands, except share and per share amounts)
 
September 30, 2017
 
December 31, 2016
 
(Unaudited)
 
 
ASSETS
 
 
 
Portfolio investments at fair value:
 
 
 
Non-Control/Non-Affiliate investments (amortized cost: $996,358 and $935,741 as of September 30, 2017 and December 31, 2016, respectively)
$
967,475

 
$
916,393

Affiliate investments (amortized cost: $69,734 and $53,771 as of September 30, 2017 and December 31, 2016, respectively)
74,104

 
56,312

Control investments (amortized cost: $44,794 and $12,883 as of September 30, 2017 and December 31, 2016, respectively)
49,127

 
16,542

Total portfolio investments (amortized cost: $1,110,886 and $1,002,395 as of September 30, 2017 and December 31, 2016, respectively)
1,090,706

 
989,247

 
 
 
 
Cash and cash equivalents
39,709

 
23,719

Interest receivable
9,652

 
7,204

Receivable for securities sold
12,835

 
7,610

Prepaid and other assets
1,698

 
1,268

Deferred offering costs (net of accumulated amortization of $0 and $9,919 as of September 30, 2017 and December 31, 2016, respectively)
—

 
680

Deferred financing costs (net of accumulated amortization of $2,551 and $2,862 as of September 30, 2017 and December 31, 2016, respectively)
3,488

 
3,840

Total assets
$
1,158,088

 
$
1,033,568

 
 
 
 
LIABILITIES
 

 
 

Accounts payable and other liabilities
$
1,608

 
$
1,164

Payable for unsettled trades
152

 
932

Stockholder distributions payable
4,565

 
4,354

Base management fees payable
5,682

 
5,054

Due to affiliates
306

 
184

Directors’ fees payable
24

 
12

Payable for securities purchased
9,806

 
11,035

Notes payable
490,000

 
413,000

Total liabilities
512,143

 
435,735

 
 
 
 
Commitments and Contingencies (Note 12)
 
 
 
 
 
 
 
NET ASSETS
 

 
 

Common stock, $.001 par value; 150,000,000 shares authorized, 79,204,960 and 73,382,971 issued and outstanding as of September 30, 2017 and December 31, 2016, respectively
79

 
73

Additional paid-in capital
682,790

 
633,855

Accumulated distributions in excess of net investment income
(16,266
)
 
(22,602
)
Net unrealized depreciation
(20,658
)
 
(13,493
)
Total net assets
645,945

 
597,833

 
 
 
 
Total liabilities and net assets
$
1,158,088

 
$
1,033,568

 
 
 
 
Net asset value per share
$
8.16

 
$
8.15


See notes to the condensed consolidated financial statements.

1


HMS Income Fund, Inc.
Condensed Consolidated Statements of Operations
(dollars in thousands, except share and per share amounts)
(Unaudited) 
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
INVESTMENT INCOME:
 

 
 

 
 

 
 

From non-control/non-affiliate investments:
 
 
 
 
 
 
 
Interest income
$
22,752

 
$
20,055

 
$
67,852

 
$
59,731

Fee income
145

 
134

 
1,682

 
641

Dividend income
188

 
250

 
572

 
436

From affiliate investments:
 
 
 
 
 
 
 
Interest income
1,307

 
1,085

 
3,408

 
2,080

Fee income
53

 
37

 
156

 
170

Dividend income
582

 
406

 
1,563

 
939

From control investments:
 
 
 
 
 
 
 
Interest income
164

 
177

 
502

 
567

Fee income
15

 
20

 
56

 
60

Dividend income
125

 
70

 
452

 
70

Total interest, fee and dividend income
25,331

 
22,234

 
76,243

 
64,694

EXPENSES:
 

 
 

 
 

 
 

Interest expense
5,004

 
3,905

 
13,342

 
11,219

Base management and incentive fees
5,648

 
4,905

 
18,419

 
14,585

Administrative services expenses
694

 
529

 
2,228

 
1,636

Offering costs
881

 
290

 
1,679

 
422

Professional fees
141

 
162

 
465

 
833

Insurance
47

 
48

 
143

 
143

Other general and administrative
509

 
387

 
1,128

 
1,112

Expenses before fee and expense waivers
12,924

 
10,226

 
37,404

 
29,950

Waiver of incentive fees
—

 
—

 
(2,318
)
 
(493
)
Waiver of administrative services expenses
(694
)
 
(529
)
 
(2,228
)
 
(1,636
)
Total expenses, net of fee and expense waivers
12,230

 
9,697

 
32,858

 
27,821

Net investment income before taxes
13,101

 
12,537

 
43,385

 
36,873

Income tax expense (benefit), including excise tax
61

 
19

 
139

 
67

NET INVESTMENT INCOME
13,040

 
12,518

 
43,246

 
36,806

NET REALIZED GAIN (LOSS) FROM INVESTMENTS
 

 
 

 
 

 
 

Non-Control/Non-Affiliate investments
(227
)
 
(1,949
)
 
2,408

 
(11,964
)
Affiliate investments
951

 
—

 
951

 
—

Control investments
—

 
—

 
—

 
—

Total realized gain (loss) from investments
724

 
(1,949
)
 
3,359

 
(11,964
)
NET REALIZED INCOME
13,764

 
10,569

 
46,605

 
24,842

NET UNREALIZED APPRECIATION (DEPRECIATION)
 

 
 

 
 

 
 

Non-Control/Non-Affiliate investments
(5,533
)
 
11,891

 
(9,663
)
 
11,187

Affiliate investments
(48
)
 
(108
)
 
1,824

 
438

Control investments
531

 
(7
)
 
674

 
1,304

Total net unrealized appreciation (depreciation)
(5,050
)
 
11,776

 
(7,165
)
 
12,929

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
$
8,714

 
$
22,345

 
$
39,440

 
$
37,771

PER SHARE INFORMATION - BASIC AND DILUTED
 
 
 
 
 
 
 
NET INVESTMENT INCOME PER SHARE
$
0.16

 
$
0.18

 
$
0.56

 
$
0.55

NET REALIZED INCOME PER SHARE
$
0.18

 
$
0.15

 
$
0.61

 
$
0.37

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS PER SHARE (EARNINGS PER SHARE)
$
0.11

 
$
0.32

 
$
0.51

 
$
0.57

DISTRIBUTIONS DECLARED PER SHARE
$
0.17

 
$
0.17

 
$
0.52

 
$
0.52

WEIGHTED AVERAGE SHARES OUTSTANDING – BASIC AND DILUTED
78,807,225

 
69,729,799

 
76,899,096

 
66,576,489

See notes to the condensed consolidated financial statements.

2


HMS Income Fund, Inc.
Condensed Consolidated Statements of Changes in Net Assets
(dollars in thousands, except number of shares)
(Unaudited) 
 
 
Nine Months Ended September 30, 2017
 
Nine Months Ended September 30, 2016
Change in Net Assets from Operations:
 
 
 
 
Net investment income
 
$
43,246

 
$
36,806

Net realized gain (loss) on investments
 
3,359

 
(11,964
)
Net unrealized appreciation (depreciation)
 
(7,165
)
 
12,929

Net increase in net assets resulting from operations
 
39,440

 
37,771

 
 
 
 
 
Change in Net Assets from Stockholders’ Distributions:
 
 
 
 
Distributions from net investment income
 
(36,911
)
 
(34,994
)
Distributions from net realized gain on investments
 
(3,359
)
 
—

Net decrease in net assets resulting from stockholders’ distributions
 
(40,270
)
 
(34,994
)
 
 
 
 
 
Change in Net Assets from Capital Share Transactions:
 
 
 
 
Issuance of common stock, net of issuance costs
 
42,366

 
57,705

Reinvestment of stockholder distributions
 
20,594

 
18,263

Repurchase of common stock
 
(14,018
)
 
(8,423
)
Net increase in net assets resulting from capital share transactions
 
48,942

 
67,545

 
 
 
 
 
Total Increase in Net Assets
 
48,112

 
70,322

Net Assets at beginning of the period
 
597,833

 
491,652

Net Assets at end of the period
 
$
645,945

 
$
561,974

 
 
 
 
 
NAV per share at end of the period
 
$
8.16

 
$
7.92

 
 
 
 
 
Common shares outstanding, beginning of the period
 
73,382,971

 
62,382,044

Issuance of common shares
 
5,063,398

 
7,328,503

Issuance of common shares pursuant to distribution reinvestment plan
 
2,466,862

 
2,311,510

Repurchase of common shares
 
(1,708,271
)
 
(1,079,994
)
Common shares outstanding, end of the period
 
79,204,960

 
70,942,063


See notes to the condensed consolidated financial statements.


3


HMS Income Fund, Inc.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(Unaudited) 
 
Nine Months Ended 
 September 30, 2017
 
Nine Months Ended 
 September 30, 2016
CASH FLOWS FROM OPERATING ACTIVITIES
 

 
 

Net increase in net assets resulting from operations
$
39,440

 
$
37,771

Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities:
 
 
 
Principal repayments received and proceeds from sales of investments in portfolio companies
370,941

 
222,423

Investments in portfolio companies
(470,875
)
 
(275,098
)
Net unrealized (appreciation) depreciation of portfolio investments
7,165

 
(12,929
)
Net realized (gain) loss on sale of portfolio investments
(3,359
)
 
11,964

Amortization of deferred financing costs
1,013

 
1,115

Amortization of deferred offering costs
1,679

 
422

Accretion of unearned income
(10,793
)
 
(7,778
)
Net payment-in-kind interest accrual
(897
)
 
(255
)
Changes in other assets and liabilities:
 
 
 

Interest receivable
(2,448
)
 
873

Prepaid and other assets
(390
)
 
(9
)
Base management fees payable
628

 
(149
)
Due to affiliates
(83
)
 
491

Directors’ fees payable
12

 
15

Accounts payable and other liabilities
285

 
166

Payable for unsettled trades
(780
)
 
709

Net cash used in operating activities
(68,462
)
 
(20,269
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Proceeds from issuance of common stock
46,041

 
63,447

Redemption of common shares
(14,018
)
 
(8,423
)
Payment of selling commissions and dealer manager fees
(3,511
)
 
(5,687
)
Payment of offering costs
(959
)
 
(1,226
)
Payment of stockholder distributions
(19,465
)
 
(16,375
)
Repayments on notes payable
(339,000
)
 
(255,000
)
Proceeds from notes payable
416,000

 
260,000

Payment of deferred financing costs
(636
)
 
(428
)
Net cash provided by financing activities
84,452

 
36,308

 
 
 
 
Net increase in cash and cash equivalents
15,990

 
16,039

 
 
 
 
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD
23,719

 
24,001

 
 
 
 
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD
$
39,709

 
$
40,040

 
See notes to the condensed consolidated financial statements.


4

HMS Income Fund, Inc.
Condensed Consolidated Schedule of Investments
As of September 30, 2017
(dollars in thousands)
(Unaudited)
Portfolio Company (1) (3)
Business Description
Type of Investment (2) (3)
Index Rate (22)
Principal (7)
Cost (7)
Fair Value (27)
 
 
 
 
 
 
 
Control Investments (6)
Copper Trail Energy Fund I, LP (9)(15)(16)
Investment Partnership
LP Interests (Copper Trail Energy Fund I, LP) (Fully diluted 30.1%)
—
$
—

$
2,500

$
2,500

GRT Rubber Technologies, LLC (8) (10) (13)
Engineered Rubber Product Manufacturer
LIBOR Plus 9.00% (Floor 1.00%), Current Coupon 10.24%, Secured Debt (Maturity - December 19, 2019)
1 month LIBOR
5,925

5,859

5,925

 
 
Member Units (2,896 shares)
—
—
6,435

10,186

 
 
 
 
 
12,294

16,111

HMS-ORIX SLF LLC (9) (15) (23)
Investment Partnership
Membership Interests (Fully diluted 60.00%) (16)
—
—
30,000

30,516

 
 
 
 
 
 
 
Subtotal Control Investments (6) (5% of total investments at fair value)
 
 
$
44,794

$
49,127

Affiliate Investments (4)
AFG Capital Group, LLC (10) (13)
Provider of Rent-to-Own Financing Solutions and Services
Member Units (46 shares) (16)
—
$
—

$
300

$
782

 
 
Warrants (10 equivalent shares, Expiration - November 7, 2024)
—
—

65

187

 
 
 
 
 
365

969

Charps, LLC (10) (13)
Pipeline Maintenance and Construction
12.00% Secured Debt (Maturity - January 31, 2022)
None
4,600

4,492

4,495

 
 
Preferred Member Units (400 units)
—
—
100

100

 
 
 
 
 
4,592

4,595

Clad-Rex Steel, LLC (10) (13)
Specialty Manufacturer of Vinyl-Clad Metal
LIBOR Plus 9.50% (Floor 1.00%), Current Coupon 10.74%, Secured Debt (Maturity - December 20, 2021) (8)
1 month LIBOR
3,420

3,360

3,420

 
 
Member Units (179 units) (16)
—
—

1,820

2,130

 
 
10.00% Secured Debt (Clad-Rex Steel RE Investor, LLC) (Maturity - December 19, 2036)
None
297

293

294

 
 
Member Units (Clad-Rex Steel RE Investor, LLC) (200 units)
—
—

53

53

 
 
 
 
 
5,526

5,897

Freeport First Lien Loan Fund III, LP (9) (15)
Investment Partnership
LP Interests (Freeport First Lien Loan Fund III, LP) (Fully diluted 5.60%) (16)
—
—

7,559

7,507

Gamber-Johnson Holdings, LLC (8) (10) (13)
Manufacturer of Ruggedized Computer Mounting Systems
LIBOR Plus 11.00% (Floor 1.00%), Current Coupon 12.23%, Secured Debt (Maturity - June 24, 2021)
1 month LIBOR
5,920

5,816

5,920

 
 
Member Units (2,155 units) (16)
—
—

3,711

5,740

 
 
 
 
 
9,527

11,660

Guerdon Modular Holdings, Inc. (10) (13)
Multi-Family and Commercial Modular Construction Company
13.00% Secured Debt (Maturity - August 13, 2019)
None
2,677

2,640

2,658

 
 
Common Stock (53,008 shares)
—
—

746

—

 
 
Class B Preferred Stock (101,250 shares)
—
—

285

237

 
 
 
 
 
3,671

2,895

Gulf Publishing Investor, LLC (10) (13)
Energy Focused Media and Publishing
12.50% Secured Debt (Maturity - April 29, 2021)
None
3,200

3,148

3,148

 
 
LIBOR Plus 9.50% (Floor 1.00%), Current Coupon 10.74%, Secured Debt (Maturity - April 29, 2021) (8)
3 month LIBOR
20

20

20

 
 
Member Units (781 shares)
—
—

920

1,082

 
 
 
 
 
4,088

4,250

Harris Preston & Partners Capital Funds (15)(16)
Investment Partnership
LP Interests (HPEP 3, LP) (Fully diluted 9.60%) (9)
—
—

943

943

 
 
LP Interests (2717 MH, LP)(Fully diluted 7.00%)
—
—

400

400

 
 
 
 
 
1,343

1,343

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hawk Ridge Systems, LLC (9) (10) (13)
Value-Added Reseller of Engineering Design and Manufacturing Solutions
10.00% Secured Debt (Maturity - December 2, 2021)
None
$
2,375

$
2,334

$
2,334

 
 
Preferred Member Units (56 units)(16)
—
—

713

808

 
 
Preferred Member Units (HRS Services, ULC) (56 units)(16)
—
—

38

43

 
 
 
 
 
3,085

3,185

HW Temps LLC (8) (10) (13)
Temporary Staffing Solutions
LIBOR Plus 13.00% (Floor 1.00%), Current Coupon 14.24%, Secured Debt (Maturity - July 2, 2020)
1 month LIBOR
2,494

2,451

2,451

 
 
Preferred Member Units (800 shares) (16)
—
—

986

985

 
 
 
 
 
3,437

3,436

Market Force Information, Inc. (8)(10)(13)
Provider of Customer Experience Management Services
LIBOR Plus 11.00% (Floor 1.00%), Current Coupon 12.32%, Secured Debt (Maturity - July 28, 2022)
3 month LIBOR
5,880

5,766

5,766

 
 
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.32%, Secured Debt (Maturity - July 28, 2022)
1 month LIBOR
128

128

128

 
 
Member Units (170,000 units)
—
—

3,675

3,675

 
 
 
 
 
9,569

9,569

M.H. Corbin, Inc. (10) (13)
Manufacturer and Distributor of Traffic Safety Products
10.00% Secured Debt (Maturity - August 31, 2020)
None
3,194

3,172

3,172

 
 
Preferred Member Units (1,000 shares)
—
—
1,500

1,500

 
 
 
 
 
4,672

4,672

Mystic Logistics, Inc. (10) (13)
Logistics and Distribution Services Provider for Large Volume Mailers
12.00% Secured Debt (Maturity - August 15, 2019)
None
1,942

1,910

1,942

 
 
Common Stock (1,468 shares) (16)
—
—
680

1,648

 
 
 
 
 
2,590

3,590

NuStep, LLC (10) (13)
Designer, Manufacturer and Distributor of Fitness Equipment
12.00% Secured Debt (Maturity - January 31, 2022)
None
5,150

5,041

5,042

 
 
Preferred Member Units (102 units)
—
—
2,550

2,550

 
 
 
 
 
7,591

7,592

SoftTouch Medical Holdings LLC (8) (10) (13)
Home Provider of Pediatric Durable Medical Equipment
LIBOR Plus 9.00% (Floor 1.00%), Current Coupon 10.24%, Secured Debt (Maturity - October 31, 2019)
1 month LIBOR
1,260

1,249

1,260

 
 
Member Units (785 units) (16)
—
—

870

1,684

 
 
 
 
 
2,119

2,944

 
 
 
 
 
 
 
Subtotal Affiliate Investments (4) (7% of total investments at fair value)
 
 
$
69,734

$
74,104

 
 
 
 
 
 
 
Non-Control/Non-Affiliate Investments (5)
AAC Holding Corp. (8)
Substance Abuse Treatment Service Provider
LIBOR Plus 6.75% (Floor 1.00%), Current Coupon 8.06%, Secured Debt (Maturity - June 30, 2023)
3 month LIBOR
$
11,826

$
11,538

$
11,826

Adams Publishing Group, LLC (8) (11)
Local Newspaper Operator
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.33%, Secured Debt (Maturity - November 3, 2020)
3 month LIBOR
8,572

8,336

8,411

ADS Tactical, Inc. (8) (11)
Value-Added Logistics and Supply Chain Solutions Provider
LIBOR Plus 7.50% (Floor 0.75%), Current Coupon 8.83%, Secured Debt (Maturity - December 31, 2022)
3 month LIBOR
13,010

12,687

12,753

Aethon United BR, LP (8)(11)
Oil & Gas Exploration & Production
LIBOR Plus 6.75% (Floor 1.00%), Current Coupon 7.98%, Secured Debt (Maturity - September 8, 2023) (14)
3 month LIBOR
3,438

3,386

3,386

Ahead, LLC (8) (11)
IT Infrastructure Value Added Reseller
LIBOR Plus 6.50%, Current Coupon 7.84%, Secured Debt (Maturity - November 2, 2020)
3 month LIBOR
9,125

8,937

9,122

Allflex Holdings III Inc. (8)
Manufacturer of Livestock Identification Products
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.31%, Secured Debt (Maturity - July 19, 2021) (14)
3 month LIBOR
14,640

14,730

14,744

American Scaffold Holdings, Inc. (8) (11)
Marine Scaffolding Service Provider
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.83%, Secured Debt (Maturity - March 31, 2022)
3 month LIBOR
7,125

7,037

7,089

American Teleconferencing Services, Ltd. (8)
Provider of Audio Conferencing and Video Collaboration Solutions
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.78%, Secured Debt (Maturity - December 8, 2021)
2 month LIBOR
$
9,663

$
8,858

$
9,349

 
 
LIBOR Plus 9.50% (Floor 1.00%), Current Coupon 10.74%, Secured Debt (Maturity - June 6, 2022) (14)
1 month LIBOR
5,571

5,324

5,533

 
 
 
 
 
14,182

14,882

Apex Linen Service, Inc. (10) (13)
Industrial Launderers
13.00% Secured Debt (Maturity - October 30, 2022)
None
3,604

3,550

3,550

 
 
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.24%, Secured Debt (Maturity - October 30, 2022) (8)
1 month LIBOR
600

600

600

 
 
 
 
 
4,150

4,150

Arcus Hunting, LLC (8) (11)
Manufacturer of Bowhunting and Archery Products and Accessories
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.30%, Secured Debt (Maturity - November 13, 2019)
1 month LIBOR
6,521

6,439

6,521

 
 
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 7.84%, Secured Debt (Maturity - November 13, 2019)
1 month LIBOR
2,048

2,041

2,041

 
 
 
 
 
8,480

8,562

ATI Investment Sub, Inc. (8)
Manufacturer of Solar Tracking Systems
LIBOR Plus 7.25% (Floor 1.00%), Current Coupon 8.49%, Secured Debt (Maturity - June 22, 2021)
1 month LIBOR
7,614

7,462

7,595

ATX Networks Corp. (8) (9)
Provider of Radio Frequency Management Equipment
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.33%, Secured Debt (Maturity - June 11, 2021)
3 month LIBOR
14,588

14,390

14,442

BarFly Ventures, LLC (11)
Casual Restaurant Group
12.00% Secured Debt (Maturity - August 31, 2020)
None
2,905

2,860

2,905

 
 
Warrants (.410 equivalent units, Expiration - August 31, 2025)
—
—

158

148

 
 
Options (.731 equivalent units)
—
—

133

262

 
 
 
 
 
3,151

3,315

BBB Tank Services, LLC (10) (13)
Maintenance, Repair and Construction Services to the Above-Ground Storage Tank Market
15.00% Secured Debt (Maturity - April 8, 2021)
None
1,007

992

999

 
 
LIBOR Plus 9.50% (Floor 1.00%), Current Coupon 10.74%, Secured Debt (Maturity - April 9, 2018) (8)
1 month LIBOR
200

200

200

 
 
Member Units (200,000 units)
—
—

200

145

 
 
 
 
 
1,392

1,344

Berry Aviation, Inc. (11)
Airline Charter Service Operator
12.00% Current / 1.75% PIK, Current Coupon 13.75%, Secured Debt (Maturity - January 30, 2020) (14)
None
1,407

1,393

1,407

 
 
Common Stock (138 shares)
—
—
100

220

 
 
 
 
 
1,493

1,627

BigName Commerce, LLC (8) (11)
Provider of Envelopes and Complimentary Stationery Products
LIBOR Plus 7.25% (Floor 1.00%), Current Coupon 8.55%, Secured Debt (Maturity - May 11, 2022)
1 month LIBOR
2,503

2,474

2,474

Binswanger Enterprises, LLC (8) (11)
Glass Repair and Installation Service Provider
LIBOR Plus 8.00% (Floor 1.00%), Current Coupon 9.33%, Secured Debt (Maturity - March 9, 2022)
3 month LIBOR
15,325

15,046

15,047

 
 
Member Units (1,050,000 Class A units)
—
—
1,050

940

 
 
 
 
 
16,096

15,987

Bluestem Brands, Inc. (8)
Multi-Channel Retailer of General Merchandise
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 8.77%, Secured Debt (Maturity - November 6, 2020)
3 month LIBOR
13,206

13,024

9,366

Boccella Precast Products, LLC (8)(10)(13)
Manufacturer of Precast Hollow Core Concrete
LIBOR Plus 10.00% (Floor 1.00%), Current Coupon 11.34%, Secured Debt (Maturity - June 30, 2022)
1 month LIBOR
4,100

4,000

4,011

 
 
Member Units (540,000 units)
—
—
540

540

 
 
 
 
 
4,540

4,551

 
 
 
 
 
 
 
Brightwood Capital Fund Investments (9) (15)
Investment Partnership
LP Interests (Brightwood Capital Fund III, LP) (Fully diluted 0.52%) (16)
—
—
$
4,075

$
3,443

 
 
LP Interests (Brightwood Capital Fund IV, LP) (Fully diluted 1.58%) (16)
—
—
1,037

1,037

 
 
 
 
 
5,112

4,480

Brundage-Bone Concrete Pumping, Inc.
Construction Services Provider
10.38% Secured Debt (Maturity - September 1, 2021) (14)
None
12,000

12,076

12,360

Buca C, LLC (8) (10) (13)
Casual Restaurant Group
LIBOR Plus 7.25% (Floor 1.00%), Current Coupon 8.33%, Secured Debt (Maturity - June 30, 2020)
1 month LIBOR
14,136

13,965

13,965

 
 
Preferred Member Units (4 units, 6.00% cumulative) (16)
—
—
2,702

2,740

 
 
 
 
 
16,667

16,705

CAI Software, LLC (10) (13)
Provider of Specialized Enterprise Resource Planning Software
12.00% Secured Debt (Maturity - October 10, 2019)
None
871

859

871

 
 
Member Units (16,339 units) (16)
—
—
163

760

 
 
 
 
 
1,022

1,631

CapFusion Holding, LLC (9) (10) (13) (18)
Business Lender
13.00% Secured Debt (Maturity - March 25, 2021) (18)
None
2,830

2,555

1,661

 
 
Warrants (400 equivalent units, Expiration - March 24, 2026)
—
—
300

—

 
 
 
 
 
2,855

1,661

CDHA Management, LLC (8) (11)
Dental Services
LIBOR Plus 7.25% (Floor 1.00%), Current Coupon 8.68%, Secured Debt (Maturity - December 5, 2021)
6 month LIBOR
4,345

4,245

4,345

Cengage Learning, Inc. (8)
Provider of Educational Print and Digital Services
LIBOR Plus 4.25% (Floor 1.00%), Current Coupon 5.49%, Secured Debt (Maturity - June 7, 2023)
1 month LIBOR
9,794

9,259

9,056

Cenveo Corporation
Provider of Commercial Printing, Envelopes, Labels, Printed Office Products
6.00% Secured Debt (Maturity - August 1, 2019)
None
15,000

13,526

11,888

Charlotte Russe, Inc. (8)
Fast-Fashion Retailer to Young Women
LIBOR Plus 5.50% (Floor 1.25%), Current Coupon 6.82%, Secured Debt (Maturity - May 22, 2019)
3 month LIBOR
14,972

14,845

6,635

Clarius BIGS, LLC (11) (18)
Prints & Advertising Film Financing
15.00% PIK Secured Debt (Maturity - January 5, 2015) (18)
None
2,140

1,882

64

 
 
20.00% PIK Secured Debt (Maturity - January 5, 2015) (18)
None
773

680

23

 
 
 
 
 
2,562

87

Construction Supply Investments, LLC (9)(11)
Distribution Platform of Specialty Construction Materials to Professional Concrete and Masonry Contractors
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.23%, Secured Debt (Maturity - June 30, 2023)(8)
—
7,313

7,276

7,276

 
 
Member units (20,000 units)
—
—

3,723

3,723

 
 
 
 
 
10,999

10,999

ContextMedia Health, LLC (8)
Provider of Healthcare Media Content
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.75%, Secured Debt (Maturity - December 23, 2021)
1 month LIBOR
9,625

8,743

9,589

Covenant Surgical Partners, Inc.
Ambulatory Surgical Centers
8.75% Secured Debt (Maturity - August 1, 2019)
None
9,500

9,500

9,812

CST Industries, Inc. (8)
Storage Tank Manufacturer
Prime Plus 5.25% (Floor 2.50%), Current Coupon 9.50%, Secured Debt (Maturity - May 22, 2017)
PRIME
2,759

2,768

2,690

 
 
Prime Plus 5.25% (Floor 2.50%), Current Coupon 4.10%, Secured Debt (Maturity - October 14, 2017)
PRIME
482

482

482

 
 
 
 
 
3,250

3,172

CTVSH, PLLC (8)(11)
Emergency Care and Specialty Service Animal Hospital
LIBOR Plus 8.00% (Floor 1.00%), Current Coupon 9.31%, Secured Debt (Maturity - August 3, 2022)
1 month LIBOR
3,000

2,942

2,942

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Datacom, LLC (10) (13)
Technology and Telecommunications Provider
5.25% Current / 5.25% PIK, Current Coupon 10.50% Secured Debt (Maturity - May 30, 2019)
None
$
1,348

$
1,338

$
1,263

 
 
8.00% Secured Debt (Maturity - May 30, 2018)
None
150

150

150

 
 
Class A Preferred Member Units (1,530 units, 15.00% cumulative) (16)
—
—

131

151

 
 
Class B Preferred Member Units (717 units)
—
—

670

—

 
 
 
 
 
2,289

1,564

Digital River, Inc. (8)
Provider of Outsourced e-Commerce Solutions and Services
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.82%, Secured Debt (Maturity - February 12, 2021)
3 month LIBOR
14,586

14,496

14,659

Digital Room, LLC (8)
Organic Lead Generation for Online Postsecondary Schools
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.24%, Secured Debt (Maturity - November 21, 2022)
1 month LIBOR
7,339

7,207

7,302

East West Copolymer & Rubber, LLC (10) (13) (18)
Manufacturer of Synthetic Rubbers
12.00% Secured Debt (Maturity - October 17, 2019) (18)
None
909

859

—

 
 
Warrants (627,697 equivalent shares, Expiration - October 15, 2024)
—
—

13

—

 
 
 
 
 
872

—

ECP-PF Holdings Groups, Inc. (8)(11)
Fitness Club Operator
LIBOR Plus 9.00% (Floor 1.00%), Current Coupon 10.30%, Secured Debt (Maturity - November 26, 2019)
1 month LIBOR
1,875

1,866

1,875

Evergreen Skills Lux S.á r.l. (d/b/a Skillsoft) (8) (9)
Technology-Based Performance Support Solutions
LIBOR Plus 8.25% (Floor 1.00%), Current Coupon 9.49%, Secured Debt (Maturity - April 28, 2022) (14)
1 month LIBOR
10,901

10,492

8,971

Extreme Reach, Inc. (8)(12)
Integrated TV and Video Advertising Platform
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 7.59%, Secured Debt (Maturity - February 7, 2020)
3 month LIBOR
8,849

8,834

8,845

Felix Investments Holdings II, LLC (8)(11)
Oil and Gas Exploration and Production
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.81%, Secured Debt (Maturity - August 9, 2022)
3 month LIBOR
3,333

3,264

3,264

Flavors Holdings, Inc. (8)
Global Provider of Flavoring and Sweetening Products and Solutions
LIBOR Plus 5.75% (Floor 1.00%), Current Coupon 7.08%, Secured Debt (Maturity - April 3, 2020)
3 month LIBOR
12,592

11,979

11,994

GST Autoleather, Inc. (8)
Automotive Leather Manufacturer
Prime Plus 6.50% (Floor 2.00%), Current Coupon 10.75%, Secured Debt (Maturity - July 10, 2020)
PRIME
17,297

16,784

13,405

Guitar Center, Inc.
Musical Instruments Retailer
6.50% Secured Debt (Maturity - April 15, 2019)
None
15,015

14,395

13,626

Hojeij Branded Foods, LLC (8) (11)
Multi-Airport, Multi-Concept Restaurant Operator
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.31%, Secured Debt (Maturity - July 20, 2022)
3 month LIBOR
16,957

16,756

16,957

Hoover Group, Inc. (8) (9) (11)
Provider of Storage Tanks and Related Products to the Energy and Petrochemical Markets
LIBOR Plus 7.25% (Floor 1.00%), Current Coupon 8.56%, Secured Debt (Maturity - January 28, 2021)
3 month LIBOR
14,886

14,011

13,695

Hunter Defense Technologies, Inc. (8)
Provider of Military and Commercial Shelters and Systems
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.31%, Secured Debt (Maturity - August 5, 2019)
3 month LIBOR
15,000

14,551

14,888

Hydrofarm Holdings, LLC (8) (11)
Wholesaler of Horticultural Products
LIBOR Plus 7.00%, Current Coupon 8.24%, Secured Debt (Maturity - May 12, 2022)
1 month LIBOR
6,708

6,582

6,582

iEnergizer Limited (8) (9)
Provider of Business Outsourcing Solutions
LIBOR Plus 6.00% (Floor 1.25%), Current Coupon 7.25%, Secured Debt (Maturity - May 1, 2019)
1 month LIBOR
11,209

10,898

11,181

Implus Footcare, LLC (8) (11)
Provider of Footwear and Other Accessories
LIBOR Plus 6.75% (Floor 1.00%), Current Coupon 8.08%, Secured Debt (Maturity - April 30, 2021)
3 month LIBOR
14,529

14,326

14,326

Indivior Finance, LLC (8) (9)
Specialty Pharmaceutical Company Treating Opioid Dependence
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.32%, Secured Debt (Maturity - December 19, 2019)
3 month LIBOR
7,628

7,393

7,694

Industrial Services Acquisitions, LLC (11)
Industrial Cleaning Services
11.25% Current / 0.75% PIK, Current Coupon 12.00%, Unsecured Debt (Maturity - December 17, 2022) (17)
None
10,583

10,403

10,583

 
 
Member units (Industrial Services Investments, LLC) (2,100,000 units)
—
—

2,100

1,890

 
 
 
 
 
12,503

12,473

Inn of the Mountain Gods Resort and Casino
Hotel & Casino Owner & Operator
9.25% Secured Debt (Maturity - November 30, 2020)
None
10,749

10,610

9,674

Intertain Group Limited (8) (9)
Business-to-Consumer Online Gaming Operator
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.74%, Secured Debt (Maturity - April 8, 2022)
1 month LIBOR
$
8,028

$
7,891

$
8,118

iPayment, Inc. (8)
Provider of Merchant Acquisition
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.31%, Secured Debt (Maturity - April 11, 2023)
3 month LIBOR
12,000

11,887

12,150

iQor US Inc. (8)
Business Process Outsourcing Services Provider
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.30%, Secured Debt (Maturity - April 1, 2021)
3 month LIBOR
7,698

7,336

7,648

IronGate Energy Services, LLC (18)
Oil and Gas Services
11.00% Secured Debt (Maturity - July 1, 2018) (18)
None
5,825

5,827

2,039

Jackmont Hospitality, Inc. (8) (11)
Franchisee of Casual Dining Restaurants
LIBOR Plus 6.75% (Floor 1.00%)/ 2.50% PIK , Current Coupon 7.99%, Secured Debt (Maturity - May 26, 2021)
1 month LIBOR
8,780

8,755

8,780

Jacuzzi Brands Corp. (8)
Manufacturer of Bath and Spa Products
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.33%, Secured Debt (Maturity - June 28, 2023)
3 month LIBOR
5,963

5,845

5,933

Joerns Healthcare, LLC (8)
Manufacturer and Distributor of Health Care Equipment & Supplies
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.82%, Secured Debt (Maturity - May 9, 2020)
3 month LIBOR
11,119

10,931

10,429

Kellermeyer Bergensons Services, LLC (8)
Outsourced Janitorial Services to Retail/Grocery Customers
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 9.81%, Secured Debt (Maturity - April 29, 2022) (14)
3 month LIBOR
14,700

14,615

14,333

Keypoint Government Solutions, Inc. (8) (11)
Provider of Pre-Employment Screening Services
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.30%, Secured Debt (Maturity - April 18, 2024)
3 month LIBOR
12,188

12,072

12,072

LaMi Products, LLC (8) (11)
General Merchandise Distribution
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.82%, Secured Debt (Maturity -September 16, 2020)
3 month LIBOR
11,239

11,105

11,214

Larchmont Resources, LLC (8)
Oil & Gas Exploration & Production
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.22%, Secured Debt (Maturity - August 7, 2020)
3 month LIBOR
4,013

4,013

3,933

 
 
Member units (Larchmont Intermediate Holdco, LLC) (4,806 units)
—
—

601

1,658

 
 
 
 
 
4,614

5,591

Legendary Pictures Funding, LLC (8) (11)
Producer of TV, Film, and Comic Content
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.33%, Secured Debt (Maturity - April 22, 2020)
3 month LIBOR
8,020

7,928

7,920

LJ Host Merger Sub, Inc. (8)
Managed Services and Hosting Provider
LIBOR Plus 6.75% (Floor 1.25%), Current Coupon 8.08%, Secured Debt (Maturity - December 13, 2019)
3 month LIBOR
16,137

15,694

15,714

 
 
LIBOR Plus 6.75% (Floor 1.00%), Current Coupon 8.06%, Secured Debt (Maturity - December 13, 2018)
3 month LIBOR
2,433

2,339

2,293

 
 
 
 
 
18,033

18,007

Logix Acquisition Company, LLC (8) (11)
Competitive Local Exchange Carrier
LIBOR Plus 8.29% (Floor 1.00%), Current Coupon 9.53%, Secured Debt (Maturity - June 24, 2021) (24)
1 month LIBOR
8,358

8,241

8,358

LSF9 Atlantis Holdings, LLC (8)
Provider of Wireless Telecommunications Carrier Services
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.24%, Secured Debt (Maturity - May 1, 2023)
1 month LIBOR
13,913

13,805

13,997

Lulu’s Fashion Lounge, LLC (8)(11)
Fast Fashion E-Commerce Retailer
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.24%, Secured Debt (Maturity - August 23, 2022)
1 month LIBOR
6,818

6,616

6,767

Meisler Operating, LLC (10) (13)
Provider of Short Term Trailer and Container Rental
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 9.80%, Secured Debt (Maturity - June 7, 2022) (8)
3 month LIBOR
4,200

4,091

4,100

 
 
Member Units (Milton Meisler Holdings, LLC) (8,000 units)
—
—

800

800

 
 
 
 
 
4,891

4,900

MHVC Acquisition Corp. (8)
Provider of Differentiated Information Solutions, Systems Engineering and Analytics
LIBOR Plus 5.25% (Floor 1.00%), Current Coupon 6.49%, Secured Debt (Maturity - April 29, 2024)
1 month LIBOR
10,474

10,424

10,592

Minute Key, Inc. (10) (13)
Operator of Automated Key Duplication Kiosk
12.00% Secured Debt (Maturity - September 19, 2019) (14)
None
4,146

4,079

4,146

 
 
Warrants (359,352 equivalent units, Expiration - May 20, 2025)
—
—

70

263

 
 
 
 
 
4,149

4,409

NBG Acquisition, Inc. (8)
Wholesaler of Home Decor Products
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.91%, Secured Debt (Maturity - April 26, 2024)
6 month LIBOR
$
4,430

$
4,361

$
4,408

New Media Holdings II LLC (8) (9)
Local Newspaper Operator
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 7.49%, Secured Debt (Maturity - July 14, 2022)
1 month LIBOR
17,075

16,791

17,102

NNE Issuer, LLC (8) (11)
Oil & Gas Exploration & Production
LIBOR Plus 8.00%, Current Coupon 9.32%, Secured Debt (Maturity - March 2, 2022)
3 month LIBOR
10,500

10,407

10,407

North American Lifting Holdings, Inc. (8)
Crane Service Provider
LIBOR Plus 4.50% (Floor 1.00%), Current Coupon 5.83%, Secured Debt (Maturity - November 27, 2020)
3 month LIBOR
6,326

5,634

5,836

Novetta Solutions, LLC (8)(12)
Provider of Advanced Analytics Solutions for Defense Agencies
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.34%, Secured Debt (Maturity - October 17, 2022)
3 month LIBOR
8,649

8,421

8,411

NTM Acquisition Corp. (8)
Provider of B2B Travel Information Content
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 7.55%, Secured Debt (Maturity - June 7, 2022)
3 month LIBOR
11,052

10,935

10,997

Pardus Oil & Gas, LLC
Oil & Gas Exploration and Production
13.00% PIK, Secured Debt (Maturity - November 12, 2021)
None
1,053

1,053

693

 
 
5.00% PIK, Secured Debt (Maturity - May 13, 2022) (14)
None
543

543

70

 
 
Class A units (1,331 units)
—
—

1,331

—

 
 
 
 
 
2,927

763

Paris Presents, Inc. (8)
Branded Cosmetic and Bath Accessories
LIBOR Plus 8.75% (Floor 1.00%), Current Coupon 9.99%, Secured Debt (Maturity - December 31, 2021) (14)
1 month LIBOR
10,000

9,894

9,900

Parq Holdings, LP (8) (9)
Hotel and Casino Operator
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 8.73%, Secured Debt (Maturity - December 17, 2020)
1 month LIBOR
12,500

12,337

12,469

Permian Holdco 2, Inc.
Storage Tank Manufacturer
14.00% PIK Unsecured Debt (Maturity - October 15, 2021) (17)
None
548

548

548

 
 
Series A Preferred Shares (Permian Holdco 1, Inc.) (386,255 units) (12.00% Cumulative) (16)
—
—

2,109

2,109

 
 
Common Shares (Permian Holdco 1, Inc.) (386,255 units)
—
—

—

—

 
 
 
 
 
2,657

2,657

Permian Holdings, Inc.
Storage Tank Manufacturer
10.50% Secured Debt (Maturity - January 15, 2018)
None
1,000

760

290

Pernix Therapeutics Holdings, Inc. (11)
Pharmaceutical Royalty - Anti-Migraine
12.00% Secured Debt (Maturity - August 1, 2020)
None
2,737

2,716

1,725

PPC/Shift, LLC (8) (11)
Provider of Digital Solutions to Automotive Industry
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.33%, Secured Debt (Maturity - December 22, 2021)
3 month LIBOR
6,869

6,749

6,869

Prowler Acquisition Corporation (8)
Specialty Distributor to the Energy Sector
LIBOR Plus 4.50% (Floor 1.00%), Current Coupon 5.83%, Secured Debt (Maturity - January 28, 2020)
3 month LIBOR
12,445

11,101

11,076

PSC Industrial Holdings Corp. (8)
Diversified Industrial Service Provider
LIBOR Plus 4.75% (Floor 1.00%), Current Coupon 5.99%, Secured Debt (Maturity - December 5, 2020)
1 month LIBOR
5,596

5,275

5,587

Redbox Automated Retail, LLC (8)
Operator of Home Media Entertainment Kiosks
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 8.74%, Secured Debt (Maturity - September 27, 2021)
1 month LIBOR
10,500

10,176

10,605

Renaissance Learning, Inc. (8)
Technology-based K-12 Learning Solutions
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.33%, Secured Debt (Maturity - April 11, 2022) (14)
3 month LIBOR
12,695

12,344

12,854

Resolute Industrial, LLC (8) (11)
HVAC Equipment Rental and Remanufacturing
LIBOR Plus 6.40% (Floor 1.00%), Current Coupon 7.73%, Secured Debt (Maturity - July 26, 2022) (25)
3 month LIBOR
17,167

16,622

16,730

 
 
Common Stock (601 units)
—
—
750

750

 
 
 
 
 
17,372

17,480

RGL Reservoir Operations, Inc. (8) (9)
Oil & Gas Equipment & Services
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.32%, Secured Debt (Maturity - August 13, 2021)
3 month LIBOR
3,880

3,808

698

 
 
 
 
 
 
 
 
 
 
 
 
 
 
RM Bidder, LLC (11)
Full-scale Film and Television Production and Distribution
Common Stock (1,854 units)
—
$
—

$
31

$
17

 
 
Series A Warrants (124,915 equivalent units, Expiration - October 20, 2025)
—
—
284

—

 
 
Series B Warrants (93,686 equivalent units, Expiration - October 20, 2025)
—
—
—

—

 
 
 
 
 
315

17

Salient Partners, LP (8)
Provider of Asset Management Services
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 9.80%, Secured Debt (Maturity - June 9, 2021)
3 month LIBOR
11,200

10,884

10,864

Sigma Electric Manufacturing Corp. (8) (9) (11)
Manufacturer and Distributor of Electrical Fittings and Parts
LIBOR Plus 7.25% (Floor 1.00%), Current Coupon 8.58%, Secured Debt (Maturity - October 13, 2021)
3 Month LIBOR
12,437

12,176

12,437

Smart Modular Technologies, Inc. (8)(9)(11)
Provider of Specialty Memory Solutions
LIBOR Plus 6.25%, (Floor 1.00%), Current Coupon 7.56%, Secured Debt (Maturity - August 9, 2022)
3 month LIBOR
15,000

14,708

14,925

Sorenson Communications, Inc.
Manufacturer of Communication Products for Hearing Impaired
9.00% Secured Debt (Maturity - October 31, 2020) (14)
None
13,210

12,857

12,879

 
 
LIBOR Plus 5.75% (Floor 2.25%), Current Coupon 8.00%, Secured Debt (Maturity - April 30, 2020)
3 month LIBOR
2,954

2,938

2,975

 
 
 
 
 
15,795

15,854

Strike, LLC (8)
Pipeline Construction and Maintenance Services
LIBOR Plus 8.00% (Floor 1.00%), Current Coupon 9.50%, Secured Debt (Maturity - November 30, 2022)
3 month LIBOR
9,625

9,363

9,769

 
 
LIBOR Plus 8.00% (Floor 1.00%), Current Coupon 9.45%, Secured Debt (Maturity - May 30, 2019)
3 month LIBOR
500

475

513

 
 
 
 
 
9,838

10,282

Synagro Infrastructure Company, Inc. (8)
Waste Management Services
LIBOR Plus 5.25% (Floor 1.00%), Current Coupon 6.58%, Secured Debt (Maturity - August 22, 2020)
3 month LIBOR
5,384

5,250

5,142

TE Holdings, LLC
Oil & Gas Exploration & Production
Common Units (72,785 units)
—
—
728

218

Teleguam Holdings, LLC (8)
Cable and Telecom Services Provider
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 9.73%, Secured Debt (Maturity - July 25, 2024) (14)
1 month LIBOR
7,750

7,598

7,828

TMC Merger Sub Corp (8)
Refractory & Maintenance Services Provider
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - October 31, 2022) (26)
1 month LIBOR
14,734

14,602

14,808

TOMS Shoes, LLC (8)
Global Designer, Distributor, and Retailer of Casual Footwear
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.82%, Secured Debt (Maturity - October 30, 2020)
3 month LIBOR
4,875

4,595

2,331

Turning Point Brands, Inc. (8) (9) (11)
Marketer/Distributor of Tobacco Products
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.32%, Secured Debt (Maturity - May 17, 2022) (25)
3 month LIBOR
8,458

8,381

8,436

TVG-I-E CMN Acquisition, LLC (8)(11)
Organic Lead Generation for Online Postsecondary Schools
LIBOR Plus 6.00%, (Floor 1.00%), Current Coupon 7.24%, Secured Debt (Maturity - November 3, 2021)
1 month LIBOR
6,338

6,229

6,338

U.S. Telepacific Corp. (8)
Provider of Communications and Managed Services
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.32%, Secured Debt (Maturity - May 2, 2023)
3 month LIBOR
14,963

14,597

14,611

USJ-IMECO Holding Company, LLC (8)
Marine Interior Design and Installation
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.34%, Secured Debt (Maturity - April 16, 2020)
3 month LIBOR
8,264

8,243

8,202

Valley Healthcare Group, LLC (8) (10) (13)
Provider of Durable Medical Equipment
LIBOR Plus 12.50% (Floor 0.50%), Current Coupon 13.74%, Secured Debt (Maturity - December 29, 2020)
1 month LIBOR
2,962

2,918

2,918

 
 
Preferred Member Units (Valley Healthcare Holding, LLC) (400 units)
—
—

400

400

 
 
 
 
 
3,318

3,318

VIP Cinema Holdings, Inc. (8)
Supplier of Luxury Seating to the Cinema Industry
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.34%, Secured Debt (Maturity - March 1, 2023)
3 month LIBOR
9,750

9,705

9,854

 
 
 
 
 
 
 
Vistar Media, Inc. (8) (11)
Operator of Digital Out-of-Home Advertising Platform
LIBOR Plus 10.00% (Floor 1.00%), Current Coupon 11.33%, Secured Debt (Maturity - February 16, 2022)
3 month LIBOR
$
3,375

$
3,086

$
3,088

 
 
Warrants (64,025 equivalent units, Expiration - February 17, 2027)
—
—
331

331

 
 
 
 
 
3,417

3,419

Volusion, LLC (10) (13)
Provider of Online Software-as-a-Service eCommerce Solutions
11.50% Secured Debt (Maturity - January 24, 2020)
None
7,172

6,385

6,385

 
 
Preferred Member Units (2,090,001 units)
—
—
6,000

6,000

 
 
Warrants (784,866.80 equivalent units, Expiration - January 26, 2025)
—
—
1,104

960

 
 
 
 
 
13,489

13,345

Wellnext, LLC (8) (11)
Manufacturer of Supplements and Vitamins
LIBOR Plus 7.50% (Floor 0.50%), Current Coupon 8.74%, Secured Debt (Maturity - July 21, 2022) (24)
1 month LIBOR
9,930

9,852

9,930

Wireless Vision Holdings, LLC (8)(11)
Provider of Wireless Telecommunications Carrier Services
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 9.83%, Secured Debt (Maturity - September 29, 2022) (24)
3 month LIBOR
6,711

6,369

6,369

Wirepath, LLC (8)
E-Commerce Provider Into Connected Home Market
LIBOR Plus 5.25% (Floor 1.00%), Current Coupon 6.56%, Secured Debt (Maturity - August 5, 2024)
3 month LIBOR
11,500

11,443

11,593

 
 
 
 
 
 
 
Subtotal Non-Control/Non-Affiliate Investments (5) (89% of total portfolio investments at fair value)
 
 
$
996,358

$
967,475

 
 
 
 
 
 
 
Total Portfolio Investments
 
 
 
 
$
1,110,886

$
1,090,706

 
 
 
 
 
 
 
Short Term Investments (20)
 
 
 
 
 
 
Fidelity Institutional Money Market Funds (21)
—
Prime Money Market Portfolio, Class III Shares
—
—
$
21,316

$
21,316

UMB Bank Money Market Account (21)
—
—
 
 
532

532

US Bank Money Market Account (21)
—
—
—
—
14,409

14,409

 
 
 
 
 
 
 
Total Short Term Investments
 
 
 
 
$
36,257

$
36,257

(1) All investments are Middle Market portfolio investments, unless otherwise noted. All of the Company’s assets are encumbered as security for the Company’s credit agreements. See Note 5 - Borrowings.
(2) Debt investments are income producing, unless otherwise noted. Equity investments and warrants are non-income producing, unless otherwise noted.
(3) See Note 3 - Fair Value Hierarchy for Investments for summary geographic location of portfolio companies.
(4) Affiliate investments are generally defined by the Investment Company Act of 1940, as amended (the “1940 Act”), as investments in which between 5% and 25% of the voting securities are owned, or an investment in an investment company’s investment adviser, and the investments are not classified as Control investments.
(5) Non-Control/Non-Affiliate investments are generally defined by the 1940 Act as investments that are neither Control investments nor Affiliate investments.
(6) Control investments are generally defined by the 1940 Act as investments in which more than 25% of the voting securities are owned or where the ability to nominate greater than 50% of the board representation is maintained.
(7) Principal is net of repayments. Cost represents amortized cost which is net of repayments and adjusted for the amortization of premiums and/or accretion of discounts, as applicable.
(8) Index based floating interest rate is subject to contractual minimum interest rates.
(9) The investment is not a qualifying asset in an eligible portfolio company under Section 55(a) of the 1940 Act. A business development company (“BDC”) may not acquire any asset other than qualifying assets in eligible portfolio companies unless, at the time the acquisition is made, qualifying assets represent at least 70% of the BDC’s total assets. As of September 30, 2017, approximately 15.6% of the Company’s total assets were considered non-qualifying.
(10) Investment is classified as a Lower Middle Market investment.
(11) Investment is classified as a Private Loan portfolio investment.
(12) Investment or portion of investment is under contract to purchase and met trade date accounting criteria as of September 30, 2017. Settlement occurred or is scheduled to occur after September 30, 2017.
(13) Investment serviced by Main Street Capital Corporation pursuant to servicing arrangements with the Company.
(14) Second lien secured debt investment.
(15) Investment is classified as an Other Portfolio investment.
(16) Income producing through dividends or distributions.
(17) Unsecured debt investment.
(18) Investment is on non-accrual status as of September 30, 2017.
(19) Maturity date is under on-going negotiations with the portfolio company and other lenders, if applicable.
(20) Short term investments represent an investment in a fund that invests in highly liquid investments with average original maturity dates of three months or less.
(21) Effective yield as of September 30, 2017 was approximately 0.01%.
(22) The 1, 2, 3, and 6-month London Interbank Offered Rate (“LIBOR”) rates were 1.24%, 1.27%, 1.34% and 1.51%, respectively, as of September 30, 2017. The actual LIBOR rate for each loan listed may not be the applicable LIBOR rate as of September 30, 2017, as the loan may have been priced or repriced based on a LIBOR rate prior to or subsequent to September 30, 2017. The prime rate was 4.25% as of September 30, 2017.
(23) Transactions for the nine months ended September 30, 2017 with HMS-ORIX SLF LLC are as follows:
 
 
 
 
Nine Months Ended September 30, 2017
 
 
 
Nine Months Ended September 30, 2017
Company
 
Fair Value at December 31, 2016
 
Contributions (Cost)
 
Redemptions (Cost)
 
Net Unrealized Gain (Loss)
 
Fair Value at September 30, 2017
 
Net Realized Gain (Loss)
Dividend Income
HMS-ORIX SLF LLC*
 
$
—

 
$
30,000

 
$
—

 
$
516

 
$
30,516

 
$
—

$
—

* Together with ORIX Funds Corp. (“Orix”), the Company co-invests through HMS-ORIX SLF LLC (“HMS-ORIX”), which is organized as a Delaware limited liability company. Pursuant to the terms of the limited liability company agreement and through representation on the HMS-ORIX Board of Managers, the Company and Orix each have 50% voting control of HMS-ORIX and together will agree on all portfolio and investment decisions as well as all other significant actions for HMS-ORIX. Therefore, although the Company owns more than 25% of the voting securities of HMS-ORIX, the Company does not have control over HMS-ORIX for purposes of the 1940 Act or otherwise.
(24) The Company has entered into an intercreditor agreement that entitles the Company to the "last out" tranche of the first lien secured loans, whereby the "first out" tranche receives priority over the "last out" tranche with respect to payments of principal, interest and any other amounts due thereunder. Therefore, the Company receives a higher interest rate than the contractual stated interest rate of LIBOR plus 7.50% (Floor 1.00%) per the credit agreement and the Condensed Consolidated Schedule of Investments above reflects such higher rate.
(25) As part of the credit agreement with the portfolio company, the Company is entitled to the "last out" tranche of the first lien secured loans, whereby the "first out" tranche receives priority over the "last out" tranche with respect to payments of principal, interest and any other amounts due thereunder. The rate the Company receives per the credit agreement is the same as the rate reflected in the Condensed Consolidated Schedule of Investments above.
(26) The Company has entered into an intercreditor agreement that entitles the Company to the "first out" tranche of the first lien secured loans, whereby the "first out" tranche receives priority over the "last out" tranche with respect to payments of principal, interest and any other amounts due thereunder. Therefore, the Company receives a lower interest rate than the contractual stated interest rate of LIBOR plus 6.64% (Floor 1.00%) per the credit agreement and the Condensed Consolidated Schedule of Investments above reflects such lower rate.
(27) The fair value of the investment was determined using significant unobservable inputs. See Note 3 - Fair Value Hierarchy for Investments.


See notes to the condensed consolidated financial statements.

5


HMS Income Fund, Inc.
Condensed Consolidated Schedule of Investments
As of December 31, 2016
(dollars in thousands)
Portfolio Company (1) (3)
Business Description
Type of Investment (2) (3)
Index Rate (22)
Principal (7)
Cost (7)
Fair Value
 
 
Control Investments (6)
GRT Rubber Technologies, LLC (8) (10) (13)
Engineered Rubber Product Manufacturer
LIBOR Plus 9.00% (Floor 1.00%), Current Coupon 10.00%, Secured Debt (Maturity - December 19, 2019)
1 month LIBOR
$
6,538

$
6,448

$
6,538

 
 
Member Units (2,896 shares)
—
—

6,435

10,004

 
 
 
 
 
12,883

16,542

 
 
 
 
 
 
 
Subtotal Control Investments (6) (2% of total investments at fair value)
 
 
$
12,883

$
16,542

 
Affiliate Investments (4)
AFG Capital Group, LLC (10) (13)
Provider of Rent-to-Own Financing Solutions and Services
Member Units (46 shares)
—
$
—

$
300

$
687

 
 
Warrants (10 equivalent shares, Expiration - November 7, 2024)
—
—

65

167

 
 
 
 
 
365

854

Clad-Rex Steel, LLC (10) (13)
Specialty Manufacturer of Vinyl-Clad Metal
LIBOR Plus 9.50% (Floor 1.00%), Current Coupon 10.50%, Secured Debt (Maturity - December 20, 2021) (8)
1 month LIBOR
3,520

3,449

3,449

 
 
LIBOR Plus 9.50% (Floor 1.00%), Current Coupon 10.50%, Secured Debt (Maturity - December 20, 2018) (8)
1 month LIBOR
100

99

99

 
 
Member Units (179 units)
—
—

1,820

1,820

 
 
10.00% Secured Debt (Clad-Rex Steel RE Investor, LLC) (Maturity - December 20, 2036)
None
301

298

298

 
 
Member Units (Clad-Rex Steel RE Investor, LLC) (200 units)
—
—

53

53

 
 
 
 
 
5,719

5,719

EIG Traverse Co-Investment, LP (9) (15)
Investment Partnership
LP Interests (EIG Traverse Co-Investment, LP) (Fully diluted 22.20%) (16)
—
—

9,805

9,905

Freeport First Lien Loan Fund III, LP (9) (15)
Investment Partnership
LP Interests (Freeport First Lien Loan Fund III, LP) (Fully diluted 5.60%) (16)
—
—

4,763

4,763

Gamber-Johnson Holdings, LLC (8) (10) (13)
Manufacturer of Ruggedized Computer Mounting Systems
LIBOR Plus 11.00% (Floor 1.00%), Current Coupon 12.00%, Secured Debt (Maturity - June 24, 2021)
1 month LIBOR
6,020

5,902

5,964

 
 
Member Units (2,155 units)
 
—

3,711

4,730

 
 
 
 
 
9,613

10,694

Guerdon Modular Holdings, Inc. (10) (13)
Multi-Family and Commercial Modular Construction Company
9.00% Current / 4.00% PIK Secured Debt (Maturity - August 13, 2019)
None
2,668

2,621

2,642

 
 
Common Stock (53,008 shares)
—
—

746

20

 
 
Class B Preferred Stock (101,250 shares)
—
—

285

285

 
 
 
 
 
3,652

2,947

Gulf Publishing Holdings, LLC (10) (13)
Energy Focused Media and Publishing
12.50% Secured Debt (Maturity - April 29, 2021)
None
2,500

2,455

2,455

 
 
Member Units (781 shares)
 
—

781

781

 
 
 
 
 
3,236

3,236

Hawk Ridge Systems, LLC (9) (10) (13)
Value-Added Reseller of Engineering Design and Manufacturing Solutions
10.00% Secured Debt (Maturity - December 2, 2021)
None
2,500

2,451

2,451

 
 
Preferred Member Units (56 units)
—
—

713

713

 
 
Preferred Member Units (HRS Services, ULC) (56 units)
—
—

38

38

 
 
 
 
 
3,202

3,202

HW Temps LLC (8) (10) (13)
Temporary Staffing Solutions
LIBOR Plus 13.00% (Floor 1.00%), Current Coupon 14.00%, Secured Debt (Maturity - July 2, 2020)
1 month LIBOR
2,644

2,591

2,591

 
 
Preferred Member Units (800 shares) (16)
—
—

986

985

 
 
 
 
 
3,577

3,576

M.H. Corbin Holding, LLC (10) (13)
Manufacturer and Distributor of Traffic Safety Products
10.00% Secured Debt (Maturity - August 31, 2021)
None
3,325

3,299

3,299

 
 
Preferred Member Units (1,000 shares)
 
—

1,500

1,500

 
 
 
 
 
4,799

4,799

 
 
 
 
 
 
 
Mystic Logistics, Inc. (10) (13)
Logistics and Distribution Services Provider for Large Volume Mailers
12.00% Secured Debt (Maturity - August 15, 2019)
None
$
2,294

$
2,246

$
2,294

 
 
Common Stock (1,468 shares) (16)
—
—

680

1,445

 
 
 
 
 
2,926

3,739

SoftTouch Medical Holdings LLC (8) (10) (13)
Home Provider of Pediatric Durable Medical Equipment
LIBOR Plus 9.00% (Floor 1.00%), Current Coupon 10.00%, Secured Debt (Maturity - October 31, 2019)
1 month LIBOR
1,260

1,244

1,260

 
 
Member Units (785 units) (16)
—
—

870

1,618

 
 
 
 
 
2,114

2,878

 
 
 
 
 
 
 
Subtotal Affiliate Investments (4) (6% of total investments at fair value)
 
 
$
53,771

$
56,312

 
 
 
 
 




Non-Control/Non-Affiliate Investments (5)
Adams Publishing Group, LLC (8) (11)
Local Newspaper Operator
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.00%, Secured Debt (Maturity - November 3, 2020)
3 month LIBOR
$
7,589

$
7,459

$
7,589

ADS Tactical, Inc. (8) (11)
Value-Added Logistics and Supply Chain Solutions Provider
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 8.50%, Secured Debt (Maturity - December 31, 2022)
3 month LIBOR
10,000

9,750

9,750

Ahead, LLC (8) (11)
IT Infrastructure Value Added Reseller
LIBOR Plus 6.50%, Current Coupon 7.50%, Secured Debt (Maturity - November 2, 2020)
3 month LIBOR
9,500

9,267

9,536

Allflex Holdings III Inc. (8)
Manufacturer of Livestock Identification Products
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.00%, Secured Debt (Maturity - July 19, 2021) (14)
6 month LIBOR
14,922

15,012

14,936

American Scaffold Holdings, Inc. (8) (11)
Marine Scaffolding Service Provider
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - March 31, 2022)
1 month LIBOR
7,359

7,257

7,323

American Teleconferencing Services, Ltd. (8)
Provider of Audio Conferencing and Video Collaboration Solutions
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - December 8, 2021)
3 month LIBOR
10,056

9,122

9,848

 
 
LIBOR Plus 9.50% (Floor 1.00%), Current Coupon 10.50%, Secured Debt (Maturity - June 6, 2022) (14)
3 month LIBOR
5,571

5,353

5,353

 
 
 
 
 
14,475

15,201

AmeriTech College Operations, LLC (10) (13)
For-Profit Nursing and Healthcare College
13.00% Secured Debt (Maturity - January 31, 2020)
None
375

375

375

 
 
10.00% Secured Debt (Maturity - November 30, 2019)
None
61

61

61

 
 
13.00% Secured Debt (Maturity - November 30, 2019)
None
64

64

64

 
 
Preferred Member Units (364 units, 5.00% cumulative) (16)
—
—

284

284

 
 
 
 
 
784

784

AP Gaming I, LLC (8) (11)
Developer, Manufacturer and Operator of Gaming Machines
LIBOR Plus 8.25% (Floor 1.00%), Current Coupon 9.25%, Secured Debt (Maturity - December 21, 2020)
3 month LIBOR
11,291

11,194

11,267

Apex Linen Service, Inc. (10) (13)
Industrial Launderers
13.00% Secured Debt (Maturity - October 30, 2022)
None
3,604

3,545

3,545

 
 
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - October 30, 2022)
1 month LIBOR
600

600

600

 
 
 
 
 
4,145

4,145

Arcus Hunting, LLC (8) (11)
Manufacturer of Bowhunting and Archery Products and Accessories
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.00%, Secured Debt (Maturity - November 13, 2019)
1 month LIBOR
6,973

6,850

6,973

Artel, LLC (8) (12)
Provider of Secure Satellite Network and IT Solutions
LIBOR Plus 7.00% (Floor 1.25%), 7.25% Current/1.00% PIK, Current Coupon 8.25%, Secured Debt (Maturity - November 27, 2017)
3 month LIBOR
5,173

5,000

4,837

ATI Investment Sub, Inc. (8)
Manufacturer of Solar Tracking Systems
LIBOR Plus 7.25% (Floor 1.00%), Current Coupon 8.25%, Secured Debt (Maturity - June 22, 2021)
1 month LIBOR
9,500

9,322

9,476

ATX Networks Corp. (8) (9)
Provider of Radio Frequency Management Equipment
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - June 11, 2021)
3 month LIBOR
14,775

14,541

14,516

 
 
 
 
 
 
 
BarFly Ventures, LLC (11)
Casual Restaurant Group
12.00% Secured Debt (Maturity - August 30, 2020)
None
$
1,986

$
1,953

$
1,942

 
 
Warrants (.410 equivalent units, Expiration - August 31, 2025)
—
—

158

94

 
 
Options (.731 equivalent units)
—
—

133

164

 
 
 
 
 
2,244

2,200

BBB Tank Services, LLC (10) (13)
Maintenance, Repair and Construction Services to the Above-Ground Storage Tank Market
15% Current Secured Debt (Maturity - April 8, 2021)
None
1,007

989

989

 
 
LIBOR Plus 9.50% (Floor 1.00%), Current Coupon 10.50%, Secured Debt (Maturity - April 8, 2021)
1 month LIBOR
200

200

200

 
 
Member Units (200,000 units)
—
—

200

200

 
 
 
 
 
1,389

1,389

Berry Aviation, Inc. (11)
Airline Charter Service Operator
12.00% Current / 1.75% PIK, Current Coupon 13.75%, Secured Debt (Maturity - January 30, 2020) (14)
None
1,407

1,390

1,407

 
 
Common Stock (138 shares)
—
—
100

205

 
 
 
 
 
1,490

1,612

Bluestem Brands, Inc. (8)
Multi-Channel Retailer of General Merchandise
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 8.50%, Secured Debt (Maturity - November 6, 2020)
3 month LIBOR
13,812

13,582

12,039

Brightwood Capital Fund III, LP (9) (15)
Investment Partnership
LP Interests (Brightwood Capital Fund III, LP) (Fully diluted .52%) (16)
—
—
4,075

3,698

Brundage-Bone Concrete Pumping, Inc.
Construction Services Provider
10.38% Secured Debt (Maturity - September 1, 2021) (14)
None
12,000

12,088

12,960

Buca C, LLC (8) (10) (13)
Casual Restaurant Group
LIBOR Plus 7.25% (Floor 1.00%), Current Coupon 8.25%, Secured Debt (Maturity - June 30, 2020)
1 month LIBOR
15,114

14,889

15,114

 
 
Preferred Member Units (4 units, 6.00% cumulative) (16)
—
—

2,547

3,110

 
 
 
 
 
17,436

18,224

CAI Software, LLC (10) (13)
Provider of Specialized Enterprise Resource Planning Software
12.00% Secured Debt (Maturity - October 10, 2019)
None
921

904

921

 
 
Member Units (16,339 units)
—
—

163

620

 
 
 
 
 
1,067

1,541

CapFusion Holding, LLC (9) (10) (13)
Business Lender
13.00% Secured Debt (Maturity - March 25, 2021)
None
3,600

3,289

3,289

 
 
Warrants (400 equivalent units, Expiration - March 24, 2026)
—
—

300

300

 
 
 
 
 
3,589

3,589

CDHA Management, LLC (8) (11)
Dental Services
Prime Plus 6.25% (Floor 3.75%), Current Coupon 10.00%, Secured Debt (Maturity - December 5, 2021)
PRIME
4,491

4,376

4,376

 
 
Prime Plus 6.25% (Floor 3.75%), Current Coupon 10.00%, Secured Debt (Maturity - December 5, 2021)
PRIME
—

—

—

 
 
 
 
 
4,376

4,376

Cenveo Corporation
Provider of Commercial Printing, Envelopes, Labels, Printed Office Products
6.00% Secured Debt (Maturity - August 1, 2019)
None
15,000

13,013

13,388

Charlotte Russe, Inc. (8)
Fast-Fashion Retailer to Young Women
LIBOR Plus 5.50% (Floor 1.25%), Current Coupon 6.75%, Secured Debt (Maturity - May 22, 2019)
3 month LIBOR
15,101

14,918

9,184

CJ Holding Company (8)
Oil and Gas Equipment and Services
LIBOR Plus 9.00% (Floor 1.00%), Current Coupon 10.00%, Secured Debt (Maturity - March 31, 2017)
3 month LIBOR
83

85

83

Clarius BIGS, LLC (11) (18)
Prints & Advertising Film Financing
15.00% PIK Secured Debt (Maturity - January 5, 2015) (18)
None
2,144

1,886

64

 
 
20.00% PIK Secured Debt (Maturity - January 5, 2015) (18)
None
774

681

23

 
 
 
 
 
2,567

87

Compuware Corporation (8)
Provider of Software and Supporting Services
LIBOR Plus 5.25% (Floor 1.00%), Current Coupon 6.25%, Secured Debt (Maturity - December 15, 2019)
3 month LIBOR
12,265

12,004

12,341

Construction Supply Investments, LLC (8) (11)
Distribution Platform of Specialty Construction Materials to Professional Concrete and Masonry Contractors
LIBOR Plus 9.50% (Floor 1.00%), Current Coupon 10.50%, Secured Debt (Maturity - June 30, 2023)
3 month LIBOR
$
8,500

$
8,305

$
8,330

 
 
Member units (20,000 units)
—
—

2,000

2,000

 
 
 
 
 
10,305

10,330

ContextMedia Health, LLC (8) (12)
Provider of Healthcare Media Content
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - December 21, 2021)
1 month LIBOR
10,000

9,000

9,150

Covenant Surgical Partners, Inc.
Ambulatory Surgical Centers
8.75% Secured Debt (Maturity - August 1, 2019)
None
9,500

9,500

9,168

CRGT, Inc. (8)
Provider of Custom Software Development
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - December 18, 2020)
1 month LIBOR
9,642

9,492

9,666

CST Industries, Inc. (8)
Storage Tank Manufacturer
LIBOR Plus 6.25% (Floor 1.50%), Current Coupon 7.75%, Secured Debt (Maturity - May 22, 2017)
3 month LIBOR
2,759

2,766

2,759

Datacom, LLC (10) (13)
Technology and Telecommunications Provider
5.25% Current / 5.25% PIK, Current Coupon 10.50% Secured Debt (Maturity - May 30, 2019)
None
1,296

1,282

1,222

 
 
8.00% Secured Debt (Maturity - May 30, 2017)
—
100

100

100

 
 
Class A Preferred Member Units (1,530 units, 15.00% cumulative) (16)
—
—

131

152

 
 
Class B Preferred Member Units (717 units)
—
—

670

170

 
 
 
 
 
2,183

1,644

Digital River, Inc. (8)
Provider of Outsourced e-Commerce Solutions and Services
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - February 12, 2021)
3 month LIBOR
14,586

14,477

14,713

Digital Room, LLC (8)
Organic Lead Generation for Online Postsecondary Schools
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - November 21, 2022)
3 month LIBOR
7,625

7,475

7,549

East West Copolymer & Rubber, LLC (10) (13)
Manufacturer of Synthetic Rubbers
12.00% Current / 2.00% PIK, Current Coupon 14.00%, Secured Debt (Maturity - October 17, 2019)
None
2,400

2,351

2,136

 
 
Warrants (627,697 equivalent shares, Expiration - October 15, 2024)
—
—

13

—

 
 
 
 
 
2,364

2,136

ECP-PF Holdings Groups, Inc. (11)
Fitness Club Operator
LIBOR Plus 9.00% (Floor 1.00%), Current Coupon 10.00%, Secured Debt (Maturity - November 26, 2019)
3 month LIBOR
1,875

1,863

1,875

Evergreen Skills Lux S.á r.l. (d/b/a Skillsoft) (8) (9)
Technology-Based Performance Support Solutions
LIBOR Plus 8.25% (Floor 1.00%), Current Coupon 9.34%, Secured Debt (Maturity - April 28, 2022) (14)
6 month LIBOR
10,902

10,443

8,214

Flavors Holdings, Inc. (8)
Global Provider of Flavoring and Sweetening Products and Solutions
LIBOR Plus 5.75% (Floor 1.00%), Current Coupon 6.75%, Secured Debt (Maturity - April 3, 2020)
3 month LIBOR
11,774

11,236

9,596

GST Autoleather, Inc. (8)
Automotive Leather Manufacturer
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity - July 10, 2020)
3 month LIBOR
12,204

12,073

11,929

Guitar Center, Inc.
Musical Instruments Retailer
6.50% Secured Debt (Maturity - April 15, 2019)
None
15,015

14,128

13,626

Hojeij Branded Foods, LLC (8) (11)
Multi-Airport, Multi-Concept Restaurant Operator
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - July 28, 2021)
3 month LIBOR
5,419

5,376

5,419

Hoover Group, Inc. (8) (9) (11)
Provider of Storage Tanks and Related Products to the Energy and Petrochemical Markets
LIBOR Plus 7.25% (Floor 1.00%), Current Coupon 8.25%, Secured Debt (Maturity - January 28, 2021)
3 month LIBOR
15,000

13,961

13,961

Horizon Global Corporation (8) (9)
Auto Parts Manufacturer
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - June 30, 2021)
1 month LIBOR
12,098

11,893

12,325

Hunter Defense Technologies, Inc. (8)
Provider of Military and Commercial Shelters and Systems
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - August 5, 2019)
3 Month LIBOR
13,847

13,255

12,878

Hygea Holdings Corp. (8) (11)
Provider of Physician Services
LIBOR Plus 9.25%, Current Coupon 10.17%, Secured Debt (Maturity - February 24, 2019)
3 Month LIBOR
7,875

7,378

7,615

 
 
Warrants (5,910,453 equivalent shares, Expiration - February 24, 2023)
—
—

369

1,531

 
 
 
 
 
7,747

9,146

iEnergizer Limited (8) (9)
Provider of Business Outsourcing Solutions
LIBOR 6.00% (Floor 1.25%), Current Coupon 7.25%, Secured Debt (Maturity - May 1, 2019)
1 month LIBOR
$
8,569

$
8,110

$
8,312

Indivior Finance, LLC (8) (9)
Specialty Pharmaceutical Company Treating Opioid Dependence
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - December 19, 2019)
3 month LIBOR
9,000

8,644

9,079

Industrial Container Services, LLC (8) (11)
Steel Drum Reconditioner
LIBOR Plus 5.75% (Floor 1.00%), Current Coupon 6.75%, Secured Debt (Maturity - December 31, 2018)
3 month LIBOR
8,927

8,871

8,927

Industrial Services Acquisitions, LLC (11)
Industrial Cleaning Services
11.25% Current / 0.75% PIK, Current Coupon 12.00%, Unsecured Debt (Maturity - December 17, 2022) (17)
None
10,523

10,325

10,325

 
 
Member units (Industrial Services Investments, LLC) (2,100,000 units)
—
—

2,100

2,100

 
 
 
 
 
12,425

12,425

Inn of the Mountain Gods Resort and Casino
Hotel & Casino Owner & Operator
9.25% Secured Debt (Maturity - November 30, 2020)
None
10,749

10,583

9,782

Intertain Group Limited (8) (9)
Business-to-Consumer Online Gaming Operator
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - April 8, 2022)
3 month LIBOR
8,799

8,633

8,876

iPayment, Inc. (8)
Provider of Merchant Acquisition
LIBOR Plus 5.25% (Floor 1.50%), Current Coupon 6.75%, Secured Debt (Maturity - May 8, 2017)
3 month LIBOR
15,007

14,986

14,481

Ipreo Holdings, LLC
Application Software for Capital Markets
7.25% Unsecured Debt (Maturity - August 1, 2022) (17)
None
6,250

5,318

5,266

iQor US Inc. (8)
Business Process Outsourcing Services Provider
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.00%, Secured Debt (Maturity - April 1, 2021)
1 month LIBOR
7,757

7,331

7,442

IronGate Energy Services, LLC (18)
Oil and Gas Services
11.00% Secured Debt (Maturity - July 1, 2018) (18)
None
5,825

5,827

1,631

Jackmont Hospitality, Inc. (8) (11)
Franchisee of Casual Dining Restaurants
LIBOR Plus 4.25% (Floor 1.00%)/ 2.50% PIK , Current Coupon 7.75%, Secured Debt (Maturity - May 26, 2021)
1 month LIBOR
8,891

8,861

8,891

Joerns Healthcare, LLC (8)
Manufacturer and Distributor of Health Care Equipment & Supplies
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.00%, Secured Debt (Maturity - May 9, 2020)
3 month LIBOR
12,172

11,947

11,442

JSS Holdings, Inc. (8)
Aircraft Maintenance Program Provider
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - August 31, 2021)
3 month LIBOR
13,828

13,550

13,759

Kellermeyer Bergensons Services, LLC (8)
Outsourced Janitorial Services to Retail/Grocery Customers
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 9.50%, Secured Debt (Maturity - April 29, 2022) (14)
3 month LIBOR
14,700

14,603

13,964

Kendra Scott, LLC (8)
Jewelry Retail Stores
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - July 17, 2020)
3 month LIBOR
9,375

9,305

9,328

Keypoint Government Solutions, Inc. (8)
Provider of Pre-Employment Screening Services
LIBOR Plus 6.50% (Floor 1.25%), Current Coupon 7.75%, Secured Debt (Maturity - November 13, 2017)
3 month LIBOR
1,761

1,757

1,752

LaMi Products, LLC (8) (11)
General Merchandise Distribution
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - September 16, 2020)
3 month LIBOR
10,735

10,564

10,730

Larchmont Resources, LLC (8)
Oil & Gas Exploration & Production
LIBOR Plus 9.00% (Floor 1.00%), Current Coupon 10.00% PIK, Secured Debt (Maturity - August 7, 2020)
3 month LIBOR
3,816

3,816

3,731

 
 
Member units (Larchmont Intermediate Holdo, LLC) (4,806 units)
—
—

601

2,027

 
 
 
 
 
4,417

5,758

Legendary Pictures Funding, LLC (8) (11)
Producer of TV, Film, and Comic Content
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - April 22, 2020)
3 month LIBOR
8,020

7,905

8,030

LJ Host Merger Sub, Inc. (8)
Managed Services and Hosting Provider
LIBOR Plus 4.75% (Floor 1.25%), Current Coupon 6.00%, Secured Debt (Maturity - December 13, 2019)
3 month LIBOR
4,846

4,837

4,595

Logix Acquisition Company, LLC (8) (11)
Competitive Local Exchange Carrier
LIBOR Plus 8.28% (Floor 1.00%), Current Coupon 9.28%, Secured Debt (Maturity - June 24, 2021)
3 month LIBOR
8,593

8,455

8,593

Minute Key, Inc. (10) (13)
Operator of Automated Key Duplication Kiosk
10.00% Current / 2.00% PIK Secured Debt (Maturity - September 19, 2019) (14)
None
3,905

3,821

3,821

 
 
Warrants (359,352 equivalent units, Expiration - May 20, 2025)
—
—

70

117

 
 
 
 
 
3,891

3,938

Mood Media Corporation (8) (9)
Provider of Electronic Equipment
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - May 1, 2019)
3 month LIBOR
$
14,822

$
14,741

$
14,328

New Media Holdings II LLC (8) (9)
Local Newspaper Operator
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 7.25%, Secured Debt (Maturity - June 4, 2020)
3 month LIBOR
14,706

14,578

14,633

North American Lifting Holdings, Inc. (8)
Crane Service Provider
LIBOR Plus 4.50% (Floor 1.00%), Current Coupon 5.50%, Secured Debt (Maturity - November 27, 2020)
3 month LIBOR
2,405

2,016

2,101

North Atlantic Trading Company, Inc. (8)
Marketer/Distributor of Tobacco
Prime Plus 5.50% (Floor 3.75%), Current Coupon 9.25%, Secured Debt (Maturity - January 13, 2020)
PRIME
10,897

10,913

10,829

Novitex Acquisition, LLC (8)
Provider of Document Management Services
LIBOR Plus 6.75% (Floor 1.25%), Current Coupon 8.00%, Secured Debt (Maturity - July 7, 2020)
3 month LIBOR
13,322

13,004

12,823

NTM Acquisition Corp. (8)
Provider of B2B Travel Information Content
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 7.25%, Secured Debt (Maturity - June 7, 2022)
3 month LIBOR
4,144

4,085

4,128

Pardus Oil & Gas, LLC
Oil & Gas Exploration and Production
13.00% PIK, Secured Debt (Maturity - November 12, 2021)
None
989

989

989

 
 
5.00% PIK, Secured Debt (Maturity - May 13, 2022) (14)
None
517

517

293

 
 
Class A units (1,331 units)
—
—

1,331

523

 
 
 
 
 
2,837

1,805

Paris Presents, Inc. (8)
Branded Cosmetic and Bath Accessories
LIBOR Plus 8.75% (Floor 1.00%), Current Coupon 9.75%, Secured Debt (Maturity - December 31, 2021) (14)
1 month LIBOR
7,500

7,382

7,350

Parq Holdings, LP (8) (9)
Hotel and Casino Operator
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 8.50%, Secured Debt (Maturity - December 17, 2020)
1 month LIBOR
12,500

12,378

12,313

Permian Holdco 2, Inc.
Storage Tank Manufacturer
14.00% PIK Unsecured Debt (Maturity - October 15, 2021)
None
483

483

483

 
 
Series A Preferred Shares (Permian Holdco 1, Inc.) (386,255 units) (12.00% Cumulative) (16)
—
—

997

997

 
 
Common Shares (Permian Holdco 1, Inc.) (386,255 units)
—
—

997

997

 
 
 
 
 
2,477

2,477

Permian Holdings, Inc.
Storage Tank Manufacturer
10.50% Secured Debt (Maturity - January 15, 2018)
None
1,000

338

338

Pernix Therapeutics Holdings, Inc. (11)
Pharmaceutical Royalty - Anti-Migraine
12.00% Secured Debt (Maturity - August 1, 2020)
None
3,016

2,990

2,910

Pike Corporation (8)
Construction and Maintenance Services for Electric Transmission and Distribution Infrastructure
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 9.50%, Secured Debt (Maturity - June 22, 2022) (14)
1 month LIBOR
13,334

13,070

13,411

Polycom, Inc. (8)
Provider of Audio and Video Communication Solutions
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - September 27, 2023)
3 month LIBOR
12,089

11,617

12,194

PPC/Shift, LLC (8) (11)
Provider of Digital Solutions to Automotive Industry
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - December 22, 2021)
3 month LIBOR
7,000

6,851

6,851

Premier Dental Services, Inc. (8)
Dental Care Services
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - November 1, 2018)
3 month LIBOR
4,511

4,497

4,494

Prowler Acquisition Corporation (8)
Specialty Distributor to the Energy Sector
LIBOR Plus 4.50% (Floor 1.00%), Current Coupon 5.50%, Secured Debt (Maturity - January 28, 2020)
3 month LIBOR
11,329

9,896

8,383

Raley’s, Inc. (8)
Family-Owned Supermarket Chain in California
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 7.25%, Secured Debt (Maturity - May 18, 2022)
3 month LIBOR
4,195

4,125

4,242

Redbox Automated Retail, LLC (8)
Operator of Home Media Entertainment Kiosks
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 8.50%, Secured Debt (Maturity - September 27, 2021)
3 month LIBOR
14,344

13,925

13,989

Renaissance Learning, Inc. (8)
Technology-based K-12 Learning Solutions
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.00%, Secured Debt (Maturity - April 11, 2022) (14)
3 month LIBOR
12,950

12,548

12,896

RGL Reservoir Operations, Inc. (8) (9)
Oil & Gas Equipment & Services
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.00%, Secured Debt (Maturity - August 13, 2021)
3 month LIBOR
3,910

3,826

880

RM Bidder, LLC (11)
Full-scale Film and Television Production and Distribution
Common Stock (1,854 units)
—
$
—

$
31

$
29

 
 
Series A Warrants (124,915 equivalent units, Expiration - October 20, 2025)
—
—

284

200

 
 
Series B Warrants (93,686 equivalent units, Expiration - October 20, 2025)
—
—

—

—

 
 
 
 
 
315

229

Salient Partners, LP (8)
Provider of Asset Management Services
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 9.50%, Secured Debt (Maturity - June 9, 2021)
3 month LIBOR
11,842

11,527

11,338

School Specialty, Inc. (8)
Distributor of Education Supplies and Furniture
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 9.50%, Secured Debt (Maturity - June 11, 2019)
1 month LIBOR
5,467

5,396

5,536

Sigma Electric Manufacturing Corp. (8) (11)
Manufacturer and Distributor of Electrical Fittings and Parts
LIBOR Plus 7.25% (Floor 1.00%), Current Coupon 8.25%, Secured Debt (Maturity - May 13, 2019)
3 Month LIBOR
12,500

12,199

12,199

Sorenson Communications, Inc.
Manufacturer of Communication Products for Hearing Impaired
9.00% Secured Debt (Maturity - October 31, 2020) (14)
None
11,710

11,308

10,305

 
 
LIBOR Plus 5.75% (Floor 2.25%), Current Coupon 8.00%, Secured Debt (Maturity - April 30, 2020)
3 month LIBOR
2,977

2,957

2,955

 
 
 
 
 
14,265

13,260

Strike, LLC (8)
Pipeline Construction and Maintenance Services
LIBOR Plus 8.00% (Floor 1.00%), Current Coupon 9.29%, Secured Debt (Maturity - November 30, 2022)
6 month LIBOR
10,000

9,667

9,900

Synagro Infrastructure Company, Inc. (8)
Waste Management Services
LIBOR Plus 5.25% (Floor 1.00%), Current Coupon 6.25%, Secured Debt (Maturity - August 22, 2020)
3 month LIBOR
2,704

2,687

2,372

TaxAct, Inc. (8)
Provider of Tax Preparation Solutions
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - January 3, 2023)
1 month LIBOR
6,500

6,369

6,549

TE Holdings, LLC
Oil & Gas Exploration & Production
Common Units (72,785 units)
—
—
728

546

Teleguam Holdings, LLC (8)
Cable and Telecom Services Provider
LIBOR Plus 7.50% (Floor 1.25%), Current Coupon 8.75%, Secured Debt (Maturity - June 10, 2019) (14)
1 month LIBOR
6,397

6,387

6,268

 
 
LIBOR Plus 4.00% (Floor 1.25%), Current Coupon 5.25%, Secured Debt (Maturity - December 10, 2018)
1 month LIBOR
7,481

7,335

7,406

 
 
 
 
 
13,722

13,674

TMC Merger Sub Corp (8)
Refractory & Maintenance Services Provider
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 7.25%, Secured Debt (Maturity - October 31, 2022)
1 week LIBOR
12,500

12,376

12,438

The Topps Company, Inc. (8)
Trading Cards & Confectionary
LIBOR Plus 6.00% (Floor 1.25%), Current Coupon 7.25%, Secured Debt (Maturity - October 2, 2018)
3 month LIBOR
1,109

1,104

1,113

TOMS Shoes, LLC (8)
Global Designer, Distributor, and Retailer of Casual Footwear
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity - October 30, 2020)
3 month LIBOR
4,913

4,573

3,635

Travel Leaders Group, LLC (8)
Travel Agency Network Provider
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - December 7, 2020)
1 month LIBOR
15,988

15,900

15,960

TVG-I-E CMN Acquisition, LLC (8) (11)
Organic Lead Generation for Online Postsecondary Schools
LIBOR Plus 6.00%, Current Coupon 7.00%, Secured Debt (Maturity - November 3, 2021)
1 month LIBOR
6,459

6,333

6,333

Unirush LLC (10) (13)
Provider of Prepaid Debit Card Solutions
12.00% Secured Debt (Maturity Date - February 1, 2019)
None
3,000

2,745

3,000

 
 
Warrants (111,181 equivalent units, Expiration - February 2, 2026)
—
—

313

313

 
 
 
 
 
3,058

3,313

U.S. Telepacific Corp. (8) (11)
Provider of Communications and Managed Services
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 9.50%, Secured Debt (Maturity - February 24, 2021)
3 month LIBOR
7,500

7,367

7,367

USJ-IMECO Holding Company, LLC (8)
Marine Interior Design and Installation
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - April 16, 2020)
3 month LIBOR
8,857

8,829

8,813

 
 
 
 
 
 
 
Valley Healthcare Group, LLC (8) (10) (13)
Provider of Durable Medical Equipment
LIBOR Plus 12.50% (Floor 0.50%), Current Coupon 13.12%, Secured Debt (Maturity - December 29, 2020)
1 month LIBOR
$
3,239

$
3,183

$
3,183

 
 
Preferred Member Units (Valley Healthcare Holding, LLC) (400 units)
—
—

400

400

 
 
 
 
 
3,583

3,583

VCVH Holding Corp. (8)
Healthcare Technology Services Focused on Revenue Maximization
LIBOR Plus 9.25% (Floor 1.00%), Current Coupon 10.25%, Secured Debt (Maturity - June 1, 2024) (14)
3 month LIBOR
3,500

3,417

3,474

Volusion, LLC (10) (13)
Provider of Online Software-as-a-Service eCommerce Solutions
11.50% Secured Debt (Maturity - January 24, 2020)
None
7,500

6,484

6,484

 
 
Preferred Member Units (2,090,001 units)
—
—

6,000

6,000

 
 
Warrants (784,866.80 equivalent units, Expiration - January 26, 2025)
—
—

1,104

1,104

 
 
 
 
 
13,588

13,588

Wellnext, LLC (8) (11)
Manufacturer of Supplements and Vitamins
LIBOR Plus 9.00% (Floor 0.50%), Current Coupon 9.85%, Secured Debt (Maturity - May 23, 2021)
3 month LIBOR
10,058

9,966

10,058

Worley Claims Services, LLC (8) (11)
Insurance Adjustment Management and Services Provider
LIBOR Plus 8.00% (Floor 1.00%), Current Coupon 9.00%, Secured Debt (Maturity - October 31, 2020)
1 month LIBOR
6,370

6,326

6,370

YP Holdings LLC (8)
Online and Offline Advertising Operator
LIBOR Plus 11.00% (Floor 1.25%), Current Coupon 12.25%, Secured Debt (Maturity - June 4, 2018)
1 month LIBOR
15,280

15,016

15,241

 
 
 
 
 
 
 
Subtotal Non-Control/Non-Affiliate Investments (5) (91% of total portfolio investments at fair value)
 
 
$
935,741

$
916,393

 
 
 
 
 
 
 
Total Portfolio Investments
 
 
 
 
$
1,002,395

$
989,247

 
 
 
 
 
 
 
Short Term Investments (20)
 
 
 
 
 
 
Fidelity Institutional Money Market Funds (21)
—
Prime Money Market Portfolio, Class III Shares
—
—
$
9,775

$
9,775

UMB Bank Money Market Account (21)
—
—
 
 
642

642

US Bank Money Market Account (21)
—
—
—
—
10,672

10,672

 
 
 
 
 
 
 
Total Short Term Investments
 
 
 
 
$
21,089

$
21,089

(1) All investments are Middle Market portfolio investments, unless otherwise noted. All of the assets of HMS Income Fund, Inc. (the “Company”) are encumbered as security for the Company’s credit agreements. See Note 5 - Borrowings.
(2) Debt investments are income producing, unless otherwise noted. Equity investments and warrants are non-income producing, unless otherwise noted.
(3) See Note 3 - Fair Value Hierarchy for Investments for summary geographic location of portfolio companies.
(4) Affiliate investments are defined by the 1940 Act, as investments in which between 5% and 25% of the voting securities are owned, or an investment in an investment company’s investment adviser, and the investments are not classified as Control investments.
(5) Non-Control/Non-Affiliate investments are defined by the 1940 Act as investments that are neither Control investments nor Affiliate investments.
(6) Control investments are defined by the 1940 Act as investments in which more than 25% of the voting securities are owned or where the ability to nominate greater than 50% of the board representation is maintained.
(7) Principal is net of repayments. Cost represents amortized cost which is net of repayments and adjusted for the amortization of premiums and/or accretion of discounts, as applicable.
(8) Index based floating interest rate is subject to contractual minimum interest rates.
(9) The investment is not a qualifying asset under the 1940 Act. A BDC may not acquire any asset other than qualifying assets unless, at the time the acquisition is made, qualifying assets represent at least 70% of the BDC’s total assets. As of December 31, 2016, approximately 13.8% of the Company’s total assets were considered non-qualifying.
(10) Investment is classified as a Lower Middle Market investment.
(11) Investment is classified as a Private Loan portfolio investment.
(12) Investment or portion of investment is under contract to purchase and met trade date accounting criteria as of December 31, 2016. Settlement occurred or is scheduled to occur after December 31, 2016. See Note 2 - Basis of Presentation and Summary of Significant Accounting Policies for Summary of Security Transactions.
(13) Investment serviced by Main Street pursuant to servicing arrangements with the Company.
(14) Second lien secured debt investment.
(15) Investment is classified as an Other Portfolio investment.
(16) Income producing through dividends or distributions.
(17) Unsecured debt investment.
(18) Investment is on non-accrual status as of December 31, 2016.
(19) Maturity date is under on-going negotiations with the portfolio company and other lenders, if applicable.
(20) Short term investments represent an investment in a fund that invests in highly liquid investments with average original maturity dates of three months or less.
(21) Effective yield as of December 31, 2016 was approximately 0.01%.
(22) The 1 week and 1, 2, 3 and 6 month LIBOR rates were 0.72%, 0.77%, 0.82%, 1.00% and 1.32%, respectively, as of December 31, 2016. The actual LIBOR rate for each loan listed may not be the applicable LIBOR rate as of December 31, 2016, as the loan may have been priced or repriced based on a LIBOR rate prior to or subsequent to December 31, 2016. The prime rate was 3.75% as of December 31, 2016.


See notes to the condensed consolidated financial statements.


6


HMS Income Fund, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Note 1 – Principal Business and Organization

HMS Income Fund, Inc. (together with its consolidated subsidiaries, the “Company”) was formed as a Maryland corporation on November 28, 2011 under the General Corporation Law of the State of Maryland. The Company is an externally managed, non-diversified closed-end management investment company that has elected to be treated as a BDC under the 1940 Act. The Company has elected to be treated for U.S. federal income tax purposes as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).

The Company’s primary investment objective is to generate current income through debt and equity investments. A secondary objective of the Company is to generate long-term capital appreciation through such equity and equity-related investments including warrants, convertible securities and other rights to acquire equity securities. The Company’s portfolio strategy is to invest primarily in illiquid debt and equity securities issued by lower middle market (“LMM”) companies, which generally have annual revenues between $10 million and $150 million, and middle market (“Middle Market”) companies that are generally larger in size than the LMM companies, with annual revenues typically between $10 million and $3 billion. Our LMM and Middle Market portfolio investments generally range in size from $1 million to $15 million. The Company categorizes some of its investments in LMM companies and Middle Market companies as private loan (“Private Loan”) portfolio investments. Private Loan investments, often referred to in the debt markets as “club deals,” are investments, generally in debt instruments, that the Company originates on a collaborative basis with other investment funds. Private Loan investments are typically similar in size, structure, terms and conditions to investments the Company holds in its LMM portfolio and Middle Market portfolio. The Company’s portfolio also includes other portfolio (“Other Portfolio”) investments primarily consisting of the Company’s investment in HMS-ORIX (see Note 4 - Investment in HMS-ORIX SLF LLC) and investments managed by third parties, which differ from the typical profiles for the Company’s other types of investments.

The Company previously registered for sale up to 150,000,000 shares of common stock pursuant to a registration statement on Form N-2 (File No. 333-178548) which was initially declared effective by the Securities and Exchange Commission (the “SEC”) on June 4, 2012 (the “Initial Offering”). The Initial Offering terminated on December 1, 2015. The Company raised approximately $601.2 million under the Initial Offering, including proceeds from the dividend reinvestment plan of approximately $22.0 million. The Company also registered for sale up to $1,500,000,000 worth of shares of common stock (the “Offering”) pursuant to a new registration statement on Form N-2 (File No. 333-204659), as amended, most recently declared effective on May 1, 2017. With the approval of the Company’s board of directors, the Company closed the Offering to new investors effective September 30, 2017. Through September 30, 2017, the Company raised approximately $172.0 million in the Offering, including proceeds from the distribution reinvestment plan of approximately $45.4 million.

The Company has three wholly-owned subsidiaries. HMS Funding I LLC (“HMS Funding”) and HMS Equity Holding, LLC (“HMS Equity Holding”) were both organized as Delaware limited liability companies and HMS Equity Holding II, Inc. (“HMS Equity Holding II”) was organized as a Delaware corporation. HMS Funding was created pursuant to the EverBank Credit Facility (as defined below in Note 5 - Borrowings) in order to function as a “Structured Subsidiary,” which is permitted to incur debt outside of the EverBank Credit Facility since it is not a guarantor under the EverBank Credit Facility. HMS Equity Holding and HMS Equity Holding II, which have elected to be taxable entities, primarily hold equity investments in certain portfolio companies which are “pass through” entities for tax purposes.

The business of the Company is managed by HMS Adviser LP (the “Adviser”), a Texas limited partnership and affiliate of Hines Interests Limited Partnership (“Hines”), under an Investment Advisory and Administrative Services Agreement dated May 31, 2012 (as amended, the “Investment Advisory Agreement”). The Company and the Adviser have retained MSC Adviser I, LLC (the “Sub-Adviser”), a wholly owned subsidiary of Main Street Capital Corporation (“Main Street”), a New York Stock Exchange listed BDC, as the Company’s investment sub-adviser, pursuant to an Investment Sub-Advisory Agreement (the “Sub-Advisory Agreement”), to identify, evaluate, negotiate and structure prospective investments, make investment and portfolio management recommendations for approval by the Adviser, monitor the Company’s investment portfolio and provide certain ongoing administrative services to the Adviser. The Adviser and the Sub-Adviser are collectively referred to as the “Advisers,” and each is registered as an investment adviser under the Investment Advisers Act of 1940, as amended. Upon the execution of the Sub-Advisory Agreement, Main Street became an affiliate of the Company. The Company’s board of directors most recently reapproved the Investment Advisory Agreement and Sub-Advisory Agreement on May 12, 2017. The Company engaged Hines Securities, Inc. (the “Dealer Manager”), an affiliate of the Adviser, to serve as the Dealer Manager for the Offering. The Dealer Manager is responsible for marketing the Company’s common stock.


7


Note 2 – Basis of Presentation and Summary of Significant Accounting Policies
 
Basis of Presentation and Consolidation
 
The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q and accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company’s wholly-owned consolidated subsidiaries, HMS Funding, HMS Equity Holding and HMS Equity Holding II. All intercompany accounts and transactions have been eliminated in consolidation. Under the 1940 Act rules, regulations pursuant to Articles 6 and 10 of Regulation S-X and Topic 946, Financial Services - Investment Companies, of the Accounting Standards Codification, as amended (the “ASC”), of the Financial Accounting Standards Board (the “FASB”), the Company is precluded from consolidating portfolio company investments, including those in which the Company has a controlling interest, unless the portfolio company is a wholly-owned investment company. An exception to this general principle occurs if the Company owns a controlled operating company whose purpose is to provide services to the Company such as an investment adviser or transfer agent. None of the Company’s investments qualifies for this exception. Therefore, the Company’s portfolio company investments, including those in which the Company has a controlling interest, are carried on the Condensed Consolidated Balance Sheet at fair value, as discussed below, with changes to fair value recognized as “Net Unrealized Appreciation (Depreciation)” on the Condensed Consolidated Statements of Operations until the investment is realized, usually upon exit, resulting in any gain or loss on exit being recognized as a realized gain or loss. However, in the event that any controlled subsidiary exceeds the tests of significance set forth in Rules 3-09 or 4-08(g) of Regulation S-X, the Company will include required financial information for such subsidiary in the notes or as an attachment to its condensed consolidated financial statements.

The unaudited condensed consolidated financial statements reflect all normal recurring adjustments, which are, in the opinion of management, necessary for the fair presentation of the Company’s results for the interim periods presented. The results of operations for interim periods are not indicative of results to be expected for the full year.

Amounts as of December 31, 2016 included in the unaudited condensed consolidated financial statements have been derived from the Company’s audited consolidated financial statements as of that date. All intercompany accounts and transactions have been eliminated in consolidation. Certain financial information that is normally included in annual financial statements, including certain financial statement footnotes, prepared in accordance with GAAP, is not required for interim reporting purposes and has been condensed or omitted herein. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the year. Therefore, these financial statements should be read in conjunction with the Company’s financial statements and notes related thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, which was filed with the SEC on March 7, 2017.
 
Reclassifications

Certain amounts in the Condensed Consolidated Balance Sheet and the Condensed Consolidated Statement of Cash Flows related to base management fees payable and directors’ fees payable have been disaggregated from due to affiliates and accounts payable and other liabilities, respectively, as of September 30, 2017. Certain amounts in the Condensed Consolidated Statements of Operations related to income taxes have been disaggregated from other general and administrative expenses as of September 30, 2017. Additionally, the presentation of investment income has been changed to separately state interest income, fee income and dividend income in the Condensed Consolidated Statements of Operations. The prior periods have been reclassified to conform to this presentation as of September 30, 2017.

Interest, Fee and Dividend Income
 
Interest and dividend income are recorded on the accrual basis to the extent amounts are expected to be collected. Prepayment penalties received by the Company are recorded as income upon receipt. Dividend income is recorded when dividends are declared by the portfolio company or at the point an obligation exists for the portfolio company to make a distribution. Accrued interest and dividend income are evaluated quarterly for collectability. When a debt security becomes 90 days or more past due and the Company does not expect the debtor to be able to service all of its debt or other obligations, the debt security will generally be placed on non-accrual status and the Company will cease recognizing interest income on that debt security until the borrower has demonstrated the ability and intent to pay contractual amounts due. If there is reasonable doubt that the Company will receive any previously accrued interest, then the interest income will be written off. Additionally, if a debt security has deferred interest payment terms and the Company becomes aware of a deterioration in credit quality, the Company will evaluate the collectability of the deferred interest payment. If it is determined that the deferred interest is unlikely to be collected, the Company will place the security on non-accrual status and cease recognizing interest income on that debt security until the borrower has demonstrated the ability and intent to pay the contractual amounts due. Payments received on non-accrual investments may be recognized as income or applied to principal depending upon the collectability of the remaining principal and interest. If a debt security’s status

8


significantly improves with respect to the debtor’s ability to service the debt or other obligations, or if a debt security is fully impaired, sold or written off, it will be removed from non-accrual status.

As of September 30, 2017, the Company had five debt investments in four portfolio companies that were on non-accrual status, including four debt investments in three portfolio companies that were more than 90 days past due. Each of these portfolio companies experienced a significant decline in credit quality raising doubt regarding the Company’s ability to collect the principal and interest contractually due. Given the credit deterioration of these portfolio companies, the Company ceased accruing interest income on the non-accrual debt investments and wrote off any previously accrued interest deemed uncollectible. As of September 30, 2017, the Company is not aware of any other material changes to the creditworthiness of the borrowers underlying its debt investments.

As of December 31, 2016, the Company had five debt investments in four portfolio companies that were more than 90 days past due (two of which were in the oil and gas industry), including three debt investments in two portfolio companies that were on non-accrual status. Each of these portfolio companies experienced a significant decline in credit quality raising doubt regarding the Company’s ability to collect the principal and interest contractually due. Given the credit deterioration, the Company ceased accruing interest income on the non-accrual debt investments and wrote off any previously accrued interest deemed uncollectible.

From time to time, the Company may hold debt instruments in its investment portfolio that contain a payment-in-kind (“PIK”) interest provision. If these borrowers elect to pay or are obligated to pay interest under the optional PIK provision and, if deemed collectible in management’s judgment, then the interest would be computed at the contractual rate specified in the investment’s credit agreement, recorded as interest income and periodically added to the principal balance of the investment. Thus, the actual collection of this interest may be deferred until the time of debt principal repayment. The Company stops accruing PIK interest and writes off any accrued and uncollected interest in arrears when it determines that such PIK interest in arrears is no longer collectible.

As of both September 30, 2017 and December 31, 2016, the Company held 19 investments which contained a PIK provision. As of September 30, 2017, three of the 19 investments with PIK provisions were on non-accrual status. No PIK interest was recorded on these three non-accrual investments during the three and nine months ended September 30, 2017. As of December 31, 2016, two of the 19 investments with PIK provisions were on non-accrual status. No PIK interest was recorded on these investments during the year ended December 31, 2016. For the three months ended September 30, 2017 and 2016, the Company capitalized $58,000 and $131,000, respectively, of PIK interest income. For the nine months ended September 30, 2017 and 2016, the Company capitalized $897,000 and $255,000, respectively, of PIK interest income. The Company stops accruing PIK interest and writes off any accrued and uncollected interest in arrears when it determines that such PIK interest in arrears is no longer collectible.

The Company may periodically provide services, including structuring and advisory services, to its portfolio companies or other third parties. The income from such services is non-recurring. For services that are separately identifiable and evidence exists to substantiate fair value, income is recognized as earned, which is generally when the investment or other applicable transaction closes. For the three months ended September 30, 2017 and 2016, the Company recognized $213,000 and $191,000, respectively, of non-recurring fee income received from its portfolio companies or other third parties, which accounted for approximately 0.8% and 0.9%, respectively, of the Company’s total investment income during such period. For the nine months ended September 30, 2017 and 2016, the Company recognized $1.9 million and $871,000 respectively, of non-recurring fee income received from its portfolio companies or other third parties, which accounted for approximately 2.5% and 1.3%, respectively, of the Company’s total investment income during such period. Fees received in connection with debt financing transactions for services that do not meet these criteria are treated as debt origination fees and are deferred and accreted into interest income over the life of the financing.

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014‑09, Revenue from Contracts with Customers (Topic 606). ASU 2014‑09 supersedes the revenue recognition requirements under ASC 605, Revenue Recognition, and most industry‑specific guidance throughout the Industry Topics of the ASC. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Under the new guidance, an entity is required to perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The new guidance will significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. Additionally, the guidance requires improved disclosures as to the nature, amount, timing and uncertainty of revenue that is recognized. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations

9


(Reporting Revenue Gross versus Net), which clarified the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarified the implementation guidance regarding performance obligations and licensing arrangements. In May 2016, the FASB issued ASU No. 2016‑12, Revenue from Contracts with Customers (Topic 606)-Narrow‑Scope Improvements and Practical Expedients, which clarified guidance on assessing collectability, presenting sales tax, measuring non-cash consideration, and certain transition matters. The new guidance will be effective for the annual reporting period beginning after December 15, 2017, including interim periods within that reporting period. Early adoption would be permitted for annual reporting periods beginning after December 15, 2016. The Company expects to identify similar performance obligations under ASC 606 as compared with deliverables and separate units of account previously identified. As a result, the Company expects the timing of its revenue recognition to remain the same.

From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by the Company as of the specified effective date. The Company believes that the impact of recently issued standards and any that are not yet effective will not have a material impact on its financial statements upon adoption.

Note 3 — Fair Value Hierarchy for Investments

Fair Value Hierarchy
 
ASC Topic 820, Fair Value Measurement and Disclosures (“ASC 820”), establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability of inputs used in measuring investments at fair value. Market price observability is affected by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
 
Based on the observability of the inputs used in the valuation techniques, the Company is required to provide disclosures on fair value measurements according to the fair value hierarchy. The fair value hierarchy ranks the observability of the inputs used to determine fair values. Investments carried at fair value are classified and disclosed in one of the following three categories:
 
•
Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
•
Level 2—Valuations based on inputs other than quoted prices in active markets, which are either directly or indirectly observable for essentially the full term of the investment. Level 2 inputs include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in non-active markets (for example, thinly traded public companies), pricing models whose inputs are observable for substantially the full term of the investment, and pricing models whose inputs are derived principally from or corroborated by, observable market data through correlation or other means for substantially the full term of the investment.
•
Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Such information may be the result of consensus pricing information or broker quotes for which sufficient observable inputs were not available.

As required by ASC 820, when the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3). Therefore, gains and losses for such investments categorized within the Level 3 table below may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3). The Company conducts reviews of fair value hierarchy classifications on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain investments.

As of September 30, 2017 and December 31, 2016, the Company’s investment portfolio was comprised of debt securities, equity investments and Other Portfolio investments. The fair value determination for these investments primarily consisted of unobservable (Level 3) inputs.

As of September 30, 2017 and December 31, 2016, all of the Company’s LMM portfolio investments consisted of illiquid securities issued by private companies. The fair value determination for the LMM portfolio investments primarily consisted of unobservable inputs. As a result, all of the Company’s LMM portfolio investments were categorized as Level 3 as of September 30, 2017 and December 31, 2016.

As of September 30, 2017 and December 31, 2016, the Company’s Middle Market portfolio investments consisted primarily of investments in secured and unsecured debt investments and independently rated debt investments. The fair value determination

10


for these investments consisted of a combination of (1) observable inputs in non-active markets for which sufficient observable inputs were available to determine the fair value of these investments, (2) observable inputs in non-active markets for which sufficient observable inputs were not available to determine the fair value of these investments and (3) unobservable inputs. As a result, all of the Company’s Middle Market portfolio investments were categorized as Level 3 as of September 30, 2017 and December 31, 2016.

As of September 30, 2017 and December 31, 2016, the Company’s Private Loan portfolio investments consisted primarily of debt investments. The fair value determination for Private Loan investments consisted of a combination of observable inputs in non-active markets for which sufficient observable inputs were not available to determine the fair value of these investments and unobservable inputs. As a result, all of the Company’s Private Loan portfolio investments were categorized as Level 3 as of September 30, 2017 and December 31, 2016.

As of September 30, 2017 and December 31, 2016, the Company’s Other Portfolio investments consisted of illiquid securities issued by private companies. The Company relies primarily on information provided by managers of private investment funds in valuing these investments and considers whether it is appropriate, in light of all relevant circumstances, to value the Other Portfolio investments at the net asset value (“NAV”) reported by the private investment fund at the time of valuation or to adjust the value to reflect a premium or discount. The fair value determination for these investments primarily consisted of unobservable inputs. As a result, all of the Company’s Other Portfolio equity investments were categorized as Level 3 as of September 30, 2017 and December 31, 2016.

The fair value determination of the Level 3 securities required one or more of the following unobservable inputs:
 
•
Financial information obtained from each portfolio company, including unaudited statements of operations and balance sheets for the most recent period available as compared to budgeted numbers;
•
Current and projected financial condition of the portfolio company;
•
Current and projected ability of the portfolio company to service its debt obligations;
•
Type and amount of collateral, if any, underlying the investment;
•
Current financial ratios (e.g., fixed charge coverage ratio, interest coverage ratio, and net debt/earnings before interest, tax, depreciation and amortization (“EBITDA”) ratio) applicable to the investment;
•
Current liquidity of the investment and related financial ratios (e.g., current ratio and quick ratio);
•
Pending debt or capital restructuring of the portfolio company;
•
Projected operating results of the portfolio company;
•
Current information regarding any offers to purchase the investment;
•
Current ability of the portfolio company to raise any additional financing as needed;
•
Changes in the economic environment which may have a material impact on the operating results of the portfolio company;
•
Internal occurrences that may have an impact (both positive and negative) on the operating performance of the portfolio company;
•
Qualitative assessment of key management;
•
Contractual rights, obligations or restrictions associated with the investment;
•
Third party pricing for securities with limited observability of inputs determining the pricing; and
•
Other factors deemed relevant.

The following table presents fair value measurements of the Company’s investments, by major class, as of September 30, 2017 according to the fair value hierarchy (dollars in thousands):
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Total
First lien secured debt investments
$
—

 
$
—

 
$
866,403

 
$
866,403

Second lien secured debt investments
—

 
—

 
108,411

 
108,411

Unsecured debt investments
—

 
—

 
11,131

 
11,131

Equity investments(1)
—

 
—

 
104,761

 
104,761

Total
$
—

 
$
—

 
$
1,090,706

 
$
1,090,706

(1) Includes the Company’s investment in HMS-ORIX. (See Note 4 - Investment in HMS-ORIX SLF LLC)


11


The following table presents fair value measurements of the Company’s investments, by major class, as of December 31, 2016 according to the fair value hierarchy (dollars in thousands):
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Total
First lien secured debt investments
$
—

 
$
—

 
$
791,126

 
$
791,126

Second lien secured debt investments
—

 
—

 
114,652

 
114,652

Unsecured debt investments
—

 
—

 
16,074

 
16,074

Equity investments
—

 
—

 
67,395

 
67,395

Total
$
—

 
$
—

 
$
989,247

 
$
989,247


The following table presents fair value measurements of the Company’s investments, by investment classification, segregated by the level within the fair value hierarchy as of September 30, 2017 (dollars in thousands):
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Total
LMM portfolio investments
$
—

 
$
—

 
$
138,943

 
$
138,943

Private Loan investments
—

 
—

 
313,734

 
313,734

Middle Market investments
—

 
—

 
591,683

 
591,683

Other Portfolio investments
—

 
—

 
46,346

 
46,346

Total
$
—

 
$
—

 
$
1,090,706

 
$
1,090,706


The following table presents fair value measurements of the Company’s investments, by investment classification, segregated by the level within the fair value hierarchy as of December 31, 2016 (dollars in thousands):
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Total
LMM portfolio investments
$
—

 
$
—

 
$
116,060

 
$
116,060

Private Loan investments
—

 
—

 
211,357

 
211,357

Middle Market investments
—

 
—

 
643,464

 
643,464

Other Portfolio investments
—

 
—

 
18,366

 
18,366

Total
$
—

 
$
—

 
$
989,247

 
$
989,247


The significant unobservable inputs used in the fair value measurement of the Company’s LMM, Middle Market and Private Loan debt investments are (i) risk adjusted discount rates used in the yield-to-maturity valuation technique (described in Note 2 - Basis of Presentation and Summary of Significant Accounting Policies - Valuation of Portfolio Investments in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, which was filed with the SEC on March 7, 2017) and (ii) the percentage of expected principal recovery. Increases (decreases) in any of these discount rates in isolation could result in a significantly lower (higher) fair value measurement. Increases (decreases) in any of these expected principal recovery percentages in isolation could result in a significantly higher (lower) fair value measurement. The significant unobservable inputs used in the fair value measurement of the Company’s LMM equity securities and Private Loan equity securities, which are generally valued through an average of the discounted cash flow technique and the market comparable/enterprise value technique (unless one of these approaches is not applicable), are (i) EBITDA multiples and (ii) the weighted average cost of capital (“WACC”). Increases (decreases) in EBITDA multiple inputs in isolation could result in a significantly higher (lower) fair value measurement. Conversely, increases (decreases) in WACC inputs in isolation could result in a significantly lower (higher) fair value measurement. However, due to the nature of certain investments, fair value measurements may be based on other criteria, such as third-party appraisals of collateral and fair values as determined by independent third parties, which are not presented in the table below.


12


The following table, which is not intended to be all inclusive, presents the significant unobservable inputs of the Company’s Level 3 investments as of September 30, 2017 (dollars in thousands):
 
Fair Value
 
Valuation
Technique
 
Significant Unobservable Inputs
 
Range
 
Weighted
Average (2)
LMM equity investments
$
46,149

 
Discounted Cash Flow
 
WACC
 
11.4% - 16.1%
 
12.7%
 
 
 
Market Approach/Enterprise Value
 
EBITDA Multiples (1)
 
4.0x - 10.0x
 
7.2x
LMM debt investments
92,794

 
Discounted Cash Flow
 
Expected Principal Recovery
 
0.0% - 100.0%
 
97.7%
 
 
 
 
 
Risk Adjusted Discount Factor
 
10.0% - 16.5%
 
11.9%
Private Loan debt investments
250,780

 
Discounted Cash Flow
 
Expected Principal Recovery
 
3.0% - 100.0%
 
99.7%
 
 
 
 
 
Risk Adjusted Discount Factor
 
4.5% - 28.1%
 
8.0%
 
54,673

 
Market Approach
 
Third Party Quotes
 
92.0% - 100.0%
 
97.4%
Private Loan equity investments
8,281

 
Market Approach/Enterprise Value
 
EBITDA Multiples (1)
 
5.0x - 9.5x
 
8.1x
 
 
 
Discounted Cash Flow
 
WACC
 
9.9% - 12.8%
 
10.8%
Middle Market debt investments
587,698

 
Market Approach
 
Third Party Quotes
 
18.0% - 103.3%
 
95.8%
Middle Market equity investments
3,985

 
Market Approach
 
Third Party Quotes
 
$3.0 - $345.0
 
$305.3
Other Portfolio investments(3)
46,346

 
Market Approach
 
NAV (1)
 
86.1% - 101.7%
 
100.0%
 
$
1,090,706

 
 
 
 
 
 
 
 
(1) May include pro forma adjustments and/or other add-backs based on specific circumstances related to each investment.
(2) Weighted average excludes investments for which the significant unobservable input was not utilized in the fair value determination.
(3) Includes the Company’s investment in HMS-ORIX. (See Note 4 - Investment in HMS-ORIX SLF LLC)

The following table, which is not intended to be all inclusive, presents the significant unobservable inputs of the Company’s Level 3 investments as of December 31, 2016 (dollars in thousands):
 
Fair Value
Valuation
Technique
Significant Unobservable Inputs
Range
Weighted
Average (2)
LMM equity investments
$
37,616

Discounted Cash Flows
WACC
10.7% - 16.6%
12.7%
 
 
Market Approach/
Enterprise Value
EBITDA Multiples (1)
3.3x - 11.5x
6.9x
LMM debt portfolio investments
78,444

Discounted Cash Flows
Expected Principal Recovery
100.0% - 100.0%
100.0%
 
 

 
Risk Adjusted Discount Factor
8.5% - 21.0%
11.3%
Private Loan debt investments
165,968

Discounted Cash Flows
Expected Principal Recovery
3.0% - 100.0%
99.9%
 
 
 
Risk Adjusted Discount Factor
4.8% - 14.2%
8.3%
 
39,066

Market Approach
Third Party Quotes
96.5% - 100.4%
99.7%
Private Loan equity investments
6,323

Market Approach/
Enterprise Value
EBITDA Multiples  (1)
5.0x - 9.5x
8.3x
 
 
Discounted Cash Flows
WACC
10.6% - 13.2%
11.8%
Middle Market debt investments
638,374

Market Approach
Third Party Quotes
22.5% - 108.0%
95.7%
Middle Market equity investments
5,090

Market Approach
Third Party Quotes
75.0% - 337.5%
281.8%
Other Portfolio investments
18,366

Market Approach
NAV (1)
92.5% - 101.0%
99.0%
 
$
989,247

 
 
 
 
(1) May include pro forma adjustments and/or other add-backs based on specific circumstances related to each investment.
(2) Weighted average excludes investments for which the significant unobservable input was not utilized in the fair value determination.


13


The following table provides a summary of changes in fair value of the Company’s Level 3 portfolio investments for the nine months ended September 30, 2017 (dollars in thousands):
Type of Investment
January 1, 2017 Fair Value
 
PIK 
Interest
Accrual
 
New Investments(1)
 
Sales/ Repayments
 
Net Unrealized
Appreciation
(Depreciation)(2)
 
Net Realized Gain (Loss)
 
September 30, 2017 Fair Value
LMM Equity
$
37,616

 
$
154

 
$
8,276

 
$
(622
)
 
$
1,170

 
$
(445
)
 
$
46,149

LMM Debt
78,444

 
102

 
25,191

 
(9,057
)
 
(1,886
)
 
—

 
92,794

Private Loan Equity
6,323

 
—

 
3,855

 
(2,917
)
 
(1,528
)
 
2,548

 
8,281

Private Loan Debt
205,034

 
181

 
169,214

 
(68,482
)
 
(494
)
 
—

 
305,453

Middle Market Debt
638,374

 
377

 
236,193

 
(284,372
)
 
(3,180
)
 
306

 
587,698

Middle Market Equity
5,090

 
83

 
33

 
—

 
(1,221
)
 
—

 
3,985

Other Portfolio(3)
18,366

 
—

 
37,677

 
(10,756
)
 
109

 
950

 
46,346

Total
$
989,247

 
$
897

 
$
480,439

 
$
(376,206
)
 
$
(7,030
)
 
$
3,359

 
$
1,090,706

(1) Column includes changes to investments due to the net accretion of discounts/premiums and amortization of fees.
(2) Column does not include unrealized appreciation (depreciation) on unfunded commitments.
(3) Includes the Company’s investment in HMS-ORIX. (See Note 4 - Investment in HMS-ORIX SLF LLC)

The following table provides a summary of changes in fair value of the Company’s Level 3 portfolio investments for the nine months ended September 30, 2016 (dollars in thousands):
Type of Investment
January 1, 2016 Fair Value
 
PIK 
Interest
Accrual
 
New Investments(1)
 
Sales/ Repayments
 
Net Unrealized
Appreciation
(Depreciation) (2)
 
Net Realized Gain (Loss)
 
September 30, 2016 Fair Value
LMM Equity
$
24,165

 
$
(72
)
 
$
5,457

 
$
—

 
$
2,463

 
$
—

 
$
32,013

LMM Debt
61,295

 
134

 
16,058

 
(7,481
)
 
245

 
—

 
70,251

Private Loan Equity
530

 
—

 
2,602

 
—

 
99

 
—

 
3,231

Private Loan Debt
110,558

 
169

 
92,104

 
(25,952
)
 
887

 
(122
)
 
177,644

Middle Market Debt
645,913

 
24

 
176,767

 
(190,142
)
 
9,761

 
(11,842
)
 
630,481

Middle Market Equity
—

 
—

 
2,059

 
—

 
(200
)
 
—

 
1,859

Other Portfolio
10,527

 
—

 
6,537

 
—

 
60

 
—

 
17,124

Total
$
852,988

 
$
255

 
$
301,584

 
$
(223,575
)
 
$
13,315

 
$
(11,964
)
 
$
932,603

(1) Column includes changes to investments due to the net accretion of discounts/premiums and amortization of fees.
(2) Column does not include unrealized appreciation (depreciation) on unfunded commitments.
The total net unrealized appreciation (depreciation) for the nine months ended September 30, 2017 and 2016 included in the Condensed Consolidated Statement of Operations that related to Level 3 assets still held as of September 30, 2017 and 2016 was approximately $(652,000) and $1.0 million, respectively. For the nine months ended September 30, 2017 and 2016, there were no transfers between Level 2 and Level 3 portfolio investments.

Portfolio Investment Composition

The composition of the Company’s investments as of September 30, 2017, at cost and fair value, was as follows (dollars in thousands):
 
Investments at Cost
 
Cost Percentage of Total Portfolio
 
Investments at Fair Value
 
Fair Value
Percentage of
Total Portfolio
First lien secured debt investments
$
892,121

 
80.3
%
 
$
866,403

 
79.5
%
Second lien secured debt investments
109,331

 
9.8

 
108,411

 
9.9

Unsecured debt investments
10,951

 
1.0

 
11,131

 
1.0

Equity investments(1)
96,158

 
8.7

 
102,872

 
9.4

Equity warrants
2,325

 
0.2

 
1,889

 
0.2

Total
$
1,110,886

 
100.0
%
 
$
1,090,706

 
100.0
%
(1) Includes the Company’s investment in HMS-ORIX. (See Note 4 - Investment in HMS-ORIX SLF LLC)
 

14


The composition of the Company’s investments as of December 31, 2016, at cost and fair value, was as follows (dollars in thousands):
 
Investments at Cost
 
Cost Percentage of Total Portfolio
 
Investments at Fair Value
 
Fair Value
Percentage of
Total Portfolio
First lien secured debt investments
$
809,280

 
80.7
%
 
$
791,126

 
80.0
%
Second lien secured debt investments
117,339

 
11.7

 
114,652

 
11.6

Unsecured debt investments
16,126

 
1.6

 
16,074

 
1.6

Equity investments
56,974

 
5.7

 
63,569

 
6.4

Equity warrants
2,676

 
0.3

 
3,826

 
0.4

Total
$
1,002,395

 
100.0
%
 
$
989,247

 
100.0
%

The composition of the Company’s investments by geographic region as of September 30, 2017, at cost and fair value, was as follows (dollars in thousands) (since the Other Portfolio investments do not represent a single geographic region, this information excludes Other Portfolio investments):
 
Investments at Cost
 
Cost Percentage of Total Portfolio
 
Investments at Fair Value
 
Fair Value
Percentage of
Total Portfolio
Northeast
$
162,546

 
15.3
%
 
$
161,056

 
15.4
%
Southeast
205,226

 
19.3

 
212,068

 
20.3

West
195,171

 
18.3

 
181,527

 
17.4

Southwest
190,375

 
17.9

 
183,679

 
17.6

Midwest
246,739

 
23.2

 
243,600

 
23.3

Non-United States
64,315

 
6.0

 
62,430

 
6.0

Total
$
1,064,372

 
100.0
%
 
$
1,044,360

 
100.0
%
 
The composition of the Company’s investments by geographic region as of December 31, 2016, at cost and fair value, was as follows (dollars in thousands) (since the Other Portfolio investments do not represent a single geographic region, this information excludes Other Portfolio investments):
 
Investments at Cost
 
Cost Percentage of Total Portfolio
 
Investments at Fair Value
 
Fair Value
Percentage of
Total Portfolio
Northeast
$
144,465


14.6
%

$
141,637


14.6
%
Southeast
185,803


18.9


193,616


19.9

West
177,572


18.1


167,544


17.3

Southwest
188,455


19.2


181,894


18.7

Midwest
217,603


22.1


218,540


22.5

Non-United States
69,854


7.1


67,650


7.0

Total
$
983,752


100.0
%

$
970,881


100.0
%

15


The composition of the Company’s total investments by industry as of September 30, 2017 and December 31, 2016, at cost and fair value was as follows (since the Other Portfolio investments do not represent a single industry, this information excludes Other Portfolio investments):
 
Cost
 
Fair Value

September 30, 2017
 
December 31, 2016
 
September 30, 2017
 
December 31, 2016
Commercial Services and Supplies
7.5
%
 
9.1
%
 
7.5
%
 
9.2
%
Hotels, Restaurants, and Leisure
7.3

 
8.0

 
7.4

 
8.1

Media
5.4

 
7.7

 
5.3

 
7.6

Construction and Engineering
5.0

 
4.6

 
5.1

 
4.8

Diversified Consumer Services
4.7

 
2.8

 
4.7

 
2.7

IT Services
4.2

 
4.6

 
4.4

 
4.7

Communications Equipment
3.9

 
4.7

 
4.1

 
4.9

Diversified Telecommunication Services
3.7

 
3.1

 
3.7

 
3.0

Energy Equipment and Services
3.6

 
3.7

 
2.9

 
2.8

Professional Services
3.4

 
1.0

 
3.4

 
1.0

Machinery
3.3

 
1.5

 
3.8

 
1.9

Internet Software and Services
3.2

 
5.1

 
3.3

 
5.2

Aerospace and Defense
3.1

 
1.9

 
3.2

 
1.8

Distributors
3.0

 
1.6

 
3.1

 
1.7

Leisure Equipment and Products
3.0

 
0.8

 
3.1

 
0.8

Specialty Retail
2.8

 
3.9

 
1.9

 
3.3

Food Products
2.5

 
2.7

 
2.6

 
2.5

Oil, Gas, and Consumable Fuels
2.4

 
0.9

 
2.4

 
0.9

Health Care Providers and Services
2.3

 
2.2

 
2.4

 
2.4

Computers and Peripherals
2.3

 
1.0

 
2.6

 
1.1

Auto Components
2.2

 
3.1

 
1.9

 
3.2

Electronic Equipment, Instruments & Components
2.0

 
3.7

 
2.1

 
3.7

Health Care Equipment and Supplies
1.9

 
2.2

 
2.0

 
2.3

Internet and Catalog Retail
1.9

 
1.4

 
1.5

 
1.2

Construction Materials
1.5

 
1.0

 
1.5

 
1.1

Household Durables
1.5

 
—

 
1.5

 
—

Diversified Financial Services
1.4

 
1.9

 
1.3

 
1.9

Trading Companies and Distributors
1.2

 
1.0

 
1.2

 
1.0

Capital Markets
1.0

 
1.2

 
1.0

 
1.2

Food & Staples Retailing
0.9

 
1.4

 
1.0

 
1.5

Personal Products
0.9

 
0.8

 
0.9

 
0.8

Pharmaceuticals
0.9

 
1.2

 
0.9

 
1.2

Healthcare Technology
0.8

 
1.3

 
0.9

 
1.3

Marine
0.8

 
0.9

 
0.8

 
0.9

Tobacco
0.8

 
1.1

 
0.8

 
1.1

Electrical Equipment
0.7

 
0.9

 
0.7

 
1.0

Building Products
0.5

 
0.6

 
0.6

 
0.6

Road & Rail
0.5

 
—

 
0.5

 
—

Software
0.4

 
2.6

 
0.5

 
2.7

Textiles, Apparel & Luxury Goods
0.4

 
0.5

 
0.2

 
0.4

Publishing
0.4

 
0.3

 
0.4

 
0.3

Containers and Packaging
0.3

 
0.3

 
0.3

 
0.3

Air Freight & Logistics
0.2

 
0.3

 
0.3

 
0.4

Airlines
0.1

 
0.2

 
0.2

 
0.2

Chemicals
0.1

 
0.2

 
—

 
0.2

Oil and Gas Exploration and Production
0.1

 
0.1

 
—

 
0.1

Insurance
—

 
0.6

 
—

 
0.6

Consumer Finance
—

 
0.3

 
0.1

 
0.4

Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%




16


Note 4 — Investment in HMS-ORIX SLF LLC

On April 4, 2017, the Company and ORIX Funds Corp. (“Orix”), entered into a limited liability company agreement to co-manage HMS-ORIX SLF LLC (“HMS-ORIX”), which invests primarily in broadly-syndicated loans. Pursuant to the terms of the limited liability agreement and through representation on the HMS-ORIX Board of Managers, the Company and Orix each have 50% voting control of HMS-ORIX and together are required to agree on all portfolio and investment decisions as well as all other significant actions for HMS-ORIX. The Company does not operationally control HMS-ORIX and, accordingly, does not consolidate the operations of HMS-ORIX within the consolidated financial statements. The Company and Orix have committed to provide, and have funded, an aggregate of $50.0 million of equity to HMS-ORIX, with the Company providing $30.0 million (60% of the equity) and Orix providing $20.0 million (40% of the equity).

As of September 30, 2017, HMS-ORIX had total assets of $146.4 million and HMS-ORIX’s portfolio consisted of 69 broadly-syndicated loans, all of which were secured by first-priority liens, generally in industries similar to those in which the Company may directly invest. As of September 30, 2017, there were no loans in HMS-ORIX’s portfolio that were on non-accrual status.

On April 5, 2017, HMS-ORIX closed on a $100.0 million credit facility with Bank of America, N.A. The facility has a maturity date of April 5, 2020 and borrowings under the facility bear interest at a rate equal to LIBOR plus 1.65% per annum. As of September 30, 2017, $90.0 million was outstanding under this facility. Borrowings under the facility are secured by substantially all of the assets of HMS-ORIX.

The following table presents a summary of HMS-ORIX’s portfolio as of September 30, 2017 (dollars in thousands):
 
As of September 30, 2017
 
 
Total debt investments (1)
$
139,700

Weighted average effective yield on loans(2)
4.82
%
Largest loan to a single borrower(1)
$
3,505

Total of 10 largest loans to borrowers(1)
$
31,212

(1) At principal amount.
(2) Weighted average effective annual yield is calculated based on the investments at the end of each period and includes accretion of original issue discounts and amortization of premiums, and the amortization of fees received in connection with transactions. Investments, if any, on non-accrual status are assumed to have a zero yield in the calculation of weighted average effective annual yield.

The following table presents a listing of HMS-ORIX’s individual loans as of September 30, 2017:
HMS-ORIX
Loan Portfolio
As of September 30, 2017
(dollars in thousands)
Portfolio Company
Industry
Type of Investment
Principal
Cost
Fair Value
 
 
 
 
 
 
Acosta, Inc.
Commercial Services and Supplies
LIBOR (3 months) + 3.25%, Current Coupon 4.49%, Secured Debt (Maturity - September 26, 2021)
$
2,000

$
1,873

$
1,778

Acrisure, LLC
Insurance
LIBOR (1 month) + 5.00%, Current Coupon 6.27%, Secured Debt (Maturity - November 22, 2023)
1,990

1,997

2,017

Advantage Sales & Marketing Inc.
Commercial Services and Supplies
LIBOR (1 month) + 3.25%, Current Coupon 4.56%, Secured Debt (Maturity - July 23, 2021)
1,995

1,939

1,882

Air Medical Group Holdings Inc
Health Care Providers & Services
LIBOR (6 months) + 4.00%, Current Coupon 5.24%, Secured Debt (Maturity - April 28, 2022)
1,995

1,985

1,996

Albany Molecular Research, Inc.
Life Sciences Tools and Services
LIBOR (1 month) + 3.25%, Current Coupon 4.58%, Secured Debt (Maturity - August 28, 2024)
100

100

100

Alphabet Holding Company, Inc.
Food Products
LIBOR (3 months) + 3.50%, Current Coupon 4.83%, Secured Debt (Maturity - September 26, 2024)
2,000

1,990

1,980


17


HMS-ORIX
Loan Portfolio
As of September 30, 2017
(dollars in thousands)
Portfolio Company
Industry
Type of Investment
Principal
Cost
Fair Value
 
 
 
 
 
 
American Seafoods Group LLC
Food Products
LIBOR (1 month) + 3.25%, Current Coupon 4.49%, Secured Debt (Maturity - August 21, 2023)
$
1,500

$
1,493

$
1,510

Ancestry.com Operations Inc.
Internet Software & Services
LIBOR (1 month) + 3.25%, Current Coupon 4.49%, Secured Debt (Maturity - October 19, 2023)
2,000

2,019

2,017

Arch Coal, Inc.
Metals & Mining
LIBOR (1 month) + 3.25%, Current Coupon 4.49%, Secured Debt (Maturity - March 7, 2024)
1,990

1,997

2,002

AshCo, Inc.
Specialty Retail
LIBOR (3 months) + 5.00%, Current Coupon 6.30%, Secured Debt (Maturity - December 15, 2023)
2,000

1,955

1,889

Asurion, LLC
Insurance
LIBOR (1 month) + 3.00%, Current Coupon 4.24%, Secured Debt (Maturity - November 3, 2023)
1,316

1,316

1,323

Atkore International, Inc.
Electric Equipment, Instruments & Components
LIBOR (3 months) + 3.00%, Current Coupon 4.34%, Secured Debt (Maturity - December 22, 2023)
2,985

3,014

3,006

Avantor Performance Materials Holdings, Inc.
Biotechnology
LIBOR (1 month) + 4.00%, Current Coupon 5.24%, Secured Debt (Maturity - March 8, 2024)
2,985

3,021

2,998

BCP Renaissance
Oil, Gas and Consumable Fuels
LIBOR (3 months) + 4.00%, Current Coupon 5.32%, Secured Debt (Maturity - September 19, 2024)
600

602

607

BMC Software Finance, Inc.
Software
LIBOR (1 month) + 4.00%, Current Coupon 5.24%, Secured Debt (Maturity - September 12, 2022)
2,972

2,996

2,992

Builders FirstSource, Inc.
Building Products
LIBOR (1 month) + 3.00%, Current Coupon 4.33%, Secured Debt (Maturity - February 29, 2024)
2,985

2,981

2,998

Calpine Corporation
Independent Power & Renewable Elec. Producers
LIBOR (3 months) + 2.75%, Current Coupon 4.09%, Secured Debt (Maturity - January 15, 2023)
1,995

2,002

1,994

CHS/Community Health Systems, Inc.
Health Care Providers & Services
LIBOR (3 months) + 3.00%, Current Coupon 4.32%, Secured Debt (Maturity - January 27, 2021)
1,646

1,640

1,638

Clubcorp Club Operations, Inc.
Real Estate Management and Development
LIBOR (3 months) + 3.25%, Current Coupon 4.59%, Secured Debt (Maturity - August 16, 2024)
2,000

1,990

1,991

Colorado Buyer Inc
Technology Hardware, Storage & Peripherals
LIBOR (3 months) + 3.00%, Current Coupon 4.31%, Secured Debt (Maturity - May 1, 2024)
2,993

3,003

3,011

Confie Seguros Holding II Co.
Insurance
LIBOR (1 month) + 5.50%, Current Coupon 6.74%, Secured Debt (Maturity - April 19, 2022)
1,990

1,997

1,965

CPI International, Inc.
Aerospace & Defense
LIBOR (1 month) + 3.50%, Current Coupon 4.74%, Secured Debt (Maturity - July 26, 2024)
2,000

2,000

2,003

Diamond Resorts International, Inc.
Hotels, Restaurants & Leisure
LIBOR (1 month) + 6.00%, Current Coupon 7.24%, Secured Debt (Maturity - September 1, 2023)
1,990

2,019

2,004

Duff & Phelps Corporation
Diversified Financial Services
LIBOR (3 months) + 3.75%, Current Coupon 5.08%, Secured Debt (Maturity - April 23, 2020)
1,990

2,003

1,996

EFS Cogen Holdings I LLC
Electric Utilities
LIBOR (3 months) + 3.50%, Current Coupon 4.84%, Secured Debt (Maturity - June 28, 2023)
1,929

1,942

1,955

Endo Luxembourg Finance Company I S.a.r.l.
Pharmaceuticals
LIBOR (1 month) + 4.25%, Current Coupon 5.50%, Secured Debt (Maturity - April 29, 2024)
1,995

2,014

2,017

Envision Healthcare Corporation
Health Care Providers & Services
LIBOR (1 month) + 3.00%, Current Coupon 4.24%, Secured Debt (Maturity - December 1, 2023)
2,487

2,488

2,499


18


HMS-ORIX
Loan Portfolio
As of September 30, 2017
(dollars in thousands)
Portfolio Company
Industry
Type of Investment
Principal
Cost
Fair Value
 
 
 
 
 
 
Everi Payments Inc.
Leisure Products
LIBOR (3 months) + 4.50%, Current Coupon 5.74%, Secured Debt (Maturity - May 9, 2024)
$
1,995

$
1,988

$
2,015

First American Payment Systems, L.P.
Diversified Financial Services
LIBOR (1 month) + 5.75%, Current Coupon 6.98%, Secured Debt (Maturity - January 5, 2024)
961

972

963

Fitness International, LLC
Hotels, Restaurants & Leisure
Prime + 3.25%, Current Coupon 7.50%, Secured Debt (Maturity - July 1, 2020)
2,000

2,027

2,013

Flex Acquisition Company Inc
Containers and Packaging
LIBOR (3 months) + 3.00%, Current Coupon 4.30%, Secured Debt (Maturity - December 29, 2023)
2,000

2,010

2,007

Flexera Software LLC
Software
LIBOR (1 month) + 3.50%, Current Coupon 4.83%, Secured Debt (Maturity - April 2, 2020)
1,995

2,015

2,008

Gardner Denver, Inc.
Machinery
LIBOR (1 month) + 2.75%, Current Coupon 4.08%, Secured Debt (Maturity - July 30, 2024)
2,000

2,010

2,005

Golden Nugget, Inc.
Hotels, Restaurants & Leisure
LIBOR (1 month) + 3.25%, Current Coupon 4.49%, Secured Debt (Maturity - October 4, 2023)
1,995

1,995

2,007

Greatbatch Ltd.
Health Care Equipment & Supplies
LIBOR (2 months) + 3.50%, Current Coupon 4.74%, Secured Debt (Maturity - October 27, 2022)
2,794

2,811

2,814

GYP Holdings III Corp.
Trading Companies & Distributors
LIBOR (1 month) + 3.00%, Current Coupon 4.31%, Secured Debt (Maturity - March 31, 2023)
3,491

3,516

3,521

Harbor Freight Tools USA, Inc.
Specialty Retail
LIBOR (1 month) + 3.25%, Current Coupon 4.49%, Secured Debt (Maturity - August 18, 2023)
1,980

1,987

1,990

HD Supply Waterworks, Ltd.
Trading Companies & Distributors
LIBOR (3 months) + 3.00%, Current Coupon 4.46%, Secured Debt (Maturity - August 1, 2024)
140

140

140

Horizon Pharma, Inc.
Pharmaceuticals
LIBOR (1 month) + 3.75%, Current Coupon 5.00%, Secured Debt (Maturity - March 29, 2024)
1,995

2,014

2,016

IG Investments Holdings, LLC
Professional Services
LIBOR (1 month) + 4.00%, Current Coupon 5.33%, Secured Debt (Maturity - October 31, 2021)
1,990

2,001

2,012

Jackson Hewitt Tax Service Inc.
Diversified Consumer Services
LIBOR (1 month) + 7.00%, Current Coupon 8.31%, Secured Debt (Maturity - July 30, 2020)
1,939

1,861

1,876

KC MergerSub, Inc.
Diversified Consumer Services
LIBOR (1 month) + 3.75%, Current Coupon 5.08%, Secured Debt (Maturity - August 12, 2022)
2,489

2,495

2,486

KMG Chemicals, Inc.
Chemicals
LIBOR (1 month) + 4.25%, Current Coupon 5.49%, Secured Debt (Maturity - June 13, 2024)
1,304

1,299

1,326

LANDesk Group, Inc.
Software
LIBOR (1 month) + 4.25%, Current Coupon 5.49%, Secured Debt (Maturity - January 22, 2024)
995

1,001

972

Learfield Communications LLC
Media
LIBOR (1 month) + 3.25%, Current Coupon 4.49%, Secured Debt (Maturity - December 1, 2023)
1,995

2,015

2,009

LTS Buyer LLC
Diversified Telecommunication Services
LIBOR (3 months) + 3.25%, Current Coupon 4.49%, Secured Debt (Maturity - April 13, 2020)
2,984

3,008

2,994

MA FinanceCo., LLC
Electronic Equipment, Instruments and Components
LIBOR (1 month) + 2.75%, Current Coupon 3.99%, Secured Debt (Maturity - June 21, 2024)
387

387

388

Mohegan Tribal Gaming Authority
Hotels, Restaurants & Leisure
LIBOR (1 month) + 4.00%, Current Coupon 5.24%, Secured Debt (Maturity - October 13, 2023)
1,990

2,009

2,013


19


HMS-ORIX
Loan Portfolio
As of September 30, 2017
(dollars in thousands)
Portfolio Company
Industry
Type of Investment
Principal
Cost
Fair Value
 
 
 
 
 
 
MPH Acquisition Holdings LLC
Health Care Technology
LIBOR (3 months) + 3.00%, Current Coupon 4.33%, Secured Debt (Maturity - June 7, 2023)
$
2,991

$
3,033

$
3,018

NAB Holdings, LLC
IT Services
LIBOR (3 months) + 3.50%, Current Coupon 4.83%, Secured Debt (Maturity - June 14, 2024)
1,995

1,985

2,009

Ortho-Clinical Diagnostics, Inc
Life Sciences Tools and Services
LIBOR (1 month) + 3.75%, Current Coupon 5.08%, Secured Debt (Maturity - June 30, 2021)
1,990

1,985

1,999

QUIKRETE Holdings, Inc.
Construction Materials
LIBOR (1 month) + 2.75%, Current Coupon 3.99%, Secured Debt (Maturity - November 15, 2023)
2,985

2,985

2,988

Rackspace Hosting, Inc.
Electric Equipment, Instruments & Components
LIBOR (1 month) + 3.00%, Current Coupon 4.31%, Secured Debt (Maturity - November 3, 2023)
3,292

3,318

3,291

Scientific Games International, Inc.
Leisure Products
LIBOR (1 month) + 3.25%, Current Coupon 4.49%, Secured Debt (Maturity - August 14, 2024)
400

402

401

Seattle Spin Co.
Electronic Equipment, Instruments and Components
LIBOR (3 months) + 2.75%, Current Coupon 3.99%, Secured Debt (Maturity - June 21, 2024)
2,613

2,616

2,622

SeaWorld Parks & Entertainment, Inc.
Hotels, Restaurants & Leisure
LIBOR (3 months) + 3.00%, Current Coupon 4.33%, Secured Debt (Maturity - April 1, 2024)
1,990

1,992

1,933

Signode Industrial Group US Inc.
Machinery
LIBOR (1 month) + 2.75%, Current Coupon 3.99%, Secured Debt (Maturity - April 30, 2021)
2,840

2,861

2,855

Staples, Inc.
Distributors
LIBOR (3 month) + 4.00%, Current Coupon 5.31%, Secured Debt (Maturity - August 15, 2024)
2,000

1,995

1,993

Telenet Financing USD LLC
Diversified Telecommunication Services
LIBOR (1 month) + 2.75%, Current Coupon 3.98%, Secured Debt (Maturity - June 30, 2025)
3,000

3,013

3,012

Transdigm, Inc.
Aerospace & Defense
LIBOR (1 month) + 3.00%, Current Coupon 4.24%, Secured Debt (Maturity - June 9, 2023)
1,990

1,997

1,997

 
 
LIBOR (1 month) + 3.00%, Current Coupon 4.24%, Secured Debt (Maturity - August 22, 2024)
1,003

1,000

1,005

 
 
 
2,993

2,997

3,002

Travelport Finance (Luxembourg) S.A.R.L.
Internet Software & Services
LIBOR (3 months) + 2.75%, Current Coupon 4.06%, Secured Debt (Maturity - September 2, 2021)
1,951

1,951

1,951

Traverse Midstream Partners LLC
Oil, Gas and Consumable Fuels
LIBOR (3 months) + 4.00%, Current Coupon 5.33%, Secured Debt (Maturity - September 30, 2024)
781

784

792

UFC Holdings, LLC
Media
LIBOR (3 months) + 3.25%, Current Coupon 4.49%, Secured Debt (Maturity - August 18, 2023)
1,990

2,002

2,001

Ultra Resources, Inc.
Oil, Gas and Consumable Fuels
LIBOR (1 month) + 3.00%, Current Coupon 4.31%, Secured Debt (Maturity - April 12, 2024)
2,000

2,002

2,001

Valeant Pharmaceuticals International, Inc.
Pharmaceuticals
LIBOR (1 month) + 4.75%, Current Coupon 5.99%, Secured Debt (Maturity - April 1, 2022)
2,547

2,559

2,596

Vertiv Group Corporation
Electrical Equipment
LIBOR (3 months) + 4.00%, Current Coupon 5.24%, Secured Debt (Maturity - November 30, 2023)
2,000

2,019

2,018

Vistra Operations Company LLC
Electric Utilities
LIBOR (2 months) + 2.75%, Current Coupon 3.98%, Secured Debt (Maturity - December 14, 2023)
1,990

2,002

1,999


20


HMS-ORIX
Loan Portfolio
As of September 30, 2017
(dollars in thousands)
Portfolio Company
Industry
Type of Investment
Principal
Cost
Fair Value
 
 
 
 
 
 
WideOpenWest Finance, LLC
Diversified Telecommunication Services
LIBOR (1 month) + 3.25%, Current Coupon 4.48%, Secured Debt (Maturity - August 18, 2023)
$
3,505

$
3,516

$
3,504

Total Loan Portfolio
 
 
 
$
139,954

$
139,728


For the three and nine months ended September 30, 2017, the Company did not accrue dividend income in respect of its investment in HMS-ORIX.

The following tables show the summarized financial information for HMS-ORIX (dollars in thousands):
Balance Sheet Data
As of September 30, 2017
Assets
 
Portfolio investments at fair value
$
139,728

Cash and cash equivalents
5,470

Deferred financing costs
989

Other assets
230

Total assets
$
146,417

 
 
Liabilities
 
Debt
$
90,000

Payable for securities purchased
5,371

Accounts payable and accrued expenses
186

Total liabilities
95,557

Net assets
50,860

Total liabilities and net assets
$
146,417


 
Period from inception (April 4, 2017) to September 30, 2017
 
Selected Statement of Operations Information
 
Interest income
$
2,048

Dividend income
—

Total income
2,048

Interest expense
866

Other expenses
79

Total expenses
945

Net investment income
1,103

Unrealized (depreciation) on investments
(226
)
Realized (losses) from investments
(17
)
Net increase in net assets
$
860


Note 5 — Borrowings
 
On March 11, 2014, the Company entered into a senior secured revolving credit agreement with Capital One, National Association (“Capital One”), as administrative agent, and with Capital One and other financial institutions as lenders. On March 6, 2017, this credit facility was amended and restated (as amended and restated, the “EverBank Credit Facility”) to, among other things, extend

21


the maturity date to March 6, 2020, reduce revolver commitments from $125.0 million to $95.0 million, and assign Capital One’s role as administrative agent to EverBank Commercial Finance, Inc. (“EverBank”). On October 19, 2017, the Company amended the EverBank Credit Facility to increase the revolver commitments to $120.0 million. Borrowings under the EverBank Credit Facility bear interest, subject to the Company’s election, on a per annum basis equal to (i) the adjusted London Interbank Offered Rate (“LIBOR”) rate plus 2.75% or (ii) the base rate plus 1.75%. The base rate is defined as the higher of (a) the prime rate, (b) the Federal Funds Rate (as defined in the credit agreement) plus 0.5% or (c) the adjusted LIBOR rate plus 1.0%. The adjusted LIBOR rate is defined in the credit agreement for the EverBank Credit Facility as the one-month LIBOR rate plus such amount as adjusted for statutory reserve requirements for Eurocurrency liabilities. As of September 30, 2017, the one-month LIBOR rate was 1.24%. The Company pays an annual unused commitment fee of 0.300% on the unused revolver commitments if more than 50% of the revolver commitments are being used and an annual unused commitment fee of 0.625% on the unused revolver commitments if less than 50% of the revolver commitments are being used.

The EverBank Credit Facility permits the creation of certain “Structured Subsidiaries,” which are not guarantors under the EverBank Credit Facility and which are permitted to incur debt outside of the EverBank Credit Facility. Borrowings under the EverBank Credit Facility are secured by all of the Company’s assets, other than the assets of the Structured Subsidiaries, as well as all of the assets, and a pledge of equity ownership interests, of any future subsidiaries of the Company (other than Structured Subsidiaries). The credit agreement for the EverBank Credit Facility contains affirmative and negative covenants usual and customary for credit facilities of this nature, including (i) maintaining a minimum interest coverage ratio of at least 2.00 to 1.00; (ii) maintaining an asset coverage ratio of at least 2.10 to 1.00; and (iii) maintaining a minimum consolidated tangible net worth, excluding Structured Subsidiaries, of at least the greater of (a) the aggregate amount of the revolver commitments or (b) $50.0 million. Further, the EverBank Credit Facility contains limitations on incurrence of other indebtedness (other than by the Structured Subsidiaries), limitations on industry concentration, and an anti-hoarding provision to protect the collateral under the EverBank Credit Facility. Additionally, the Company must provide information to EverBank on a regular basis, preserve its corporate existence, comply with applicable laws, including the 1940 Act, pay obligations when they become due, and invest the proceeds of the sales of common stock in accordance with its investment objectives and strategies (as set forth in the EverBank Credit Facility). Further, the credit agreement contains usual and customary default provisions including: (i) a default in the payment of interest and principal; (ii) insolvency or bankruptcy of the Company; (iii) a material adverse change in the Company’s business; or (iv) breach of any covenant, representation or warranty in the loan agreement or other credit documents and failure to cure such breach within defined periods. Additionally, the EverBank Credit Facility requires the company to obtain written approval from the administrative agent prior to entering into any material amendment, waiver or other modification of any provision of the Investment Advisory Agreement. As of September 30, 2017, the Company was not aware of any instances of noncompliance with covenants related to the EverBank Credit Facility.

On June 2, 2014, HMS Funding entered into a credit agreement (the “Deutsche Bank Credit Facility”) among HMS Funding, as borrower, the Company, as equityholder and as servicer, Deutsche Bank AG, New York Branch (“Deutsche Bank”), as administrative agent, the financial institutions party thereto as lenders (together with Deutsche Bank, the “HMS Funding Lenders”), and U.S. Bank National Association, as collateral agent and collateral custodian. The Deutsche Bank Credit Facility was amended and restated on May 18, 2015 and subsequently has been amended on multiple occasions, most recently on June 30, 2017, increasing the revolver commitments to $400.0 million. The Company contributes certain assets to HMS Funding from time to time, as permitted under the EverBank Credit Facility, as collateral to secure the Deutsche Bank Credit Facility.

Under the Deutsche Bank Credit Facility, interest is calculated as the sum of the index plus the applicable margin of 2.50%. If the Deutsche Bank Credit Facility is funded via an asset backed commercial paper conduit, the index will be the related commercial paper rate; otherwise, the index will be equal to one-month LIBOR. As of September 30, 2017, the one-month LIBOR rate was 1.24%. The Deutsche Bank Credit Facility provides for a revolving period until December 16, 2017, unless otherwise extended with the consent of the HMS Funding Lenders. The amortization period begins the day after the last day of the revolving period and ends on June 16, 2020, the maturity date. During the amortization period, the applicable margin will increase by 0.25%. During the revolving period, HMS Funding will pay a utilization fee equal to 2.50% of the undrawn amount of the required utilization, which is 75% of the loan commitment amount. HMS Funding will incur an undrawn fee equal to 0.40% per annum of the difference between the aggregate commitments and the outstanding advances under the facility, provided that the undrawn fee relating to any utilization shortfall will not be payable to the extent that the utilization fee relating to such utilization shortfall is incurred. Additionally, per the terms of a fee letter executed on May 18, 2015, HMS Funding pays Deutsche Bank an administrative agent fee of 0.25% of the aggregate revolver commitments.

HMS Funding’s obligations under the Deutsche Bank Credit Facility are secured by a first priority security interest in its assets, including all of the present and future property and assets of HMS Funding. The Deutsche Bank Credit Facility contains affirmative and negative covenants usual and customary for credit facilities of this nature, including maintaining a positive tangible net worth, limitations on industry concentration and complying with all applicable laws. The Deutsche Bank Credit Facility contains usual and customary default provisions including: (i) a default in the payment of interest and principal; (ii) insolvency or bankruptcy of

22


the Company; (iii) the occurrence of a change of control; or (iv) any uncured breach of a covenant, representation or warranty in the Deutsche Bank Credit Facility. As of September 30, 2017, the Company was not aware of any instances of noncompliance with covenants related to the Deutsche Bank Credit Facility.

As of September 30, 2017, the Company had borrowings of $95.0 million outstanding on the EverBank Credit Facility and had borrowings of $395.0 million outstanding on the Deutsche Bank Credit Facility, both of which the Company estimated approximated fair value.

Note 6 – Financial Highlights
 
The following is a schedule of financial highlights of the Company for the nine months ended September 30, 2017 and 2016.
Per Share Data:
Nine Months Ended 
 September 30, 2017
 
Nine Months Ended 
 September 30, 2016
NAV at beginning of period
$
8.15

 
$
7.88

Results from Operations
 
 
 
Net investment income (1) (2)
0.56

 
0.55

Net realized appreciation (depreciation) (1) (2)
0.04

 
(0.19
)
Net unrealized appreciation (depreciation) (1) (2)
(0.09
)
 
0.20

Net increase (decrease) in net assets resulting from operations
0.51

 
0.56

Stockholder distributions (1) (3)
 
 
 
Distributions from net investment income (1) (2)
(0.48
)
 
(0.52
)
Distributions from realized appreciation (1) (2)
(0.04
)
 
—

Net decrease in net assets resulting from stockholder distributions
(0.52
)
 
(0.52
)
Capital share transactions
 
 
 
Issuance of common stock above NAV (4), net of offering costs (1)
0.02

 
—

Net increase in net assets resulting from capital share transactions
0.02

 
—

NAV at end of the period
$
8.16

 
$
7.92

 
 
 
 
Shares outstanding at end of period
79,204,960

 
70,942,063

Weighted average shares outstanding
76,899,096

 
66,576,489

(1)
Based on weighted average number of shares of common stock outstanding for the period.
(2)
Changes in net investment income and realized and unrealized appreciation (depreciation) from investments can change significantly from period to period.
(3)
The stockholder distributions represent the stockholder distributions declared for the period.
(4)
The continuous issuance of shares of common stock may cause an incremental increase in NAV per share due to the sale of shares at the then prevailing public offering price in excess of NAV per share on each subscription closing date. The per share data was derived by computing (i) the sum of (A) the number of shares issued in connection with subscriptions and/or distribution reinvestment on each share transaction date times (B) the differences between the net proceeds per share and the NAV per share on each share transaction date, divided by (ii) the weighted average shares of common stock outstanding for the period.

 
Nine Months Ended 
 September 30, 2017
 
Nine Months Ended 
 September 30, 2016
 
(dollars in thousands)
NAV at end of period
$
645,945

 
$
561,974

Average net assets
$
625,272

 
$
519,511

Average Credit Facilities borrowings
$
426,500

 
$
391,750

 
 
 
 
Ratios to average net assets:
 
 
 
Ratio of total expenses to average net assets (1)
5.28
%
 
5.37
%
Ratio of net investment income to average net assets (1)
6.92
%
 
7.08
%
Portfolio turnover ratio
36.85
%
 
25.02
%
Total return (2)
6.50
%
 
7.11
%
(1)
For the nine months ended September 30, 2017 and 2016, the Advisers did not waive base management fees but waived subordinated incentive fees of approximately $2.3 million and $493,000, respectively, and administrative services expenses of approximately $2.2 million and $1.6 million, respectively. The ratio is calculated by reducing the expenses to reflect the waiver of expenses and reimbursement of administrative services in both periods presented. Excluding interest expense, the ratio of total expenses to average net assets for the nine months ended

23


September 30, 2017 and September 30, 2016 was 3.14% and 3.21%, respectively. See Note 10 - Related Party Transactions and Arrangements for further discussion of fee waivers provided by the Advisers.
(2)
Total return is calculated on the change in NAV per share and stockholder distributions declared per share over the reporting period. The total return does not reflect the sales load from the sale of the Company’s common stock.

Note 7 – Stockholder Distributions

The following table reflects the cash distributions per share that the Company declared on its common stock during the nine months ended September 30, 2017 and 2016 (dollars in thousands except per share amounts).
 
Distributions
 
Per Share
 
Amount
2017
 
 
 
Three months ended September 30, 2017
$
0.17

 
$
13,910

Three months ended June 30, 2017
$
0.18

 
$
13,438

Three months ended March 31, 2017
$
0.17

 
$
12,922

2016
 
 
 
Three months ended September 30, 2016
$
0.17

 
$
12,307

Three months ended June 30, 2016
$
0.18

 
$
11,650

Three months ended March 31, 2016
$
0.17

 
$
11,037


On September 19, 2017, with the authorization of the Company’s board of directors, the Company declared distributions to its stockholders for the period of October 2017 through December 2017. These distributions have been, or will be, calculated based on stockholders of record each day from October 1, 2017 through December 31, 2017 in an amount equal to $0.00191781 per share, per day. Distributions are paid on the first business day following the completion of each month to which they relate.

The Company has adopted an “opt in” distribution reinvestment plan for its stockholders. As a result, if the Company makes a distribution, its stockholders will receive distributions in cash unless they specifically “opt in” to the distribution reinvestment plan so as to have their cash distributions reinvested in additional shares of the Company’s common stock.

The following table reflects the sources of the cash distributions that the Company declared and, in some instances, paid on its common stock during the nine months ended September 30, 2017 and 2016.
 
Nine Months Ended 
 September 30, 2017
 
Nine Months Ended 
 September 30, 2016
 
(dollars in thousands)
Source of Distribution
Distribution
Amount
 
Percentage
 
Distribution
Amount
 
Percentage
Net realized income from operations (before waiver of incentive fees)
$
40,270

 
100
%
 
$
24,349

 
70
%
Waiver of incentive fees
—

 
—

 
493

 
1

Distributions in excess of net investment income (1)
—

 
—

 
10,152

 
29

Total
$
40,270

 
100
%
 
$
34,994

 
100
%
(1)
Includes adjustments made to GAAP basis net investment income to arrive at taxable income available for distributions. See Note 8 for the sources of the Company’s cash distributions on a tax basis.

The Company may fund its cash distributions from all sources of funds legally available, including stock 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 it on account of preferred and common equity investments in portfolio companies, and fee and expense waivers from its Advisers. The Company has not established limits on the amount of funds that the Company may use from legally available sources to make distributions. The Company expects that for the foreseeable future, a portion of the distributions may be paid from sources other than net realized income from operations, which may include stock offering proceeds, borrowings, and fee and expense waivers from the Advisers. See Note 10 - Related Party Transactions and Arrangements - Advisory Agreements and Conditional Fee Waiver.

The Company’s distributions may exceed its earnings and, as a result, a portion of the distributions it makes may represent a return of capital for U.S. federal income tax purposes. The timing and amount of any future distributions to stockholders are subject to applicable legal restrictions and the sole discretion of the Company’s board of directors. 



24


Note 8 – Taxable Income

The Company has elected to be treated for U.S. federal income tax purposes as a RIC. As a RIC, the Company generally will not incur corporate-level U.S. federal income taxes on net ordinary income or capital gains that the Company timely distributes each taxable year as dividends to its stockholders. To qualify as a RIC in any taxable year, the Company must, among other things, satisfy certain source-of-income and asset diversification requirements. In addition, the Company must distribute an amount in each taxable year generally at least equal to 90% of its investment company taxable income, determined without regard to any deduction for dividends paid, in order to maintain its ability to be subject to taxation as a RIC. As a part of maintaining its RIC status, undistributed taxable income (subject to a 4% nondeductible, U.S. federal excise tax) pertaining to a given taxable year may be distributed up to 12 months subsequent to the end of that taxable year, provided such distributions are declared prior to the earlier of eight-and-one-half months after the close of that taxable year or the filing of the U.S. federal income tax return for such prior taxable year. In order to avoid the imposition of the 4% nondeductible, U.S. federal excise tax, the Company needs to distribute, in respect of each calendar year, dividends of an amount at least equal to the sum of: (1) 98.0% of its net ordinary income (taking into account certain deferrals and elections) for the calendar year, (2) 98.2% of its capital gain in excess of capital loss, or capital gain net income, (adjusted for certain ordinary losses) for the one-year period generally ending on October 31 of that calendar year (or, if the Company so elects for that calendar year) and (3) any net ordinary income and capital gain net income for preceding years that was not distributed with respect to such years and on which the Company incurred no U.S. federal income tax. For the taxable year ended December 31, 2015, the Company distributed $3.8 million, or $0.0615 per share, of its taxable income in 2016, prior to the filing of its U.S. federal income tax return for the 2015 taxable year. As a result, the Company was subject to a $119,000 4% nondeductible, U.S. federal excise tax for the 2015 taxable year. For the taxable year ended December 31, 2016, the Company distributed $7.3 million, or $0.099478 per share, of its taxable income in 2017, prior to the filing of its U.S. federal income tax return for the 2016 taxable year. As a result, the Company was subject to a 4% nondeductible, U.S federal excise tax liability for the 2016 taxable year of approximately $246,000.

The Company accounts for income taxes in conformity with ASC Topic 740 - Income Taxes, which provides guidelines for how uncertain tax positions should be recognized, measured, presented and disclosed in financial statements. ASC Topic 740 requires the evaluation of tax positions taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the Company’s financial statements is the largest benefit or expense that has a greater than 50% likelihood of being realized upon its ultimate settlement with the relevant tax authority. Positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. It is the Company’s policy to recognize accrued interest and penalties related to uncertain tax benefits, if any, 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. Management has analyzed the Company’s tax positions, and has concluded that there were no material uncertain income tax positions through September 30, 2017. The Company identifies its major tax jurisdiction as the United States, and the Company is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next 12 months. Tax returns for the 2014 through 2016 taxable years remain subject to examination by U.S. federal and most state tax authorities.

The Company has formed wholly-owned subsidiaries, HMS Equity Holding and HMS Equity Holding II, which have elected to be taxable entities for U.S. tax purposes. HMS Equity Holding and HMS Equity Holding II primarily hold equity investments in portfolio companies which are treated as “pass through” entities for U.S. tax purposes. HMS Equity Holding and HMS Equity Holding II are consolidated for financial reporting purposes, and the portfolio investments held by each entity are included in the condensed consolidated financial statements as portfolio investments recorded at fair value. HMS Equity Holding and HMS Equity Holding II are not consolidated with the Company for U.S. federal income tax purposes and may generate income tax expense, or benefit, and the related tax assets and liabilities, as a result of its ownership of certain portfolio investments. This income tax expense, or benefit, if any, and the related tax assets and liabilities, are reflected in the Company’s condensed consolidated financial statements.

Listed below is a reconciliation of “Net increase (decrease) in net assets resulting from operations” to taxable income and to total distributions declared to common stockholders for the nine months ended September 30, 2017 and 2016 (dollars in thousands).
 
Nine Months Ended September 30, 2017
 
Nine Months Ended September 30, 2016
 
 
 
 
Net increase (decrease) in net assets resulting from operations
$
39,440

 
$
37,771

Net change in unrealized (appreciation) depreciation
7,165

 
(12,929
)
Income tax (benefit) provision
139

 
67

Pre-tax book (income) loss not consolidated for tax purposes
755

 
11,137


25


 
Nine Months Ended September 30, 2017
 
Nine Months Ended September 30, 2016
 
 
 
 
Book income and tax income differences, including debt origination, structuring fees, dividends, realized gains and changes in estimates
1,526

 
427

Estimated taxable income (1)
49,025

 
36,473

 
 
 
 
Taxable income earned in prior year and carried forward for distribution in current year
7,238

 
3,855

 
 
 
 
Taxable income earned prior to period end and carried forward for distribution next period
(20,558
)
 
(9,407
)
Dividend accrued as of period end and paid-in the following period
4,565

 
4,073

Taxable income earned to be carried forward
(15,993
)
 
(5,334
)
 
 
 
 
Total distributions accrued or paid to common stockholders
$
40,270

 
$
34,994

(1)
The Company’s taxable income for each period is an estimate and will not be finally determined until the Company files its tax return for each year. Therefore, the final taxable income, and the taxable income earned in each period and carried forward for distribution in the following period, may be different than this estimate.

The income tax expense, or benefit, and the related tax assets and liabilities generated by HMS Equity Holding and HMS Equity Holding II, if any, are reflected in the Company’s Condensed Consolidated Statement of Operations. For the nine months ended September 30, 2017 and 2016, the Company recognized a net income tax (benefit) provision of $139,000 and $67,000, respectively, related to deferred taxes of $1.5 million and $10.7 million, respectively, and other taxes of $139,000 and $67,000, respectively, offset by a valuation allowance of $(1.5) million and $(10.7) million, respectively. For the nine months ended September 30, 2017 and 2016, the other taxes included $139,000 and $67,000, respectively, related to accruals for state and other taxes.

As of September 30, 2017, the cost basis of investments for tax purposes was $1.1 billion, with such investments having an estimated net unrealized depreciation of $20.2 million, composed of gross unrealized appreciation of $22.8 million and gross unrealized depreciation of $43.0 million. As of December 31, 2016, the cost basis of investments for tax purposes was $1.0 billion, with such investments having an estimated net unrealized depreciation of $13.2 million, composed of gross unrealized appreciation of $20.3 million and gross unrealized depreciation of $33.5 million.

The net deferred tax asset at both September 30, 2017 and December 31, 2016 was $0, primarily related to loss carryforwards, timing differences in net unrealized depreciation of portfolio investments, and basis differences of portfolio investments held by HMS Equity Holding and HMS Equity Holding II, which are “pass through” entities for tax purposes, offset by a valuation allowance. Based on HMS Equity Holding’s and HMS Equity Holding II’s short operating history, management believes it is more likely than not that there will be inadequate profits in HMS Equity Holding and HMS Equity Holding II against which the deferred tax assets can be offset. Accordingly, the Company recorded a full valuation allowance against such deferred tax assets.

The following table sets forth the significant components of net deferred tax assets and liabilities as of September 30, 2017 and December 31, 2016 (amounts in thousands):
 
 
September 30, 2017
 
December 31, 2016
Deferred tax assets:
 
 
 
 
Net operating loss carryforwards
 
$
2,654

 
$
2,258

Capital loss carryforwards
 
8,429

 
8,366

Net basis differences in portfolio investments
 
—

 
—

Net unrealized depreciation of portfolio investments
 
1,205

 
20

    Total deferred tax assets
 
12,288

 
10,644

Deferred tax liabilities:
 
 
 
 
Net basis differences in portfolio investments
 
(1,294
)
 
(1,119
)
Net unrealized appreciation of portfolio investments
 
—

 
—

Other
 
—

 
—

    Total deferred tax liabilities
 
(1,294
)
 
(1,119
)
Valuation allowance
 
(10,994
)
 
(9,525
)
    Total net deferred tax assets (liabilities)
 
$
—

 
$
—


For federal income tax purposes, the net loss carryforwards expire in various taxable years from 2034 through 2037 and the net capital loss carryforwards expire in taxable years 2020 and 2022. The timing and manner in which HMS Equity Holding and HMS

26


Equity Holding II will utilize any net loss carryforwards in such taxable years, or in total, may be limited in the future under the provisions of the Code.

For the years ending December 31, 2016, 2015 and 2014, respectively, the tax characteristics of distributions paid to shareholders were as follows (amounts in thousands):
 
Year Ended December 31,
Tax Characteristics of Distributions
2016
 
2015
 
2014
 
 
 
 
 
 
 
 
 
Ordinary income
$
44,848

93.90
%
 
$
34,085

99.68
%
 
$
11,162

99.51
%
Capital gain distributions
2,913

6.10

 
110

0.32

 
55

0.49

Total
$
47,761

100.00
%
 
$
34,195

100.00
%
 
$
11,217

100.00
%

The determination of the tax attributes of the Company’s distributions is made annually at the end of the Company’s taxable year based upon the Company’s taxable income for the full taxable year and distributions paid for the full taxable year. Therefore, a determination made on an interim basis may not be representative of the actual tax attributes of distributions for a full year. If the Company had determined the tax attributes of its distributions taxable year-to-date as of September 30, 2017, 100% would be from its current and accumulated earnings and profits. However, there can be no certainty to stockholders that this determination is representative of what the actual tax attributes of the Company’s anticipated fiscal and taxable years ending December 31, 2017 distributions to stockholders will be. The actual tax characteristics of distributions to stockholders will be reported to the Internal Revenue Service and stockholders subject to information reporting shortly after the close of each calendar year on Form 1099-DIV.

Dividends from net investment income and distributions from net realized capital gains are determined in accordance with U.S. federal tax regulations, which may differ from amounts determined in accordance with GAAP and those differences could be material. These book-to-tax differences are either temporary or permanent in nature. Reclassifications due to permanent book-to-tax differences, such as the non-deductible excise tax, have no impact on net assets.

Note 9 – Supplemental Cash Flow Disclosures
 
Listed below are the supplemental cash flow disclosures for the nine months ended September 30, 2017 and 2016 (dollars in thousands):
Supplemental Disclosure of Cash Flow Information
 
Nine Months Ended September 30, 2017
 
Nine Months Ended September 30, 2016
Cash paid for interest
 
$
12,296

 
$
10,078

Cash paid for income taxes
 
358

 
265

 
 
 
 
 
Supplemental Disclosure of Non-Cash Flow Information
 
 

 
 

Stockholder distributions declared and unpaid
 
4,565

 
4,073

Stockholder distributions reinvested
 
20,594

 
18,263

Change in unpaid deferred offering costs
 
(40
)
 
1,107

Unpaid deferred financing costs
 
25

 
4

Unpaid sales commissions and dealer manager fee
 
251

 
57


Note 10 — Related Party Transactions and Arrangements
 
Advisory Agreements and Conditional Fee Waiver
 
The Company and the Adviser have entered into two expense support and conditional reimbursement agreements (as amended from time to time, the “2013 and 2014 Expense Reimbursement Agreements”), pursuant to which the Adviser could pay the Company up to 100% of its operating expenses through December 31, 2014 (the “Expense Support Payment”) in order to achieve a reasonable level of expenses relative to its investment income (the “Operating Expense Objective”). The Company’s board of directors, in its sole discretion, may approve the repayment of unreimbursed Expense Support Payments upon a determination by the board of directors that the Company has achieved the Operating Expense Objective in any quarter following receipt by the Company of an Expense Support Payment. The Company may reimburse any unreimbursed Expense Support Payments for up

27


to three years from the date each respective Expense Support Payment was determined. Any Expense Support Payments that remain unreimbursed three years after such payment will be permanently waived.

The Company and the Advisers entered into a conditional fee waiver agreement (as amended from time to time, the “Conditional Fee Waiver Agreement”), pursuant to which the Advisers could waive certain fees through December 31, 2015 upon the occurrence of any event that, in the Advisers’ sole discretion, causes such waivers to be deemed necessary. The previously waived fees are potentially subject to repayment by the Company, if at all, within a period not to exceed three years from the date of each respective fee waiver.

The Company and the Advisers entered into conditional income incentive fee waiver agreements (the “2016-2017 Conditional Income Incentive Fee Waiver Agreements”), most recently on October 19, 2017, pursuant to which, for a period from January 1, 2016 through September 30, 2017, the Advisers could waive the “subordinated incentive fee on income,” as such term is defined in the Investment Advisory Agreement, upon the occurrence of any event that, in the Advisers’ sole discretion, causes such waiver to be deemed necessary. The 2016-2017 Conditional Income Incentive Fee Waiver Agreements may require the Company to repay the Advisers for previously waived reimbursement of Expense Support Payments or waived base management fees or incentive fees under certain circumstances.

The previously waived fees are potentially subject to repayment by the Company, if at all, within a period not to exceed three years from the date of each respective fee waiver. Thus, in any quarter where a surplus exists, that surplus will be available, subject to approval of the board of directors, to reimburse waived fees and Expense Support Payments as follows:

1.
First, to reimburse Expense Support Payments, beginning with the earliest year eligible for reimbursement; and
2.
Second, to reimburse all waived fees, beginning with the earliest year eligible for reimbursement.

Reimbursement of previously waived fees will only be permitted with the approval of the board of directors and if the operating expense ratio is equal to or less than the operating expense ratio at the time the corresponding fees were waived and if the annualized rate of regular cash distributions to stockholders is equal to or greater than the annualized rate of the regular cash distributions at the time the corresponding fees were waived.

For the three months ended September 30, 2017 and 2016, the Company incurred base management fees of approximately $5.6 million and $4.9 million, respectively, and the Advisers waived no base management fees in either period. For the three months ended September 30, 2017 and 2016, the Company incurred no capital gains incentive fees or subordinated incentive fees on income in either period. For the three months ended September 30, 2017 and 2016, the Advisers waived no capital gains incentive fees nor subordinated incentive fees in either period.

For the nine months ended September 30, 2017 and 2016, the Company incurred base management fees of approximately $16.1 million and $14.1 million, respectively, and the Advisers waived no base management fees in either period. For the nine months ended September 30, 2017 and 2016, the Company incurred no capital gains incentive fees in either period, and incurred subordinated incentive fees on income of approximately $2.3 million and $493,000, respectively, which were fully waived by the Advisers.

For the nine months ended September 30, 2017 and 2016, the Company did not record an accrual for any previously waived fees. Any future reimbursement of previously waived fees to the Advisers will not be accrued until the reimbursement of the waived fees becomes probable and estimable, which will be upon approval of the Company’s board of directors. To date, none of the previously waived fees has been approved by the board of directors for reimbursement.

The table below presents the fees waived by the Advisers and the timing of potential reimbursement of waived fees (dollars in thousands). Previously waived fees will only be reimbursed with the approval of the Company’s board of directors and if the “Operating Expense Ratio” (as described in footnote 3 to the table below) is equal to or less than the Company’s operating expense ratio at the time the corresponding fees were waived and if the annualized rate of the Company’s regular cash distributions to stockholders is equal to or greater than the annualized rate of the Company’s regular cash distributions at the time the corresponding fees were waived.
 
Management Fee (1)
 
Subordinated Incentive Fee (1)
 
Capital Gain Incentive Fee (1)
 
Expense Support (1)
 
 
 
 
Quarter Ended
Waivers
Repaid to Adviser (2)
 
Waivers
Repaid to Adviser (2)
 
Waivers
Repaid to Adviser (2)
 
Payments
Repaid to Adviser (2)
 
Operating Expense Ratio (3)
Annualized Distribution Rate (4)
Eligible to be Repaid Through
6/30/2012
$
31

$
—

 
$
18

$
—

 
$
—

$
—

 
$
—

$
—

 
1.35%
7.00%
Expired

28


 
Management Fee (1)
 
Subordinated Incentive Fee (1)
 
Capital Gain Incentive Fee (1)
 
Expense Support (1)
 
 
 
 
Quarter Ended
Waivers
Repaid to Adviser (2)
 
Waivers
Repaid to Adviser (2)
 
Waivers
Repaid to Adviser (2)
 
Payments
Repaid to Adviser (2)
 
Operating Expense Ratio (3)
Annualized Distribution Rate (4)
Eligible to be Repaid Through
9/30/2012
$
97

$
—

 
$
52

$
—

 
$
3

$
—

 
$
—

$
—

 
1.97%
7.00%
Expired
12/31/2012
$
104

$
—

 
$
53

$
—

 
$
—

$
—

 
$
—

$
—

 
2.96%
7.00%
Expired
3/31/2013
$
84

$
—

 
$
—

$
—

 
$
—

$
—

 
$
—

$
—

 
1.86%
7.00%
Expired
6/30/2013
$
118

$
—

 
$
—

$
—

 
$
—

$
—

 
$
—

$
—

 
1.36%
7.00%
Expired
9/30/2013
$
268

$
—

 
$
—

$
—

 
$
—

$
—

 
$
—

$
—

 
1.22%
7.00%
Expired
12/31/2013
$
309

$
—

 
$
—

$
—

 
$
5

$
—

 
$
153

$
—

 
0.49%
7.00%
Expired
3/31/2014
$
306

$
—

 
$
—

$
—

 
$
—

$
—

 
$
—

$
—

 
1.28%
7.00%
Expired
6/30/2014
$
548

$
—

 
$
—

$
—

 
$
—

$
—

 
$
—

$
—

 
1.28%
7.00%
Expired
9/30/2014
$
821

$
—

 
$
—

$
—

 
$
—

$
—

 
$
328

$
—

 
1.23%
7.00%
Expired
12/31/2014
$
148

$
—

 
$
451

$
—

 
$
—

$
—

 
$
—

$
—

 
1.70%
7.00%
12/31/2017
3/31/2015
$
—

$
—

 
$
358

$
—

 
$
—

$
—

 
$
—

$
—

 
1.78%
7.18%
3/31/2018
6/30/2015
$
—

$
—

 
$
930

$
—

 
$
—

$
—

 
$
—

$
—

 
1.69%
7.07%
6/30/2018
9/30/2015
$
—

$
—

 
$
155

$
—

 
$
—

$
—

 
$
—

$
—

 
2.11%
7.07%
9/30/2018
12/31/2015
$
—

$
—

 
$
1,159

$
—

 
$
—

$
—

 
$
—

$
—

 
2.27%
7.78%
12/31/2018
3/31/2016
$
—

$
—

 
$
493

$
—

 
$
—

$
—

 
$
—

$
—

 
1.83%
8.14%
3/31/2019
6/30/2016
$
—

$
—

 
$
—

$
—

 
$
—

$
—

 
$
—

$
—

 
1.76%
7.95%
6/30/2019
9/30/2016
$
—

$
—

 
$
—

$
—

 
$
—

$
—

 
$
—

$
—

 
1.73%
7.87%
9/30/2019
12/31/2016
$
—

$
—

 
$
1,196

$
—

 
$
—

$
—

 
$
—

$
—

 
1.68%
7.69%
12/31/2019
3/31/2017
$
—

$
—

 
$
1,495

$
—

 
$
—

$
—

 
$
—

$
—

 
1.68%
7.53%
3/31/2020
6/30/2017
$
—

$
—

 
$
823

$
—

 
$
—

$
—

 
$
—

$
—

 
1.67%
7.53%
6/30/2020
9/30/2017
$
—

$
—

 
$
—

$
—

 
$
—

$
—

 
$
—

$
—

 
1.91%
7.53%
9/30/2020
(1)
Fees waived pursuant to the Conditional Fee Waiver Agreement and the 2016-2017 Conditional Income Incentive Fee Waiver Agreements and Expense Support Payments pursuant to the 2013 and 2014 Expense Reimbursement Agreements.
(2)
Subject to the approval of the Company’s board of directors, in future periods, previously waived fees may be paid to the Advisers, if the Company’s cumulative net increase in net assets resulting from operations exceeds the amount of cumulative distributions paid to stockholders. The previously waived fees are potentially subject to repayment by the Company, if at all, within a period not to exceed three years from the date of each respective fee waiver. To date, none of the previously waived fees and Expense Support Payments have been approved for reimbursement by the Company’s board of directors.
(3)
The “Operating Expense Ratio” is calculated on a quarterly basis as a percentage of average net assets and includes all expenses borne by the Company, except for base management and incentive fees and administrative expenses waived by the Advisers and organizational and offering expenses. For the quarter ended December 31, 2013, expenses have been reduced by $153,000, the amount of the Expense Support Payment received in 2013 from the Adviser. For the quarter ended September 30, 2014, expenses have been reduced by $328,000, which Expense Support Payment was received from the Adviser on October 30, 2014.
(4)
“Annualized Distribution Rate” equals $0.00191781 per share, per day. “Annualized Distribution Rate” does not include the special stock dividend paid to stockholders on September 14, 2012 and was based on the Company’s offering price per share as of the final day of the quarter.

Pursuant to the Investment Advisory Agreement and Sub-Advisory Agreement, the Company is required to pay or reimburse the Advisers for administrative services expenses, which include all costs and expenses related to the Company’s day-to-day administration and management not related to advisory services. The Advisers do not earn any profit under their provision of administrative services to the Company. For the three months ended September 30, 2017 and 2016, the Company incurred, and the Advisers waived the reimbursement of, administrative services expenses of approximately $694,000 and $529,000, respectively. For the nine months ended September 30, 2017 and 2016, the Company incurred, and the Advisers waived the reimbursements of, administrative services expenses of approximately $2.2 million and $1.6 million, respectively. On October 19, 2017, the Company and the Advisers agreed to further amend the 2014 Expense Reimbursement Agreement, which extended the period for waiver of reimbursement of administrative services expenses accrued pursuant to the Investment Advisory Agreement and the Sub-Advisory Agreement through December 31, 2017. Waived administrative services expenses are not subject to future reimbursement.


29


The table below presents the administrative services expenses waived by the Advisers (dollars in thousands).
 
 
Administrative Services
 
 
 
 
 
 
Quarter Ended
 
Waivers
Repaid to Adviser
 
Operating Expense Ratio (1)
 
Annualized Distribution Rate (2)
 
Eligible to be Repaid Through (3)
6/30/2012
 
$
25

$
—

 
1.35%
 
7.00%
 
Not Eligible to be Repaid
9/30/2012
 
$
129

$
—

 
1.97%
 
7.00%
 
Not Eligible to be Repaid
12/31/2012
 
$
284

$
—

 
2.96%
 
7.00%
 
Not Eligible to be Repaid
3/31/2013
 
$
233

$
—

 
1.86%
 
7.00%
 
Not Eligible to be Repaid
6/30/2013
 
$
222

$
—

 
1.36%
 
7.00%
 
Not Eligible to be Repaid
9/30/2013
 
$
234

$
—

 
1.22%
 
7.00%
 
Not Eligible to be Repaid
12/31/2013
 
$
329

$
—

 
0.49%
 
7.00%
 
Not Eligible to be Repaid
3/31/2014
 
$
329

$
—

 
1.28%
 
7.00%
 
Not Eligible to be Repaid
6/30/2014
 
$
385

$
—

 
1.28%
 
7.00%
 
Not Eligible to be Repaid
9/30/2014
 
$
371

$
—

 
1.23%
 
7.00%
 
Not Eligible to be Repaid
12/31/2014
 
$
412

$
—

 
1.70%
 
7.00%
 
Not Eligible to be Repaid
3/31/2015
 
$
437

$
—

 
1.78%
 
7.18%
 
Not Eligible to be Repaid
6/30/2015
 
$
480

$
—

 
1.69%
 
7.07%
 
Not Eligible to be Repaid
9/30/2015
 
$
517

$
—

 
2.11%
 
7.07%
 
Not Eligible to be Repaid
12/31/2015
 
$
603

$
—

 
2.27%
 
7.78%
 
Not Eligible to be Repaid
3/31/2016
 
$
533

$
—

 
1.83%
 
8.14%
 
Not Eligible to be Repaid
6/30/2016
 
$
574

$
—

 
1.76%
 
7.95%
 
Not Eligible to be Repaid
9/30/2016
 
$
529

$
—

 
1.73%
 
7.87%
 
Not Eligible to be Repaid
12/31/2016
 
$
679

$
—

 
1.68%
 
7.69%
 
Not Eligible to be Repaid
3/31/2017
 
$
661

$
—

 
1.68%
 
7.53%
 
Not Eligible to be Repaid
6/30/2017
 
$
873

$
—

 
1.67%
 
7.53%
 
Not Eligible to be Repaid
9/30/2017
 
$
694

$
—

 
1.91%
 
7.53%
 
Not Eligible to be Repaid
(1)
The “Operating Expense Ratio” is calculated on a quarterly basis as a percentage of average net assets and includes all expenses borne by the Company, except for base management and incentive fees and administrative expenses waived by the Advisers and organizational and offering expenses. For the quarter ended December 31, 2013, expenses have been reduced by $153,000, the amount of the Expense Support Payment received in 2013 from the Adviser. For the quarter ended September 30, 2014, expenses have been reduced by $328,000, which Expense Support Payment was received from the Adviser on October 30, 2014.
(2)
“Annualized Distribution Rate” equals $0.00191781 per share, per day. “Annualized Distribution Rate” does not include the special stock dividend paid to stockholders on September 14, 2012 and was based on the Company’s offering price per share as of the last day of the quarter.
(3)
The Advisers have agreed to permanently waive reimbursement by the Company of administrative expenses through December 31, 2017. The waiver of reimbursement of administrative expenses is not eligible for future reimbursement from the Company to the Advisers.

The table below outlines fees incurred and expense reimbursements payable to Hines, Main Street and their affiliates for the three and nine months ended September 30, 2017 and 2016 and amounts unpaid as of September 30, 2017 and December 31, 2016 (dollars in thousands).
 
Incurred
 
Incurred
 
Unpaid as of
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
September 30, 2017
 
December 31, 2016
Type and Recipient
2017
2016
 
2017
2016
 
Incentive Fees on Income (1) - the Adviser, Sub-Adviser
$
—

$
—

 
$
—

$
—

 
$
—

 
$
—

Offering Costs - the Adviser, Sub-Adviser
272

405

 
1,000

1,226

 
18

 
(23
)
Other (2) - the Adviser
81

125

 
551

278

 
37

 
121

Selling Commissions - Dealer Manager
501

1,242

 
2,368

3,884

 
127

 
92

Dealer Manager Fee - Dealer Manager
307

608

 
1,307

1,859

 
124

 
(6
)
Due to Affiliates
 
 

 
 

 

 
$
306

 
$
184

 
 
 
 
 
 
 
 
 
 
Base Management Fees (1) - the Adviser, Sub-Adviser
$
5,648

$
4,905

 
$
16,101

$
14,092

 
$
5,682

 
$
5,054

(1)
Net of amounts waived by the Advisers.
(2)
Includes amounts the Adviser paid on behalf of the Company such as general and administrative services expenses.


30


Offering Costs

In accordance with the Investment Advisory Agreement and the Sub-Advisory Agreement, the Company reimburses the Advisers for any offering costs that are paid on the Company’s behalf, which consist of, among other costs, actual legal, accounting, bona fide out-of-pocket itemized and detailed due diligence costs, printing, filing fees, transfer agent costs, postage, escrow fees, advertising and sales literature and other offering costs. Pursuant to the terms of the Investment Advisory Agreement and the Sub-Advisory Agreement, the Company expects to reimburse the Advisers for such costs incurred on the Company’s behalf on a monthly basis, up to a maximum aggregate amount of 1.5% of the gross stock offering proceeds. The Advisers are responsible for the payment of offering costs to the extent they exceed 1.5% of the aggregate gross stock offering proceeds.

As of September 30, 2017, the Company has reimbursed the Advisers approximately $11.6 million since inception for offering costs. As of September 30, 2017, the Advisers carried a balance of approximately $1.4 million for offering costs incurred on the Company’s behalf, net of reimbursement payments from the Company.

Note 11 – Share Repurchase Plan
 
Since inception of the share repurchase program, the Company funded the repurchase of $28.0 million in shares. For the nine months ended September 30, 2017 and 2016, the Company funded $14.0 million and $8.4 million, respectively, for shares tendered for repurchase under the plan approved by the board of directors. Since inception of the share repurchase program, the Company has funded all redemption requests validly tendered and not withdrawn.
For the Quarter Ended
 
Repurchase Date
 
Shares Repurchased
 
Percentage of Shares Tendered that were Repurchased
 
Repurchase Price
per Share
 
Aggregate Consideration for Repurchased Shares
March 31, 2017
 
3/23/2017
 
614,179.64
 
100%
 
$
8.23

 
$
5,054,698

June 30, 2017
 
6/15/2017 and 6/16/2017
 
346,306.52
 
100%
 
$
8.20

 
$
2,839,713

September 30, 2017
 
9/21/2017
 
747,784.63
 
100%
 
$
8.19

 
$
6,124,356


Note 12 – Commitments and Contingencies

At September 30, 2017, the Company had a total of approximately $57.6 million in outstanding commitments comprising (i) 30 commitments to fund revolving loans that had not been fully drawn or term loans that had not been funded and (ii) four capital commitments that had not been fully called. The Company recognized unrealized depreciation of approximately $473,000 on the outstanding unfunded loan commitments and no unrealized appreciation or depreciation on the outstanding unfunded capital commitments during the nine months ended September 30, 2017. At December 31, 2016, the Company had a total of approximately $42.7 million in outstanding commitments comprising (i) 22 commitments to fund revolving loans that had not been fully drawn or term loans that had not been funded and (ii) three capital commitments that had not been fully called. The Company recognized unrealized depreciation of $266,000 on the outstanding unfunded loan commitments and unrealized appreciation of $14,000 on the outstanding unfunded capital commitments during the year ended December 31, 2016.
 
Commitments and Contingencies
 
(dollars in thousands)
 
September 30, 2017
 
December 31, 2016
Unfunded Loan Commitments

 
 
Adams Publishing Group, LLC
$
2,216


$
—

Apex Linen Services, Inc.
403

 
397

Arcus Hunting, LLC
120

 
2,136

BarFly Ventures, LLC
—

 
881

BigName Holdings, LLC
101


—

Boccella Precast Products, LLC
500

 
—

Buca C, LLC
—


1,548

CapFusion Holding, LLC
—

 
394

CDHA Management, LLC
3,373

 
3,259

Charps, LLC
1,000

 
—

Clad-Rex Steel, LLC
100


—

CST Industries, Inc.
602


—

CTVSH, PLLC
200


—

Datacom, LLC
50

 
1,302


31


 
Commitments and Contingencies
 
(dollars in thousands)
 
September 30, 2017
 
December 31, 2016
Unfunded Loan Commitments

 
 
Felix Investments Holdings II LLC
$
1,667


$
—

Gamber-Johnson Holdings, LLC
300

 
300

Guerdon Modular Holdings, Inc.
400

 
400

Hawk Ridge Systems, LLC
400

 
400

Hojeij Branded Foods, Inc.
2,090

 
2,000

Hostway Corporation
67


—

HW Temps LLC
200

 
50

Jackmont Hospitality, Inc.
—

 
1,200

LaMi Products, LLC
1,029

 
1,729

Market Force Information, Inc.
272


—

Meisler Operating, LLC
400


—

Minute Key, Inc.
2,000

 
197

Mystic Logistics, Inc.
200

 
194

NNE Issuer, LLC
7,000


—

NuStep, LLC
300


—

Pardus Oil & Gas, LLC
357

 
357

Permian Holdco 2
290

 
290

PPC/Shift, LLC
500

 
500

Resolute Industrial LLC
5,750


—

Strike, LLC
—

 
2,475

Unirush LLC
—

 
980

Volusion, LLC
—

 
2,955

Wireless Vision
8,289


—

Unfunded Capital Commitments
 
 
 
Brightwood Capital Fund III, LP
1,000

 
1,000

Brightwood Capital Fund IV, LP
9,000

 
10,000

Copper Trail Energy Fund
2,500

 
—

Freeport First Lien Loan Fund III, LP
4,941

 
7,737

Total
$
57,617

 
$
42,681


Note 13 – Subsequent Events
 
From October 1, 2017 through November 10, 2017, the Company funded approximately $1.9 million in investments and received proceeds from repayments and dispositions of approximately $62.0 million.

On October 19, 2017, the Company entered into an amendment to the EverBank Credit Facility, which increased the revolver commitments by the amount of $25.0 million (from $95.0 million to $120.0 million).

On October 19, 2017, the Company, the Adviser and the Sub-Adviser entered into a conditional income incentive fee agreement (the “Third Quarter 2017 Fee Waiver Agreement”), pursuant to which, for a period from July 1, 2017 through September 30, 2017, the Advisers could waive the “subordinated incentive fee on income,” as such term is defined in the Investment Advisory Agreement, upon the occurrence of any event that, in the Advisers’ sole discretion, causes such waiver to be deemed necessary. The Third Quarter 2017 Fee Waiver Agreement may require the Company to repay the Advisers for previously waived Expense Support Payments or waived base management fees or incentive fees under certain circumstances. The previously waived fees are potentially subject to repayment by the Company, if at all, within a period not to exceed three years from the date of each respective fee waiver.

On October 19, 2017, the Company’s board of directors approved an amendment and restatement of the Company’s distribution reinvestment plan (the “Amended DRP”). Under the Amended DRP, in the event that a continuous offering of the Company’s common stock is suspended or terminated, cash distributions paid to participating stockholders will be reinvested in additional common stock at a purchase price determined by the board of directors, or a committee thereof, in its sole discretion, that is (i) not less than the NAV per share determined in good faith by the board of directors, or a committee thereof, in its sole discretion, within forty-eight hours prior to the payment of the distribution (the “NAV Per Share”) and (ii) not more than 2.5% greater than

32


the NAV Per Share as of such date. The Amended DRP will be effective as of, and will first apply to the reinvestment of cash distributions paid on or after, November 1, 2017.

On November 3, 2017, the Company filed a tender offer statement on Schedule TO with the SEC, to commence an offer by the Company to purchase, as approved by its board of directors, 1,619,437.09 shares of our issued and outstanding common stock, par value $0.001 per share. The offer is for cash at a purchase price equal to the NAV per share to be determined within 48 hours of the repurchase date.

33


Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion is based on the condensed consolidated financial statements as of September 30, 2017 (unaudited) and December 31, 2016 and for the three and nine months ended September 30, 2017 and 2016. Amounts as of December 31, 2016 included in the unaudited condensed consolidated financial statements have been derived from the Company’s audited consolidated financial statements as of that date. This information should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto, as well as the audited consolidated financial statements, notes and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2016. Capitalized terms used in this Item 2 have the same meaning as in the accompanying condensed consolidated financial statements in Item 1 unless otherwise defined in this Report.

We refer to HMS Income Fund, Inc. as the “Company,” and the use of “we,” “our,” “us” or similar pronouns in this Report refers to HMS Income Fund, Inc.

Forward-Looking Statements
 
Some of the statements in this Report constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this Report may include statements as to:
 
•
our future operating results;
•
our business prospects and the prospects of our current and prospective portfolio companies;
•
the impact of the investments that we expect to make;
•
the ability of our portfolio companies to achieve their objectives;
•
our expected financings and investments;
•
the adequacy of our cash resources and working capital;
•
the timing of cash flows, if any, from the operations of our portfolio companies;
•
changes in political, economic or industry conditions, the interest rate environment or conditions affecting the financial and capital markets, which could result in changes to the value of our assets;
•
the impact of increased competition;
•
our contractual arrangements and relationships with third parties;
•
the dependence of our future success on the general economy, including general economic trends, and its impact on the industries in which we invest;
•
the relative and absolute performance of our investment adviser, HMS Adviser LP (the “Adviser”), a Texas limited partnership, including in identifying suitable investments for us;
•
our ability to make distributions to our stockholders;
•
the effects of applicable legislation and regulations and changes thereto; and
•
the impact of future acquisitions and divestitures.

In addition, words such as “anticipate,” “believe,” “expect” and “intend” indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this Report involve risks and uncertainties.

Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Part II-Item 1A. Risk Factors” and elsewhere in this Report and set forth in our annual report on Form 10-K for the year ended December 31, 2016. Other factors that could cause actual results to differ materially include:
 
•
changes in the economy;
•
risks associated with possible disruption in our operations or the economy generally; and
•
future changes in laws or regulations and conditions in our operating areas.

We have based the forward-looking statements included in this Report on information available to us on the date of this Report. Except as required by the federal securities laws, we assume no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise.

You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the Securities and Exchange Commission (the “SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements and projections contained in this Report are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).


34


OVERVIEW

We are a specialty finance company sponsored by Hines Interests Limited Partnership (“Hines”) that makes debt and equity investments in middle market (“Middle Market”) companies, which we define as companies with annual revenues generally between $10 million and $3 billion and in lower middle market (“LMM”) companies, which we define as companies with annual revenues generally between $10 million and $150 million. We are an externally managed, non-diversified closed-end investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). We are, therefore, required to comply with certain regulatory requirements. We have elected to be treated for U.S. federal income tax purposes as a regulated investment company (“RIC”), under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).
Our primary investment objective is to generate current income through debt and equity investments. A secondary objective is to generate long-term capital appreciation through equity and equity-related investments, including warrants, convertible securities and other rights to acquire equity securities. Our portfolio strategy calls is to invest primarily in illiquid debt and equity securities issued by LMM companies and Middle Market companies in private placements and negotiated transactions, which are traded in private over-the-counter markets for institutional investors. We will also invest in, and a significant portion of our assets are invested in, customized direct secured and unsecured loans to and equity securities of LMM companies, referred to as LMM securities. Typically, our investments in LMM companies require us to co-invest with Main Street Capital Corporation, a New York Stock Exchange listed BDC (“Main Street”), and/or its affiliates as a result of our sub-advisory relationship described below. We categorize some of our investments in LMM companies and Middle Market companies as private loan (“Private Loan”) portfolio investments. Private Loan investments, often referred to in the debt markets as “club deals,” are investments, generally in debt instruments, that we originate on a collaborative basis with other investment funds. Private Loan investments are typically similar in size, structure, terms and conditions to investments we hold in our LMM portfolio and Middle Market portfolio. Our portfolio also includes other portfolio (“Other Portfolio”) investments primarily consisting of our investment in HMS-ORIX SLF LLC (“HMS-ORIX”) and investments managed by third parties, which differ from the typical profiles for our other types of investments.

We previously registered for sale up to 150,000,000 shares of common stock pursuant to a registration statement on Form N-2 (File No. 333-178548) which was initially declared effective by the SEC on June 4, 2012 (the “Initial Offering”). The Initial Offering terminated on December 1, 2015. We raised approximately $601.2 million in the Initial Offering, including proceeds from the dividend reinvestment plan of approximately $22.0 million. We also registered for sale up to $1,500,000,000 worth of shares of common stock (the “Offering”) pursuant to a new registration statement on Form N-2 (File No. 333-204659), as amended, most recently declared effective on May 1, 2017. With the approval of our board of directors, we closed the Offering to new investors effective September 30, 2017. Through September 30, 2017, we raised approximately $172.0 million in the Offering, including proceeds from the distribution reinvestment plan of approximately $45.4 million.

Our business is managed by the Adviser, an affiliate of Hines, under an Investment Advisory and Administrative Services Agreement dated May 31, 2012, as amended (the “Investment Advisory Agreement”). We and the Adviser have retained MSC Adviser I, LLC (the “Sub-Adviser”), a wholly owned subsidiary of Main Street, as our investment sub-adviser pursuant to an Investment Sub-Advisory Agreement (the “Sub-Advisory Agreement”) to identify, evaluate, negotiate and structure prospective investments, make investment and portfolio management recommendations for approval by the Adviser, monitor our investment portfolio and provide certain ongoing administrative services to the Adviser. The Adviser and the Sub-Adviser are collectively referred to as the “Advisers,” and each is registered under the Investment Advisers Act of 1940, as amended. Upon the execution of the Sub-Advisory Agreement, Main Street became our affiliate. Our board of directors most recently reapproved the Investment Advisory Agreement and Sub-Advisory Agreement on May 12, 2017. We have engaged Hines Securities, Inc. (the “Dealer Manager”), an affiliate of the Adviser, to serve as the Dealer Manager for our offerings. The Dealer Manager is responsible for marketing our shares of common stock being offered pursuant to our offerings.

As a BDC, we are subject to certain regulatory restrictions in making our investments, including limitations on our ability to co-invest with certain affiliates, including Main Street. However, we received an order from the SEC, that permits us, subject to certain conditions, to co-invest with Main Street in certain transactions originated by Main Street and/or our Advisers. The exemptive relief permits us, and certain of our directly or indirectly wholly-owned subsidiaries on one hand, and Main Street and or/certain of its affiliates on the other hand, to co-invest in the same investment opportunities where such investment may otherwise be prohibited under Section 57(a)(4) of the 1940 Act. In addition, we may continue to co-invest with Main Street and/or its affiliates in syndicated deals and secondary loan market purchases in accordance with applicable regulatory guidance or interpretations where price is the only negotiated point.

As of September 30, 2017, we had investments in 67 Middle Market debt investments, 40 Private Loan debt investments, 31 LMM debt investments, 31 LMM equity investments, five Middle Market equity investments, 11 Private Loan equity investments and seven Other Portfolio investments with an aggregate fair value of approximately $1,090.7 million, a cost basis of approximately

35


$1,110.9 million, and a weighted average effective annual yield of approximately 8.5%. The weighted average annual yield was calculated using the effective interest rates for all investments at September 30, 2017, including accretion of original issue discount and amortization of premium to par value, the amortization of fees received in connection with transactions, and assumes zero yield for investments on non-accrual status. Approximately 82.9% and 10.4% of our total portfolio investments (at fair value, excluding our Other Portfolio investments) were secured by first priority liens and second priority liens on portfolio company assets, respectively, with the remainder in unsecured debt investments and equity investments.
 
The level of new portfolio investment activity will fluctuate from period to period based upon our view of the current economic fundamentals, our ability to identify new investment opportunities that meet our investment criteria and our ability to close on the identified transactions. The level of new investment activity and associated interest and fee income will directly impact future investment income. While we intend to grow our portfolio and our investment income over the long-term, our growth and our operating results may be more limited during depressed economic periods. However, we intend to appropriately manage our cost structure and liquidity position based on applicable economic conditions and our investment outlook. The level of realized gains or losses and unrealized appreciation or depreciation will also fluctuate depending upon portfolio activity and the performance of our individual portfolio companies. The changes in realized gains and losses and unrealized appreciation or depreciation could have a material impact on our operating results.
 
Investment Income
 
We have generated, and plan to continue to generate, investment income primarily in the form of interest on the debt securities that we hold, dividends and other distributions with respect to any equity interests that we hold and capital gains, if any, on our investments. In addition, we may generate revenue in the form of commitment, origination, structuring or diligence fees, monitoring fees, and possibly consulting fees and performance-based fees. All such fees will be generated in connection with our investments and recognized as earned or as additional yield over the life of the debt investment. To date our investment income has been interest income on debt investments, accretion of original issue discounts, dividend income, amortization of premiums and fees received from transactions and net realized/unrealized appreciation (depreciation).

Expenses
 
On both a short-term and long-term basis, our primary use of funds will be investments in portfolio companies and cash distributions to our stockholders. Our primary operating expenses will be debt service payments, general and administrative expenses, and payment of advisory fees under the Investment Advisory Agreement. The investment advisory fees paid to our Adviser (and the fees paid by our Adviser to our Sub-Adviser pursuant to the Sub-Advisory Agreement) will compensate our Advisers for their work in identifying, evaluating, negotiating, executing, monitoring and servicing our investments. We expect our expenses to fluctuate based upon the amount of assets under management.
 
We bear all other expenses of our operations and transactions, including fees and expenses relating to:
  ●
 
corporate and organizational expenses relating to offerings of our common stock, subject to certain limitations;
  ●
 
the cost of calculating our net asset value (“NAV”), including the cost of any third-party valuation services;
  ●
 
the cost of effecting sales and repurchase of shares of our common stock and other securities;
  ●
 
fees payable to third parties relating to, or associated with, monitoring our financial and legal affairs, making investments, and valuing investments, including fees and expenses associated with performing due diligence reviews of prospective investments;
  ●
 
interest payable on debt, if any, including any hedging costs;
  ●
 
investment advisory fees;
  ●
 
transfer agent and custodial fees;
  ●
 
fees and expenses associated with marketing efforts;
  ●
 
federal and state registration fees;
  ●
 
federal, state and local taxes;
  ●
 
independent directors’ fees and expenses, including travel expenses;
  ●
 
costs of director and stockholder meetings, proxy statements, stockholders’ reports and notices;
  ●
 
cost of fidelity bond, directors and officers/errors and omissions liability insurance and other insurance premiums;
  ●
 
direct costs such as printing of stockholder reports and advertising or sales materials, mailing, long distance telephone, and staff;
  ●
 
fees and expenses associated with independent audits and outside legal costs, including compliance with the Sarbanes-Oxley Act of 2002, the 1940 Act, and other applicable federal and state securities laws and regulations;

36


  ●
 
costs associated with our reporting and compliance obligations under the 1940 Act and other applicable federal and state securities laws;
  ●
 
brokerage commissions for our investments;
  ●
 
all other expenses incurred by our Advisers in performing their obligations, subject to the limitations included in the Investment Advisory Agreement and Sub-Advisory Agreement; and
  ●
 
all other expenses incurred by us or any administrator in connection with administering our business, including payments under any administration agreement that will be based upon our allocable portion of overhead and other expenses incurred by any administrator in performing its obligations under any proposed administration agreement, including rent and our allocable portion of the costs of compensation and related expenses of our Chief Compliance Officer and Chief Financial Officer and their respective staffs.

During periods of asset growth, we expect our general and administrative expenses to be relatively stable or decline as a percentage of total assets and increase during periods of asset declines.

Base Management Fee, Incentive Fee and Administrative Services Expense Reimbursement Waiver Agreements

From time to time, our Advisers may waive certain fees accrued under the Investment Advisory Agreement and the Sub-Advisory Agreement, as applicable. We may reimburse such waived fees within three years from the date of each respective fee waiver. See Note 10 - Related Party Transactions and Arrangements - Advisory Agreements and Conditional Fee Waiver to our condensed consolidated financial statements included elsewhere in this Report for additional information on our fee waivers and expense reimbursements.

Administration

Pursuant to the Investment Advisory Agreement and Sub-Advisory Agreement, we are required to pay or reimburse our Advisers for administrative services expenses, which include all costs and expenses related to our day-to-day administration and management not related to advisory services. For the three months ended September 30, 2017 and 2016, we incurred, and our Advisers waived the reimbursement of, administrative services expenses of approximately $694,000 and $529,000, respectively. For the nine months ended September 30, 2017 and 2016, we incurred, and our Advisers waived the reimbursement of, administrative services expenses of approximately $2.2 million and $1.6 million, respectively. On October 19, 2017, we and the Advisers agreed to an amendment to the 2014 Expense Reimbursement Agreement, which extended the period for waiver of reimbursement of administrative expenses accrued pursuant to the Investment Advisory Agreement and the Sub-Advisory Agreement through December 31, 2017. The waiver of the reimbursement of administrative service expenses is not subject to future reimbursement. See Note 10 - Related Party Transactions and Arrangements - Advisory Agreements and Conditional Fee Waiver to our condensed consolidated financial statements included elsewhere in this Report for additional information on our fee waivers and expense reimbursements.

CRITICAL ACCOUNTING POLICIES
 
Each of our critical accounting policies involves the use of estimates that require management to make assumptions that are subjective in nature. Management relies on its experience, collects historical and current market data, and analyzes these assumptions in order to arrive at what it believes to be reasonable estimates. In addition, application of these accounting policies involves the exercise of judgments regarding assumptions as to future uncertainties. Actual results could materially differ from these estimates. A disclosure of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2016 in Management’s Discussion and Analysis of Financial Condition and Results of Operations. There have been no changes to our critical accounting policies during 2017, except to the extent described below.

Basis of Presentation and Consolidation

Our condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and accounting principles generally accepted in the United States of America and include the accounts of our wholly-owned consolidated subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Under the 1940 Act rules, regulations pursuant to Articles 6 and 10 of Regulation S-X and Topic 946-Financial Services-Investment Companies of the Accounting Standards Codification, as amended (the “ASC”), of the Financial Accounting Standards Board (“FASB”), we are precluded from consolidating portfolio company investments, including those in which we have a controlling interest, unless the portfolio company is a wholly-owned investment company. An exception to this general principle occurs if we own a controlled operating company whose purpose is to provide services to us such as an investment adviser or transfer agent. None of our investments qualifies for this exception. Therefore, our portfolio company investments, including those in which we have a controlling interest, are carried on the Consolidated Balance Sheet at fair value with changes to fair value recognized as “Net Unrealized Appreciation (Depreciation)” on the Consolidated Statements of Operations until the investment is realized, usually

37


upon exit, resulting in any gain or loss on exit being recognized as a realized gain or loss. However, in the event that any controlled subsidiary exceeds the tests of significance set forth in Rules 3-09 or 4-08(g) of Regulation S-X, we will include required financial information for such subsidiary in the notes or as an attachment to our condensed consolidated financial statements.

PORTFOLIO INVESTMENT COMPOSITION

Our Middle Market portfolio investments primarily consist of direct or secondary purchases of interest-bearing debt securities in companies that are generally larger in size than the LMM companies included in our LMM portfolio. While our Middle Market debt investments are generally secured by a first priority lien, 16.8% of the fair value of our Middle Market portfolio is secured by second priority liens.
 
Our current LMM portfolio consists of debt investments secured by first and second priority liens (63.8% and 3.0% of the total fair value of the LMM portfolio, respectively) on the assets of the portfolio companies and equity investments (33.2% of the total fair value of the LMM portfolio) in privately held LMM companies as of September 30, 2017. The LMM debt investments generally mature between five and seven years from the original investment date. The LMM equity investments represent an equity position or the right to acquire an equity position through warrants.

Our Private Loan portfolio primarily consists of debt investments secured by first and second priority liens (92.5% and 1.5% of the total fair value of the Private Loan portfolio, respectively) on the assets of the portfolio companies, unsecured debt investments (3.4% of the total fair value of the Private Loan portfolio) and equity investments (2.6% of the total fair value of the Private Loan portfolio) in Private Loan companies as of September 30, 2017. The Private Loan debt investments typically have stated terms between three and seven years from the original investment date. The Private Loan equity investments represent an equity position or the right to acquire an equity position through warrants.

Our Other Portfolio investments primarily consist of our investment in HMS-ORIX (discussed in more detail below) and investments managed by third parties, which differ from the typical profiles for LMM, Middle Market and Private Loan portfolio investments. In the Other Portfolio investments, we may incur indirect fees and expenses in connection with investments managed by third parties, such as investments in other investment companies or private funds.

During the nine months ended September 30, 2017, we funded investment purchases of approximately $470.9 million and had two investments under contract to purchase as of September 30, 2017, for approximately $9.8 million, which settled or we scheduled to settle after September 30, 2017. We also received proceeds from sales and repayments of existing portfolio investments of approximately $370.9 million including $40.8 million in sales. Additionally, we had two investments under contract to sell as of September 30, 2017, for approximately $12.8 million, which represented the contract sales price. The combined result of these transactions increased our portfolio, on a cost basis, by approximately $108.5 million, or 10.8%, and the number of portfolio investments by 14 or 7.9%, compared to the portfolio as of December 31, 2016. As of September 30, 2017, the largest investment in an individual portfolio company represented approximately 2.8% of our portfolio’s fair value with the remaining investments in an individual portfolio company ranging from 0.0% to 1.6%. The average investment in our portfolio is approximately $5.7 million or 0.5% of the total portfolio. Our portfolio is broadened across individual portfolio investments, geographic regions, and industries. Further, our total portfolio’s investment composition (excluding our Other Portfolio investments) at fair value is comprised of 82.9% first lien debt securities and 10.4% second lien debt securities, with the remainder in unsecured debt investments and equity investments. First lien debt securities have priority over subordinated debt owed by the issuer with respect to the collateral pledged as security for the loan. Due to the relative priority of payment of first lien investments, these generally have lower yields than lower priority, less secured investments.

During the nine months ended September 30, 2016, we made investment purchases of approximately $275.1 million and had four investments under contract to purchase as of September 30, 2016 for approximately $30.4 million, which settled after September 30, 2016. We also received proceeds from sales and repayments of existing portfolio investments of approximately $222.4 million including $85.2 million in sales and had two investments under contract to sell as of September 30, 2016 for approximately $2.6 million, which represented the contract sales price.

The result of these transactions further diversified our geographic and industry concentrations and based upon our investment rating system, which is described further below, the weighted average rating of our LMM was approximately 2.7 and 2.6 as of September 30, 2017 and December 31, 2016, respectively. Lastly, the overall weighted average effective yield on our investment portfolio decreased from 8.9% as of December 31, 2016 to 8.5% as of September 30, 2017.


38


Summaries of the composition of our total investment portfolio at cost and fair value are shown in the following tables (this information excludes Other Portfolio investments):
 
September 30, 2017
 
December 31, 2016
Cost:
LMM
 
Private Loan
 
Middle Market
 
Total
 
LMM
 
Private Loan
 
Middle Market
 
Total
First Lien Secured Debt
67.9
%
 
92.5
%
 
82.8
%
 
83.8
%
 
67.9
%
 
92.0
%
 
81.5
%
 
82.3
%
Second Lien Secured Debt
3.1

 
1.5

 
16.3

 
10.3

 
3.5

 
0.7

 
16.9

 
11.9

Unsecured Debt
—

 
3.3

 
0.1

 
1.0

 
—

 
4.9

 
0.9

 
1.6

Equity
27.9

 
2.5

 
0.8

 
4.7

 
26.9

 
2.0

 
0.7

 
3.9

Equity warrants
1.1

 
0.2

 
—

 
0.2

 
1.7

 
0.4

 
—

 
0.3

Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%

 
September 30, 2017
 
December 31, 2016
Fair Value:
LMM
 
Private Loan
 
Middle Market
 
Total
 
LMM
 
Private Loan
 
Middle Market
 
Total
First Lien Secured Debt
63.8
%
 
92.5
%
 
82.4
%
 
82.9
%
 
64.3
%
 
91.5
%
 
81.3
%
 
81.5
%
Second Lien Secured Debt
3.0

 
1.5

 
16.8

 
10.4

 
3.3

 
0.7

 
17.0

 
11.8

Unsecured Debt
—

 
3.4

 
0.1

 
1.1

 
—

 
4.9

 
0.9

 
1.7

Equity
32.2

 
2.4

 
0.7

 
5.4

 
30.7

 
2.1

 
0.8

 
4.6

Equity warrants
1.0

 
0.2

 
—

 
0.2

 
1.7

 
0.8

 
—

 
0.4

Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%


For the tables showing our total investment portfolio composition by geographic region and by industry, see Note 3 - Fair Value Hierarchy for Investments - Portfolio Investment Composition to our condensed consolidated financial statements included elsewhere in this Report.

Investment in HMS-ORIX

We co-invest in broadly-syndicated loans with ORIX Funds Corp. (“Orix”) through our investment in HMS-ORIX, which is organized as a Delaware limited liability company. Pursuant to the terms of the limited liability company agreement and through representation on the HMS-ORIX Board of Managers, we and Orix each have 50% voting control of HMS-ORIX and together will agree on all portfolio and investment decisions as well as all other significant actions for HMS-ORIX. We do not operationally control HMS-ORIX, and, accordingly, we do not consolidate the operations of HMS-ORIX within the consolidated financial statements. As of September 30, 2017, we and Orix have committed to provide, and have funded, an aggregate of $50.0 million of equity to HMS-ORIX, with us providing $30.0 million (60% of the equity) and Orix providing $20.0 million (40% of the equity).

As of September 30, 2017, HMS-ORIX had total assets of $146.4 million and HMS-ORIX’s portfolio consisted of 69 broadly-syndicated loans, generally in industries similar to those in which we may directly invest.

On April 5, 2017, HMS-ORIX closed on a $100.0 million credit facility with Bank of America, N.A. The facility has a maturity date of April 5, 2020 and borrowings under the facility bear interest at a rate equal to LIBOR plus 1.65% per annum. As of September 30, 2017, $90.0 million was outstanding under this facility. Borrowings under the facility are secured by substantially all of the assets of HMS-ORIX. If we were to include our pro-rata share of the borrowings under the HMS-ORIX credit facility as leverage on our balance sheet as of September 30, 2017, our asset coverage ratio as of such date would have been 207%, assuming unfunded commitments are treated as senior securities.


39


The following table presents a summary of HMS-ORIX’s portfolio as of September 30, 2017 (dollars in thousands):
 
As of September 30, 2017
 
 
Total debt investments (1)
$
139,700

Weighted average effective yield on loans(2)
4.82
%
Largest loan to a single borrower(1)
$
3,505

Total of 10 largest loans to borrowers(1)
$
31,212

(1) At principal amount.
(2) Weighted average effective annual yield is calculated based on the investments at the end of each period and includes accretion of original issue discounts and amortization of premiums, and the amortization of fees received in connection with transactions. Investments, if any, on non-accrual status are assumed to have a zero yield in the calculation of weighted average effective annual yield.

The following table presents a listing of HMS-ORIX’s individual loans as of September 30, 2017:
HMS-ORIX
Loan Portfolio
As of September 30, 2017
(dollars in thousands)
Portfolio Company
Industry
Type of Investment
Principal
Cost
Fair Value
 
 
 
 
 
 
Acosta, Inc.
Commercial Services and Supplies
LIBOR (3 months) + 3.25%, Current Coupon 4.49%, Secured Debt (Maturity - September 26, 2021)
$
2,000

$
1,873

$
1,778

Acrisure, LLC
Insurance
LIBOR (1 month) + 5.00%, Current Coupon 6.27%, Secured Debt (Maturity - November 22, 2023)
1,990

1,997

2,017

Advantage Sales & Marketing Inc.
Commercial Services and Supplies
LIBOR (1 month) + 3.25%, Current Coupon 4.56%, Secured Debt (Maturity - July 23, 2021)
1,995

1,939

1,882

Air Medical Group Holdings Inc
Health Care Providers & Services
LIBOR (6 months) + 4.00%, Current Coupon 5.24%, Secured Debt (Maturity - April 28, 2022)
1,995

1,985

1,996

Albany Molecular Research, Inc.
Life Sciences Tools and Services
LIBOR (1 month) + 3.25%, Current Coupon 4.58%, Secured Debt (Maturity - August 28, 2024)
100

100

100

Alphabet Holding Company, Inc.
Food Products
LIBOR (3 months) + 3.50%, Current Coupon 4.83%, Secured Debt (Maturity - September 26, 2024)
2,000

1,990

1,980

American Seafoods Group LLC
Food Products
LIBOR (1 month) + 3.25%, Current Coupon 4.49%, Secured Debt (Maturity - August 21, 2023)
1,500

1,493

1,510

Ancestry.com Operations Inc.
Internet Software & Services
LIBOR (1 month) + 3.25%, Current Coupon 4.49%, Secured Debt (Maturity - October 19, 2023)
2,000

2,019

2,017

Arch Coal, Inc.
Metals & Mining
LIBOR (1 month) + 3.25%, Current Coupon 4.49%, Secured Debt (Maturity - March 7, 2024)
1,990

1,997

2,002

AshCo, Inc.
Specialty Retail
LIBOR (3 months) + 5.00%, Current Coupon 6.30%, Secured Debt (Maturity - December 15, 2023)
2,000

1,955

1,889

Asurion, LLC
Insurance
LIBOR (1 month) + 3.00%, Current Coupon 4.24%, Secured Debt (Maturity - November 3, 2023)
1,316

1,316

1,323

Atkore International, Inc.
Electric Equipment, Instruments & Components
LIBOR (3 months) + 3.00%, Current Coupon 4.34%, Secured Debt (Maturity - December 22, 2023)
2,985

3,014

3,006

Avantor Performance Materials Holdings, Inc.
Biotechnology
LIBOR (1 month) + 4.00%, Current Coupon 5.24%, Secured Debt (Maturity - March 8, 2024)
2,985

3,021

2,998

BCP Renaissance
Oil, Gas and Consumable Fuels
LIBOR (3 months) + 4.00%, Current Coupon 5.32%, Secured Debt (Maturity - September 19, 2024)
600

602

607


40


HMS-ORIX
Loan Portfolio
As of September 30, 2017
(dollars in thousands)
Portfolio Company
Industry
Type of Investment
Principal
Cost
Fair Value
 
 
 
 
 
 
BMC Software Finance, Inc.
Software
LIBOR (1 month) + 4.00%, Current Coupon 5.24%, Secured Debt (Maturity - September 12, 2022)
$
2,972

$
2,996

$
2,992

Builders FirstSource, Inc.
Building Products
LIBOR (1 month) + 3.00%, Current Coupon 4.33%, Secured Debt (Maturity - February 29, 2024)
2,985

2,981

2,998

Calpine Corporation
Independent Power & Renewable Elec. Producers
LIBOR (3 months) + 2.75%, Current Coupon 4.09%, Secured Debt (Maturity - January 15, 2023)
1,995

2,002

1,994

CHS/Community Health Systems, Inc.
Health Care Providers & Services
LIBOR (3 months) + 3.00%, Current Coupon 4.32%, Secured Debt (Maturity - January 27, 2021)
1,646

1,640

1,638

Clubcorp Club Operations, Inc.
Real Estate Management and Development
LIBOR (3 months) + 3.25%, Current Coupon 4.59%, Secured Debt (Maturity - August 16, 2024)
2,000

1,990

1,991

Colorado Buyer Inc
Technology Hardware, Storage & Peripherals
LIBOR (3 months) + 3.00%, Current Coupon 4.31%, Secured Debt (Maturity - May 1, 2024)
2,993

3,003

3,011

Confie Seguros Holding II Co.
Insurance
LIBOR (1 month) + 5.50%, Current Coupon 6.74%, Secured Debt (Maturity - April 19, 2022)
1,990

1,997

1,965

CPI International, Inc.
Aerospace & Defense
LIBOR (1 month) + 3.50%, Current Coupon 4.74%, Secured Debt (Maturity - July 26, 2024)
2,000

2,000

2,003

Diamond Resorts International, Inc.
Hotels, Restaurants & Leisure
LIBOR (1 month) + 6.00%, Current Coupon 7.24%, Secured Debt (Maturity - September 1, 2023)
1,990

2,019

2,004

Duff & Phelps Corporation
Diversified Financial Services
LIBOR (3 months) + 3.75%, Current Coupon 5.08%, Secured Debt (Maturity - April 23, 2020)
1,990

2,003

1,996

EFS Cogen Holdings I LLC
Electric Utilities
LIBOR (3 months) + 3.50%, Current Coupon 4.84%, Secured Debt (Maturity - June 28, 2023)
1,929

1,942

1,955

Endo Luxembourg Finance Company I S.a.r.l.
Pharmaceuticals
LIBOR (1 month) + 4.25%, Current Coupon 5.50%, Secured Debt (Maturity - April 29, 2024)
1,995

2,014

2,017

Envision Healthcare Corporation
Health Care Providers & Services
LIBOR (1 month) + 3.00%, Current Coupon 4.24%, Secured Debt (Maturity - December 1, 2023)
2,487

2,488

2,499

Everi Payments Inc.
Leisure Products
LIBOR (3 months) + 4.50%, Current Coupon 5.74%, Secured Debt (Maturity - May 9, 2024)
1,995

1,988

2,015

First American Payment Systems, L.P.
Diversified Financial Services
LIBOR (1 month) + 5.75%, Current Coupon 6.98%, Secured Debt (Maturity - January 5, 2024)
961

972

963

Fitness International, LLC
Hotels, Restaurants & Leisure
Prime + 3.25%, Current Coupon 7.50%, Secured Debt (Maturity - July 1, 2020)
2,000

2,027

2,013

Flex Acquisition Company Inc
Containers and Packaging
LIBOR (3 months) + 3.00%, Current Coupon 4.30%, Secured Debt (Maturity - December 29, 2023)
2,000

2,010

2,007

Flexera Software LLC
Software
LIBOR (1 month) + 3.50%, Current Coupon 4.83%, Secured Debt (Maturity - April 2, 2020)
1,995

2,015

2,008

Gardner Denver, Inc.
Machinery
LIBOR (1 month) + 2.75%, Current Coupon 4.08%, Secured Debt (Maturity - July 30, 2024)
2,000

2,010

2,005

Golden Nugget, Inc.
Hotels, Restaurants & Leisure
LIBOR (1 month) + 3.25%, Current Coupon 4.49%, Secured Debt (Maturity - October 4, 2023)
1,995

1,995

2,007

Greatbatch Ltd.
Health Care Equipment & Supplies
LIBOR (2 months) + 3.50%, Current Coupon 4.74%, Secured Debt (Maturity - October 27, 2022)
2,794

2,811

2,814


41


HMS-ORIX
Loan Portfolio
As of September 30, 2017
(dollars in thousands)
Portfolio Company
Industry
Type of Investment
Principal
Cost
Fair Value
 
 
 
 
 
 
GYP Holdings III Corp.
Trading Companies & Distributors
LIBOR (1 month) + 3.00%, Current Coupon 4.31%, Secured Debt (Maturity - March 31, 2023)
$
3,491

$
3,516

$
3,521

Harbor Freight Tools USA, Inc.
Specialty Retail
LIBOR (1 month) + 3.25%, Current Coupon 4.49%, Secured Debt (Maturity - August 18, 2023)
1,980

1,987

1,990

HD Supply Waterworks, Ltd.
Trading Companies & Distributors
LIBOR (3 months) + 3.00%, Current Coupon 4.46%, Secured Debt (Maturity - August 1, 2024)
140

140

140

Horizon Pharma, Inc.
Pharmaceuticals
LIBOR (1 month) + 3.75%, Current Coupon 5.00%, Secured Debt (Maturity - March 29, 2024)
1,995

2,014

2,016

IG Investments Holdings, LLC
Professional Services
LIBOR (1 month) + 4.00%, Current Coupon 5.33%, Secured Debt (Maturity - October 31, 2021)
1,990

2,001

2,012

Jackson Hewitt Tax Service Inc.
Diversified Consumer Services
LIBOR (1 month) + 7.00%, Current Coupon 8.31%, Secured Debt (Maturity - July 30, 2020)
1,939

1,861

1,876

KC MergerSub, Inc.
Diversified Consumer Services
LIBOR (1 month) + 3.75%, Current Coupon 5.08%, Secured Debt (Maturity - August 12, 2022)
2,489

2,495

2,486

KMG Chemicals, Inc.
Chemicals
LIBOR (1 month) + 4.25%, Current Coupon 5.49%, Secured Debt (Maturity - June 13, 2024)
1,304

1,299

1,326

LANDesk Group, Inc.
Software
LIBOR (1 month) + 4.25%, Current Coupon 5.49%, Secured Debt (Maturity - January 22, 2024)
995

1,001

972

Learfield Communications LLC
Media
LIBOR (1 month) + 3.25%, Current Coupon 4.49%, Secured Debt (Maturity - December 1, 2023)
1,995

2,015

2,009

LTS Buyer LLC
Diversified Telecommunication Services
LIBOR (3 months) + 3.25%, Current Coupon 4.49%, Secured Debt (Maturity - April 13, 2020)
2,984

3,008

2,994

MA FinanceCo., LLC
Electronic Equipment, Instruments and Components
LIBOR (1 month) + 2.75%, Current Coupon 3.99%, Secured Debt (Maturity - June 21, 2024)
387

387

388

Mohegan Tribal Gaming Authority
Hotels, Restaurants & Leisure
LIBOR (1 month) + 4.00%, Current Coupon 5.24%, Secured Debt (Maturity - October 13, 2023)
1,990

2,009

2,013

MPH Acquisition Holdings LLC
Health Care Technology
LIBOR (3 months) + 3.00%, Current Coupon 4.33%, Secured Debt (Maturity - June 7, 2023)
2,991

3,033

3,018

NAB Holdings, LLC
IT Services
LIBOR (3 months) + 3.50%, Current Coupon 4.83%, Secured Debt (Maturity - June 14, 2024)
1,995

1,985

2,009

Ortho-Clinical Diagnostics, Inc
Life Sciences Tools and Services
LIBOR (1 month) + 3.75%, Current Coupon 5.08%, Secured Debt (Maturity - June 30, 2021)
1,990

1,985

1,999

QUIKRETE Holdings, Inc.
Construction Materials
LIBOR (1 month) + 2.75%, Current Coupon 3.99%, Secured Debt (Maturity - November 15, 2023)
2,985

2,985

2,988

Rackspace Hosting, Inc.
Electric Equipment, Instruments & Components
LIBOR (1 month) + 3.00%, Current Coupon 4.31%, Secured Debt (Maturity - November 3, 2023)
3,292

3,318

3,291

Scientific Games International, Inc.
Leisure Products
LIBOR (1 month) + 3.25%, Current Coupon 4.49%, Secured Debt (Maturity - August 14, 2024)
400

402

401

Seattle Spin Co.
Electronic Equipment, Instruments and Components
LIBOR (3 months) + 2.75%, Current Coupon 3.99%, Secured Debt (Maturity - June 21, 2024)
2,613

2,616

2,622

SeaWorld Parks & Entertainment, Inc.
Hotels, Restaurants & Leisure
LIBOR (3 months) + 3.00%, Current Coupon 4.33%, Secured Debt (Maturity - April 1, 2024)
1,990

1,992

1,933


42


HMS-ORIX
Loan Portfolio
As of September 30, 2017
(dollars in thousands)
Portfolio Company
Industry
Type of Investment
Principal
Cost
Fair Value
 
 
 
 
 
 
Signode Industrial Group US Inc.
Machinery
LIBOR (1 month) + 2.75%, Current Coupon 3.99%, Secured Debt (Maturity - April 30, 2021)
$
2,840

$
2,861

$
2,855

Staples, Inc.
Distributors
LIBOR (3 month) + 4.00%, Current Coupon 5.31%, Secured Debt (Maturity - August 15, 2024)
2,000

1,995

1,993

Telenet Financing USD LLC
Diversified Telecommunication Services
LIBOR (1 month) + 2.75%, Current Coupon 3.98%, Secured Debt (Maturity - June 30, 2025)
3,000

3,013

3,012

Transdigm, Inc.
Aerospace & Defense
LIBOR (1 month) + 3.00%, Current Coupon 4.24%, Secured Debt (Maturity - June 9, 2023)
1,990

1,997

1,997

 
 
LIBOR (1 month) + 3.00%, Current Coupon 4.24%, Secured Debt (Maturity - August 22, 2024)
1,003

1,000

1,005

 
 
 
 
2,997

3,002

Travelport Finance (Luxembourg) S.A.R.L.
Internet Software & Services
LIBOR (3 months) + 2.75%, Current Coupon 4.06%, Secured Debt (Maturity - September 2, 2021)
1,951

1,951

1,951

Traverse Midstream Partners LLC
Oil, Gas and Consumable Fuels
LIBOR (3 months) + 4.00%, Current Coupon 5.33%, Secured Debt (Maturity - September 30, 2024)
781

784

792

UFC Holdings, LLC
Media
LIBOR (3 months) + 3.25%, Current Coupon 4.49%, Secured Debt (Maturity - August 18, 2023)
1,990

2,002

2,001

Ultra Resources, Inc.
Oil, Gas and Consumable Fuels
LIBOR (1 month) + 3.00%, Current Coupon 4.31%, Secured Debt (Maturity - April 12, 2024)
2,000

2,002

2,001

Valeant Pharmaceuticals International, Inc.
Pharmaceuticals
LIBOR (1 month) + 4.75%, Current Coupon 5.99%, Secured Debt (Maturity - April 1, 2022)
2,547

2,559

2,596

Vertiv Group Corporation
Electrical Equipment
LIBOR (3 months) + 4.00%, Current Coupon 5.24%, Secured Debt (Maturity - November 30, 2023)
2,000

2,019

2,018

Vistra Operations Company LLC
Electric Utilities
LIBOR (2 months) + 2.75%, Current Coupon 3.98%, Secured Debt (Maturity - December 14, 2023)
1,990

2,002

1,999

WideOpenWest Finance, LLC
Diversified Telecommunication Services
LIBOR (1 month) + 3.25%, Current Coupon 4.48%, Secured Debt (Maturity - August 18, 2023)
3,505

3,516

3,504

Total Loan Portfolio
 
 
 
$
139,954

$
139,728


For the three and nine months ended September 30, 2017, we did not accrue dividend income in respect of our investment in HMS-ORIX.


43


The following tables show the summarized financial information for HMS-ORIX (dollars in thousands):
 
As of
Balance Sheet Data
September 30, 2017
Assets
 
Portfolio investments at fair value
$
139,728

Cash and cash equivalents
5,470

Deferred financing costs
989

Other assets
230

Total assets
$
146,417

 
 
Liabilities
 
Debt
$
90,000

Payable for securities purchased
5,371

Accounts payable and accrued expenses
186

Total liabilities
95,557

Net assets
50,860

Total liabilities and net assets
$
146,417


 
Period from inception (April 4, 2017) to September 30, 2017
 
Selected Statement of Operations Information
 
Interest income
$
2,048

Dividend income
—

Total income
2,048

Interest expense
866

Other expenses
79

Total expenses
945

Net investment income
1,103

Unrealized (depreciation) on investments
(226
)
Realized (losses) from investments
(17
)
Net increase in net assets
$
860


PORTFOLIO ASSET QUALITY
  
As of September 30, 2017, we owned a broad portfolio of 192 investments in 132 companies representing a wide range of industries. We believe that this broad portfolio adds to the structural protection of the portfolio, revenue sources, income, cash flows and dividends. The portfolio included the following:

▪
67 debt investments in 59 Middle Market portfolio companies with an aggregate fair value of approximately $587.7 million and a cost basis of approximately $611.3 million. The Middle Market debt investments had a weighted average annual effective yield of approximately 8.8%, which is calculated assuming the investments on non-accrual status are non-yielding, and 83.0% of the Middle Market debt investments were secured by first priority liens. Further, 87.4% of the Middle Market investments contain variable rates, though a majority of the investments with variable rates are subject to contractual minimum base interest rates between 100 and 150 basis points.

▪
40 debt investments in 38 Private Loan portfolio companies with an aggregate fair value of approximately $305.5 million and a cost basis of approximately $306.9 million. The Private Loan debt investments had a weighted average annual effective yield of approximately 8.9%, which is calculated assuming the investments on non-accrual status are non-yielding, and 95.0% of the Private Loan debt investments were secured by first priority liens. Further, 94.5% of the Private Loan debt investments contain variable rates, though a majority of the investments with variable rates are subject to contractual minimum base interest rates between 100 and 150 basis points.


44


▪
31 debt investments in 28 LMM portfolio companies with an aggregate fair value of approximately $92.8 million and a cost basis of approximately $94.2 million. The LMM debt investments had a weighted average annual effective yield of approximately 11.7% and 95.5% of the debt investments were secured by first priority liens. Also, 45.4% of the LMM debt investments are fixed rate investments with fixed interest rates between 7.2% and 15.0%. Further, 22 LMM debt investments, representing approximately 54.6% of the LMM debt investments have variable rates subject to a contractual minimum base interest rate of 100 basis points.

▪
45 equity investments and nine equity warrant investments in 26 LMM portfolio companies, eight Private Loan portfolio companies, four Middle Market portfolio companies and five Other Portfolio companies with an aggregate fair value of approximately $104.8 million and a cost basis of approximately $98.5 million.

Overall, as of September 30, 2017, our investment portfolio had a weighted average effective yield on our investments of approximately 8.5%, and 79.5% of our total portfolio’s investment composition (including our Other Portfolio investments) was secured by first priority liens.

As of September 30, 2017, we had five investments in four portfolio companies that were on non-accrual status, which comprised approximately 0.3% of our total investment portfolio at fair value and 1.1% of the total investment portfolio at cost. As of December 31, 2016, we had three investments in two portfolio companies that were on non-accrual status, which comprised approximately 0.2% of the total investment portfolio at fair value and 0.8% of the total investment portfolio at cost. For those investments in which S&P credit ratings are available, which represents approximately 33.3% of the portfolio as of September 30, 2017, the portfolio had a weighted average effective credit rating of B.

We utilize a rating system developed by our Sub-Adviser to rate the performance of each LMM portfolio company. The investment rating system takes into consideration various factors, including each investment’s expected level of returns, collectability, comparisons to competitors and other industry participants, and the portfolio company’s future outlook.

•
Investment Rating 1 represents a LMM portfolio company that is performing in a manner which significantly exceeds expectations.
•
Investment Rating 2 represents a LMM portfolio company that, in general, is performing above expectations.
•
Investment Rating 3 represents a LMM portfolio company that is generally performing in accordance with expectations. All new LMM portfolio investments receive an initial Investment Rating 3.
•
Investment Rating 4 represents a LMM portfolio company that is underperforming expectations, requiring increased monitoring and scrutiny by us.
•
Investment Rating 5 represents a LMM portfolio company that is significantly underperforming, requiring heightened levels of monitoring and scrutiny by us and involves the recognition of significant unrealized depreciation on such investment.

The following table shows the distribution of our LMM portfolio investments on the 1 to 5 investment rating scale at fair value as of September 30, 2017 and December 31, 2016 (dollars in thousands):
 
 
September 30, 2017
 
December 31, 2016
Investment Rating
 
Investments at Fair Value
 
Percentage of Total LMM Portfolio
 
Investments at Fair Value
 
Percentage of Total LMM Portfolio
1
 
$
2,600

 
1.9
%
 
$
1,541

 
1.3
%
2
 
44,611

 
32.1

 
56,244

 
48.5

3
 
84,268

 
60.6

 
50,764

 
43.7

4
 
5,803

 
4.2

 
7,511

 
6.5

5
 
1,661

 
1.2

 
—

 
—

Total
 
$
138,943

 
100.0
%
 
$
116,060

 
100.0
%
 
Based upon the investment rating system, the weighted average rating of our LMM portfolio at fair value was approximately 2.7 and 2.6 as of September 30, 2017 and December 31, 2016, respectively.
 
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
 
RESULTS COMPARISONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017 AND SEPTEMBER 30, 2016

Total Investment Income, Operating Expenses, Net Assets
 
For the three months ended September 30, 2017 and 2016, our total investment income was approximately $25.3 million and $22.2 million, respectively, consisting predominately of interest income. As of September 30, 2017, the portfolio had a weighted

45


average annual effective yield on investments of approximately 8.5% compared to 8.5% as of September 30, 2016, and our average investment portfolio for the three months ended September 30, 2017 was $1,067.8 million compared to $931.5 million for the three months ended September 30, 2016. Additionally, during the three months ended September 30, 2017 and 2016, we accreted approximately $2.9 million and $2.7 million, respectively, of unearned income into interest income. The increase in interest income was primarily due to (i) the growth in our total portfolio resulting from the investment of additional equity capital raised and borrowings under our amended and restated senior secured revolving credit facility (the “EverBank Credit Facility”) entered into by us, HMS Equity Holding, LLC and HMS Equity Holding II, Inc., our wholly-owned subsidiaries, with EverBank Commercial Finance, Inc. as administrative agent and certain financial institutions as lenders, and the amended and restated credit agreement entered into by HMS Funding I, LLC, our wholly owned subsidiary, with Deutsche Bank AG, New York Branch as administrative agent (the “Deutsche Bank Credit Facility,” and, together with our EverBank Credit Facility, the “Credit Facilities”) and (ii) acceleration of the accretion of original issuance discounts primarily resulting from principal repayments on certain portfolio investments. We believe further increases in investment income in future periods may arise due to (i) a growing base of portfolio company investments and (ii) investments being held for the entire period relative to incremental net investment activity during each quarter. For information on the Credit Facilities, see Note 5 - Borrowings to our condensed consolidated financial statements included elsewhere in this report.

For the three months ended September 30, 2017 and 2016, we recognized $213,000 and $191,000, respectively, of non-recurring fee income received from our portfolio companies or other third parties, which accounted for approximately 0.8% and 0.9%, respectively, of our total investment income during such period.  Such fee income is transaction based and typically consists of prepayment fees, structuring fees, amendment and consent fees and other non-recurring fees. As such, future fee income is generally dependent on new direct origination investments and the occurrence of prepayments and other events at existing portfolio companies resulting in such fees.
 
For the three months ended September 30, 2017 and 2016, expenses, net of incentive fee and administrative services expense waivers, were approximately $12.3 million and $9.7 million, respectively. The increase in expenses is primarily due to (i) an increase in interest expense of $1.1 million, (ii) an increase in base management fees and incentive fees (net of fee waivers) of $0.7 million and (iii) an increase in amortization of offering costs of $0.6 million. Interest expense increased primarily due to an increase in our average borrowings of approximately $57.5 million during the period and an increase in our cost of borrowing on the Credit Facilities. Average borrowings were $453.5 million for the three months ended September 30, 2017 compared to $396.0 million for the three months ended September 30, 2016. As of September 30, 2017 and 2016, the annualized interest rate on our borrowings was 4.0% and 3.3%, respectively. Base management fees and incentive fees (net of fee waivers) increased primarily due to an increase in our average gross assets.

For the three months ended September 30, 2017, the net increase in net assets resulting from operations (gross of stockholder distributions declared) was approximately $8.7 million. The increase was attributable to (i) net investment income of approximately $13.0 million and (ii) realized gains of approximately $0.7 million, offset by unrealized depreciation on investments of approximately $5.1 million.

For the three months ended September 30, 2016, the net increase in net assets resulting from operations (gross of stockholder distributions declared) was approximately $22.3 million. The increase was primarily attributable to (i) net investment income of approximately $12.5 million and (ii) unrealized appreciation on investments of approximately $11.8 million, offset by net realized losses of approximately $1.9 million.

RESULTS COMPARISONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND SEPTEMBER 30, 2016

Total Investment Income, Operating Expenses, Net Assets
 
For the nine months ended September 30, 2017 and 2016, our total investment income was approximately $76.2 million and $64.7 million, respectively, consisting predominately of interest income. As of September 30, 2017, the portfolio had a weighted average annual effective yield on investments of approximately 8.5% compared to 8.5% as of September 30, 2016, and our average investment portfolio for the nine months ended September 30, 2017 was $1,021.0 million compared to $893.4 million for the nine months ended September 30, 2016. Additionally, during the nine months ended September 30, 2017 and 2016, we accreted approximately $10.8 million and $7.8 million, respectively, of unearned income into interest income. The increase in interest income was primarily due to (i) the growth in our total portfolio resulting from the investment of additional equity capital raised and borrowings under the Credit Facilities and (ii) acceleration of the accretion of original issuance discounts primarily resulting from principal repayments on certain portfolio investments. We believe further increases in investment income in future periods may arise due to (i) a growing base of portfolio company investments and (ii) investments being held for the entire period relative to incremental net investment activity during each quarter.


46


For the nine months ended September 30, 2017 and 2016, we recognized $1.9 million and $871,000, respectively, of non-recurring fee income received from our portfolio companies or other third parties, which accounted for approximately 2.5% and 1.3%, respectively, of our total investment income during such period.  Such fee income is transaction based and typically consists of prepayment fees, structuring fees, amendment and consent fees and other non-recurring fees. As such, future fee income is generally dependent on new direct origination investments and the occurrence of prepayments and other events at existing portfolio companies resulting in such fees.
 
For the nine months ended September 30, 2017 and 2016, expenses, net of incentive fee and administrative services expense waivers, were approximately $33.0 million and $27.9 million, respectively. The increase in expenses is primarily due to (i) an increase in interest expense of $2.1 million, (ii) an increase in base management fees and incentive fees (net of fee waivers) of $2.0 million and (iii) an increase in the amortization of offering costs of $1.3 million. Base management fees and incentive fees (net of fee waivers) increased primarily due to an increase in our average gross assets. Interest expense increased primarily due to an increase in our average borrowings of approximately $34.8 million during the period and an increase in our cost of borrowing on the Credit Facilities. Average borrowings were $426.5 million for the nine months ended September 30, 2017 compared to $391.8 million for the nine months ended September 30, 2016. As of September 30, 2017 and 2016, the annualized interest rate on borrowings was 4.0% and 3.3%, respectively.

For the nine months ended September 30, 2017, the net increase in net assets resulting from operations (gross of stockholder distributions declared) was approximately $39.4 million. The increase was attributable to (i) net investment income of approximately $43.2 million and (ii) net realized gains of approximately $3.4 million, offset by unrealized depreciation on investments of approximately $7.2 million. The realized gains were primarily the result of the exit of one Private Loan equity investment and one Other Portfolio investment.

For the nine months ended September 30, 2016, the net increase in net assets resulting from operations (gross of stockholder distributions declared) was approximately $37.8 million. The increase was attributable to (i) net investment income of approximately $36.8 million and (ii) unrealized appreciation on investments of approximately $12.9 million, offset by realized losses of approximately $12.0 million.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Overview

As of September 30, 2017, we had approximately $39.7 million in cash and cash equivalents, which we held in various custodial accounts. In addition, as of September 30, 2017, we had $5.0 million in capacity available under the Credit Facilities. To seek to enhance our returns, we intend to continue to employ leverage as market conditions permit and at the discretion of our Adviser, but in no event will leverage employed exceed 50% of the value of our assets, as required by the 1940 Act. See “Liquidity and Cash Flows - Financing Arrangements.”

As of September 30, 2017, we had 30 senior secured loan investments and four equity investments with aggregate unfunded commitments of $57.6 million. We believe that we maintain sufficient cash on hand and available borrowings to fund such unfunded commitments should the need arise.

We currently generate cash primarily from the net proceeds of our Offering and the issuance of shares under our distribution reinvestment plan and from cash flows from fees, interest earned from our investments as well as principal repayments and proceeds from sales of our investments.

Prior to investing in securities of portfolio companies, we invest the net proceeds from our Offering, from the issuance of shares of common stock under our distribution reinvestment plan and from sales and pay-downs of existing investments 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, consistent with our BDC election and our election to be taxed as a RIC. 

Liquidity and Capital Resources
 
Cash Flows

For the nine months ended September 30, 2017, we experienced a net increase in cash and cash equivalents of approximately $16.0 million. During that period, approximately $68.5 million of cash was used in our operating activities, which principally consisted of the purchase of new portfolio investments of $470.9 million and accretion of unearned income of $10.8 million, offset by principal repayments from and sales of investments in portfolio companies of $370.9 million and a net increase in net assets resulting from operations of approximately $39.4 million. During the nine months ended September 30, 2017, approximately

47


$84.5 million was provided by financing activities, which principally consisted of $41.6 million in net stock offering proceeds received and a net $77.0 million increase in borrowings under the Credit Facilities, offset by $19.5 million in cash distributions paid to stockholders and $14.0 million in cash used for the redemption of our common stock.

For the nine months ended September 30, 2016, we experienced a net increase in cash and cash equivalents of approximately $16.0 million. During that period, approximately $20.3 million of cash was used in our operating activities, which principally consisted of the purchase of new portfolio investments of $275.1 million, offset by principal repayments from and sales of investments in portfolio companies of $222.4 million and a net increase in net assets resulting from operations of approximately $37.8 million. During the nine months ended September 30, 2016, approximately $36.3 million was provided by financing activities, which principally consisted of $56.5 million in net stock offering proceeds received and a net $5.0 million increase in borrowings under the Credit Facilities, offset by $16.4 million in cash distributions paid to stockholders and $8.4 million in cash distributions used for the redemption of our common stock.

Continuous Public Offering
 
With the approval of our board of directors, we closed the Offering to new investors effective September 30, 2017. During the nine months ended September 30, 2017, we raised proceeds of $66.6 million from the Offering, including proceeds from the distribution reinvestment plan, and incurred $3.7 million for selling commissions and Dealer Manager fees. We also incurred an obligation for $1.0 million of costs related to the Offering.

During the nine months ended September 30, 2016, we raised proceeds of $81.7 million from the Offering, including proceeds from the distribution reinvestment plan, and incurred $5.7 million for selling commissions and Dealer Manager fees. We also incurred an obligation for $1.2 million of costs related to the Offering.

Distributions

The following table reflects the cash distributions per share that we have declared on our common stock during the nine months ended September 30, 2017 and 2016 (dollars in thousands except per share amounts).
 
Distributions
 
Per Share
 
Amount
2017
 
 
 
Three months ended September 30, 2017
$
0.17

 
$
13,910

Three months ended June 30, 2017
$
0.18

 
$
13,438

Three months ended March 31, 2017
$
0.17

 
$
12,922

2016
 
 
 
Three months ended September 30, 2016
$
0.17

 
$
12,307

Three months ended June 30, 2016
$
0.18

 
$
11,650

Three months ended March 31, 2016
$
0.17

 
$
11,037


On September 19, 2017, with the authorization of our board of directors, we declared distributions to our stockholders for the period of October 2017 through December 2017. These distributions have been, or will be, calculated based on stockholders of record each day from October 1, 2017 through December 31, 2017 in an amount equal to $0.00191781 per share, per day. Distributions are paid on the first business day following the completion of each month to which they relate.
 
For the years ending December 31, 2016, 2015 and 2014, respectively, the tax characteristics of distributions paid to shareholders were as follow (amounts in thousands):
 
Year Ended December 31,
Tax Characteristics of Distributions
2016
 
2015
 
2014
 
 
 
 
 
 
 
 
 
Ordinary income
$
44,848

93.90
%
 
$
34,085

99.68
%
 
$
11,162

99.51
%
Capital gain distributions
2,913

6.10

 
110

0.32

 
55

0.49

Total
$
47,761

100.00
%
 
$
34,195

100.00
%
 
$
11,217

100.00
%
The determination of the tax attributes of our distributions is made annually at the end of our taxable year, based upon our taxable income for the full taxable year and distributions paid for the full taxable year. Therefore, a determination made on an interim basis may not be representative of the actual tax attributes of distributions for a full year. If we had determined the tax attributes of our distributions taxable year-to-date as of September 30, 2017, 100% would be from our current and accumulated earnings and profits. However, there can be no certainty to stockholders that this determination is representative of what the actual tax

48


attributes of our anticipated fiscal and taxable years ending December 31, 2017 distributions to stockholders will be. The actual tax characteristics of distributions to stockholders will be reported to the Internal Revenue Service and stockholders subject to information reporting after the close of each calendar year on Form 1099-DIV.

We have adopted an “opt in” distribution reinvestment plan for our stockholders. As a result, if we make a distribution, our stockholders will receive distributions in cash unless they specifically “opt in” to the distribution reinvestment plan so as to have their cash distributions reinvested in additional shares of our common stock.
 
We may fund our cash distributions from any sources of funds legally available, including stock 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 fee waivers from our Advisers. We have not established any limit on the extent to which we may use borrowings or stock offering proceeds to fund distributions. Our distributions may exceed our earnings, especially during the period before we have substantially invested the stock offering proceeds. As a result, a portion of the distributions we make may represent a return of capital for U.S. federal income tax purposes.
 
The timing and amount of any future distributions to stockholders are subject to applicable legal restrictions and the sole discretion of our board of directors.
 
In order to satisfy the Code’s requirements applicable to entities subject to tax as RICs, we are required to distribute substantially all of our taxable income to our stockholders on an annual basis. However, we may elect to spill over certain excess undistributed taxable income from one taxable year into the next taxable year, which may require us to incur a 4% nondeductible U.S. federal excise tax on such excess undistributed taxable income. In order to avoid the imposition of the 4% nondeductible excise tax, we need to distribute, in respect of each calendar year dividends for U.S. federal income tax purposes of an amount at least equal to the sum of (1) 98.0% of our net ordinary income (taking into account certain deferrals and elections) for the calendar year, (2) 98.2% of our capital gain in excess of capital loss, or capital gain net income, adjusted for certain ordinary losses, generally for the one-year period ending on October 31 of such calendar year (or, if we so elect, for the calendar year) and (3) any net ordinary income and capital gain net income for the preceding calendar years that was not distributed during such calendar years and on which we incurred no U.S. federal income tax.

Financing Arrangements

We anticipate that we will continue to fund our investment activities through existing cash, capital raised from our stock offerings, and borrowings on the Credit Facilities. However, with the approval of our board of directors, we closed the Offering to new investors effective September 30, 2017. Our primary uses of funds in both the short-term and long-term are expected to be investments in portfolio companies, operating expenses and cash distributions to holders of our common stock.
 
As of September 30, 2017, we had $95.0 million outstanding and $0.0 million available under our EverBank Credit Facility, and $395.0 million outstanding and $5.0 million available under the Deutsche Bank Credit Facility, both of which we estimated approximated fair value. Availability under the Credit Facilities is subject to certain limitations and the asset coverage restrictions under the 1940 Act. For further information on our Credit Facilities, including key terms and financial covenants, refer to Note 5 - Borrowings to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016 as well as Note 5 - Borrowings to the condensed consolidated financial statements included elsewhere in this Report.
 
As a BDC, we generally are required to meet a coverage ratio of total assets to total senior securities, which include borrowings and any preferred stock we may issue in the future, of at least 200%. As of September 30, 2017, our asset coverage ratio under BDC regulations was 218% when assuming unfunded commitments are treated as senior securities. As of December 31, 2016, our asset coverage ratio under BDC regulations was 245% when assuming unfunded commitments are treated as senior securities. As of September 30, 2017, considering these limitations, we had the ability to draw upon the entire $5.0 million of remaining capacity in the Credit Facilities.

Although we have been able to secure access to potential additional liquidity, through proceeds from the Offering and also by entering into the Credit Facilities, there is no assurance that equity or debt capital will be available to us in the future on favorable terms, or at all.

Related-Party Transactions and Agreements

We have entered into agreements with our Adviser, our Sub-Adviser and our Dealer Manager, whereby we pay certain fees and reimbursements to these entities. These include payments to our Dealer Manager for selling commissions and the Dealer Manager fee and payments to our Adviser for reimbursement of offering costs. In addition, we make payments for certain services that include the identification, execution, and management of our investments and also the management of our day-to-day operations

49


provided to us by our Adviser and Sub-Adviser, pursuant to various agreements that we have entered into. See Note 10 - Related Party Transactions and Arrangements to the financial statements included elsewhere in this Report for additional information regarding related party transactions.

 Contractual Obligations
 
As of September 30, 2017, we had $490.0 million in borrowings outstanding under the Credit Facilities. Our EverBank Credit Facility will mature March 6, 2020, with two one-year extension options, subject to lender approval, and the Deutsche Bank Credit Facility will mature on June 16, 2020. See Note 5 - Borrowings to the financial statements included elsewhere in this Report for a description of the Credit Facilities.
 
A summary of our significant contractual payment obligations for the repayment of outstanding borrowings at September 30, 2017 is as follows:
 
Payments Due By Period (dollars in thousands)
 
Total
 
Less than 1 year
 
1-3 years
 
3-5 years
 
After 5 years
EverBank Credit Facility(1)
$
95,000

 
$
—

 
$
95,000

 
$
—

 
$
—

Deutsche Bank Credit Facility(2)
395,000

 
—

 
395,000

 
—

 
—

Total Credit Facilities
$
490,000

 
$
—

 
$
490,000

 
$
—

 
$
—

(1)
At September 30, 2017, $0.0 million remained available under our EverBank Credit Facility.
(2)
At September 30, 2017, $5.0 million remained available under the Deutsche Bank Credit Facility; however, our borrowing ability is limited to the asset coverage ratio restrictions imposed by the 1940 Act, as discussed above.

Off-Balance Sheet Arrangements
 
At September 30, 2017, we had a total of approximately $57.6 million in outstanding commitments comprised of (i) 30 commitments to fund revolving loans that had not been fully drawn or term loans that had not been funded and (ii) four capital commitments that had not been fully called. We recognized unrealized appreciation of approximately $473,000 on our outstanding unfunded loan commitments and no unrealized appreciation or depreciation on our outstanding unfunded capital commitments during the nine months ended September 30, 2017. We reasonably believe that we have sufficient assets to adequately cover and allow us to satisfy our outstanding unfunded commitments. At December 31, 2016, we had a total of approximately $42.7 million in outstanding commitments comprised of (i) 22 commitments to fund revolving loans that had not been fully drawn or term loans that had not been funded and (ii) three capital commitments that had not been fully called. We recognized unrealized depreciation of approximately $266,000 on our outstanding unfunded loan commitments and unrealized appreciation of approximately $14,000 on our outstanding unfunded capital commitments during the year ended December 31, 2016.
 
Commitments and Contingencies
 
(dollars in thousands)
 
September 30, 2017
 
December 31, 2016
Unfunded Loan Commitments
 
 
 
Adams Publishing Group, LLC
$
2,216

 
$
—

Apex Linen Services, Inc.
403

 
397

Arcus Hunting, LLC
120

 
2,136

BarFly Ventures, LLC
—

 
881

BigName Holdings, LLC
101

 
—

Boccella Precast Products, LLC
500

 
—

Buca C, LLC
—

 
1,548

CapFusion Holding, LLC
—

 
394

CDHA Management, LLC
3,373

 
3,259

Charps, LLC
1,000

 
—

Clad-Rex Steel, LLC
100

 
—

CST Industries, Inc.
602

 
—

CTVSH, PLLC
200

 
—

Datacom, LLC
50

 
1,302

Felix Investments Holdings II LLC
1,667

 
—

Gamber-Johnson Holdings, LLC
300

 
300

Guerdon Modular Holdings, Inc.
400

 
400

Hawk Ridge Systems, LLC
400

 
400


50


 
Commitments and Contingencies
 
(dollars in thousands)
 
September 30, 2017
 
December 31, 2016
Hojeij Branded Foods, Inc.
$
2,090

 
$
2,000

Hostway Corporation
67

 
—

HW Temps LLC
200

 
50

Jackmont Hospitality, Inc.
—

 
1,200

LaMi Products, LLC
1,029

 
1,729

Market Force Information, Inc.
272

 
—

Meisler Operating, LLC
400

 
—

Minute Key, Inc.
2,000

 
197

Mystic Logistics, Inc.
200

 
194

NNE Issuer, LLC
7,000

 
—

NuStep, LLC
300

 
—

Pardus Oil & Gas, LLC
357

 
357

Permian Holdco 2
290

 
290

PPC/Shift, LLC
500

 
500

Resolute Industrial LLC
5,750

 
—

Strike, LLC
—

 
2,475

Unirush LLC
—

 
980

Volusion, LLC
—

 
2,955

Wireless Vision
8,289

 
—

Unfunded Capital Commitments
 
 
 
Brightwood Capital Fund III, LP
1,000

 
1,000

Brightwood Capital Fund IV, LP
9,000

 
10,000

Copper Trail Energy Fund
2,500

 
—

Freeport First Lien Loan Fund III, LP
4,941

 
7,737

Total
$
57,617

 
$
42,681


Recent Developments and Subsequent Events
 
From October 1, 2017 through November 10, 2017, we funded approximately $1.9 million in investments and received proceeds from repayments and dispositions of approximately $62.0 million.

On October 19, 2017, we entered into an amendment to the EverBank Credit Facility, which increased the revolver commitments by the amount of $25.0 million (from $95.0 million to $120.0 million).

On October 19, 2017, we, our Adviser and our Sub-Adviser entered into a conditional income incentive fee agreement (the “Third Quarter 2017 Fee Waiver Agreement”), pursuant to which, for a period from July 1, 2017 through September 30, 2017, our Advisers could waive the “subordinated incentive fee on income,” as such term is defined in the Investment Advisory Agreement, upon the occurrence of any event that, in our Advisers’ sole discretion, causes such waiver to be deemed necessary. The Third Quarter 2017 Fee Waiver Agreement may require us to repay our Advisers for previously waived payments of up to 100% of our operating expenses or waived base management fees or incentive fees under certain circumstances. The previously waived fees are potentially subject to repayment by us, if at all, within a period not to exceed three years from the date of each respective fee waiver.

On October 19, 2017, our board of directors approved an amendment and restatement of our distribution reinvestment plan (the “Amended DRP”). Under the Amended DRP, for so long as our Offering is suspended to new investors or otherwise is terminated, cash distributions paid to participating stockholders will be reinvested in additional common stock at a purchase price determined by our board of directors, or a committee thereof, in its sole discretion, that is (i) not less than the NAV per share determined in good faith by our board of directors or a committee thereof, in its sole discretion, within forty-eight hours prior to the payment of the distribution (the “NAV Per Share”) and (ii) not more than 2.5% greater than the NAV Per Share as of such date. The Amended DRP will be effective as of, and will first apply to the reinvestment of cash distributions paid on or after, November 1, 2017.

On November 3, 2017, we filed a tender offer statement on Schedule TO with the SEC, to commence an offer by us to purchase, as approved by our board of directors, 1,619,437.09 shares of our issued and outstanding common stock, par value $0.001 per share. The offer is for cash at a purchase price equal to the NAV per share to be determined within 48 hours of the repurchase date.

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Item 3.    Quantitative and Qualitative Disclosures about Market Risk.
 
Quantitative and Qualitative Disclosures about Market Risk
 
We are subject to financial market risks, in particular changes in interest rates. Changes in interest rates may affect our interest income from portfolio investments, the fair value of our fixed income investments, and our cost of funding.
 
Our interest income will be affected by changes in various interest rates, including LIBOR and prime rates, to the extent any of our debt investments include floating interest rates. We generally invest in floating rate debt instruments, meaning that the interest rate payable on such instrument resets periodically based upon changes in a specified interest rate index, typically the one-month or three-month LIBOR. As of September 30, 2017, approximately 85.6% of our LMM, Private Loan, and Middle Market portfolio debt investments (based on cost) contained floating interest rates. At September 30, 2017, the one-month LIBOR was approximately 1.24% and the three-month LIBOR was approximately 1.34%. However, many of our investments provide that the specified interest rate index on such instruments will never fall below a level, or floor, generally between 100 and 150 basis points regardless of the level of the specified index rate, which minimizes the negative impact to our interest income that would result from a decline in index rates.

In addition, any fluctuations in prevailing interest rates may affect the fair value of our fixed rate debt instruments and result in changes in unrealized gains and losses, and may also affect a net increase or decrease in net assets resulting from operations. Such changes in unrealized appreciation and depreciation will materialize into realized gains and losses if we sell our investments before their respective debt maturity dates.

Further, because we borrow money to make investments, our net investment income is partially dependent upon the difference between the interest rate at which we invest borrowed funds and the interest rate at which we borrow funds. In periods of rising interest rates and when we have borrowed capital with floating interest rates, our interest expense will increase, which will increase our financing costs and reduce our net investment income, especially to the extent we hold fixed-rate debt investments. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income.
 
The following table shows the approximate annualized increase or decrease (dollars in thousands) in the components of net investment income due to hypothetical interest rate index changes, assuming no changes in our investments and borrowings as of September 30, 2017.
Change in interest rates
 
Increase (Decrease) in
Interest Income
 
Increase (Decrease) in
Interest Expense
 
Net Increase (Decrease) in Net
Investment Income
Down 100 basis points
 
$
(2,999
)
 
$
(4,900
)
 
$
1,901

Down 50 basis points
 
(2,722
)
 
(2,450
)
 
(272
)
Up 50 basis points
 
4,420

 
2,450

 
1,970

Up 100 basis points
 
8,844

 
4,900

 
3,944

Up 200 basis points
 
17,718

 
9,800

 
7,918

Up 300 basis points
 
26,591

 
14,700

 
11,891


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, including borrowing under the Credit Facilities or other borrowings, that could affect net increase in net assets resulting from operations, or net income. Accordingly, we can offer no assurances that actual results would not differ materially from the analysis above.

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. As of September 30, 2017, we had not entered into any interest rate hedging arrangements.
 

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Item 4.    Controls and Procedures.
 
In accordance with the Exchange Act, Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2017, to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

No change occurred in our internal controls over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act), during the nine months ended September 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.


53


PART II — OTHER INFORMATION
 
Item 1.    Legal Proceedings.
 
We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be party to certain legal proceedings, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of any legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material adverse effect upon our financial condition or results of operations.
 
Item 1A. Risk Factors.
 
There have been no material changes to the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016, that we filed with the SEC on March 7, 2017.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.
 
Issuer Purchases of Equity Securities

Repurchases of our common stock pursuant to our tender offer are as follows:
 
Period
 
Total Number of Shares Purchased
 
Average Price per Share
 
Cumulative Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (in millions)
 
 
 
 
 
 

 
 
July 1, 2017 through July 31, 2017
 
—

 
$
—

 
—

 
—

August 1, 2017 through August 31, 2017
 
—

 
$
—

 
—

 
—

September 1, 2017 through September 30, 2017
 
747,784,633

 
$
8.19

 
747,784,633

 
—


Item 3.    Defaults upon Senior Securities.
 
None.
 
Item 4.    Mine Safety Disclosures.
 
Not applicable.
 
Item 5.    Other Information.
 
Not applicable.


54


Item 6.    Exhibits.

Exhibit No.
 
Description
 
Second Quarter 2017 Conditional Income Incentive Fee Waiver Agreement, dated as of July 26, 2017, by and among the Registrant, HMS Adviser LP and MSC Adviser I, LLC (Filed as Exhibit 10.1 to the Registrant’s current report on Form 8-K, filed on July 31, 2017 (File No. 814-00939) and incorporated herein by reference).
 
Certification of Chief Executive Officer of the Registrant, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith).
 
Certification of Chief Financial Officer of the Registrant, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith).
 
Certification of Chief Executive Officer and Chief Financial Officer of the Registrant, pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith).


55


SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
HMS INCOME FUND, INC.
 
 
 
 
Date:
November 14, 2017
By:
/s/ SHERRI W. SCHUGART
 
 
 
Sherri W. Schugart
 
 
 
Chairman, Chief Executive Officer and President
 
 
 
 
Date:
November 14, 2017
By:
/s/ RYAN T. SIMS
 
 
 
Ryan T. Sims
 
 
 
Chief Financial Officer and Secretary


56


EXHIBIT INDEX
 
Exhibit No.
 
Description
 
Second Quarter 2017 Conditional Income Incentive Fee Waiver Agreement, dated as of July 26, 2017, by and among the Registrant, HMS Adviser LP and MSC Adviser I, LLC (Filed as Exhibit 10.1 to the Registrant’s current report on Form 8-K, filed on July 31, 2017 (File No. 814-00939) and incorporated herein by reference).
 
Certification of Chief Executive Officer of the Registrant, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith).
 
Certification of Chief Financial Officer of the Registrant, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith).
 
Certification of Chief Executive Officer and Chief Financial Officer of the Registrant, pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith).


57