See Unaudited Notes to Financial Statements.
GUGGENHEIM CREDIT INCOME FUND 2016 T
STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
|
| | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
| Operating activities | | | |
| Net increase in net assets resulting from operations | $ | 7,705 |
| | $ | 3,633 |
|
| Adjustments to reconcile net increase in net assets from operations to net cash used in operating activities: | | | |
| Purchase of investments in Guggenheim Credit Income Fund | (49,417 | ) | | (75,661 | ) |
| Sale of investments in Guggenheim Credit Income Fund | 556 |
| | — |
|
| Net realized gain on investment | (46 | ) | | — |
|
| Net change in unrealized appreciation on investment | (1,189 | ) | | (2,086 | ) |
| (Increase) decrease in operating assets: | | | |
| Due from Advisors | 598 |
| | — |
|
| Deferred offering costs | 509 |
| | (646 | ) |
| Dividend income receivable | — |
| | 33 |
|
| Other assets | 4 |
| | — |
|
| Increase (decrease) in operating liabilities: | | | |
| Accounts payable, accrued expenses and other liabilities | (52 | ) | | 28 |
|
| Accrued professional services fees | 149 |
| | 19 |
|
| Due to Advisors | 19 |
| | 452 |
|
| Accrued offering expenses | (193 | ) | | 172 |
|
| Due to Dealer Manager | 152 |
| | — |
|
| Net cash used in operating activities | (41,205 | ) | | (74,056 | ) |
| | | | |
| Financing activities | | | |
| Issuance of Common Shares | $ | 46,390 |
| | $ | 76,071 |
|
| Distributions paid | (4,078 | ) | | (909 | ) |
| Repurchase of Common Shares | (1,417 | ) | | (5 | ) |
| Net cash provided by financing activities | 40,895 |
| | 75,157 |
|
| | | | |
| Net increase (decrease) in cash | (310 | ) | | 1,101 |
|
| Cash, beginning of period | 1,313 |
| | 41 |
|
| Cash, end of period | $ | 1,003 |
| | $ | 1,142 |
|
| Supplemental information and non-cash financing activities: | | | |
| Distributions reinvested | $ | 3,732 |
| | $ | 910 |
|
| Due to Dealer Manager | $ | 1,253 |
| | $ | — |
|
| | | | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2020 | | 2019 | | |
| Operating activities | | | | | |
| Net increase (decrease) in net assets resulting from operations | $ | (1,802) | | | $ | 4,085 | | | |
| Adjustments to reconcile net increase (decrease) in net assets from operations to net cash provided by operating activities: | | | | | |
| Purchase of investment in GCIF | — | | | (1,000) | | | |
| Sale of investment in GCIF through GCIF's share repurchase program | 2,993 | | | 1,700 | | | |
| Net realized (gain) loss from investment in GCIF | 218 | | | (45) | | | |
| Net change in unrealized depreciation from investment in GCIF | 8,893 | | | 3,867 | | | |
| (Increase) decrease in operating assets: | | | | | |
| | | | | |
| Receivable from related parties | (275) | | | 31 | | | |
| Dividends receivable | (698) | | | 1,462 | | | |
| | | | | |
| Increase (decrease) in operating liabilities: | | | | | |
| Due to Dealer Manager | (8) | | | (13) | | | |
| Accounts payable, accrued expenses and other liabilities | (7) | | | (39) | | | |
| Accrued professional services fees | 3 | | | 17 | | | |
| Payable to related parties | (108) | | | 140 | | | |
| | | | | |
| Net cash provided by operating activities | 9,209 | | | 10,205 | | | |
| | | | | |
| Financing activities | | | | | |
| | | | | |
| Repurchase of Common Shares | (4,866) | | | (4,590) | | | |
| Distributions paid | (4,047) | | | (5,125) | | | |
| Payment of DSS Fees | (602) | | | (641) | | | |
| Net cash used in financing activities | (9,515) | | | (10,356) | | | |
| | | | | |
| Net decrease in cash | (306) | | | (151) | | | |
| Cash, beginning of period | 802 | | | 1,698 | | | |
| Cash, end of period | $ | 496 | | | $ | 1,547 | | | |
| Supplemental information and non-cash financing activities: | | | | | |
| Distributions reinvested | $ | 2,863 | | | $ | 3,898 | | | |
| Due to Dealer Manager | $ | — | | | $ | (136) | | | |
| | | | | |
| | | | | |
See Unaudited Notes to Financial Statements.
GUGGENHEIM CREDIT INCOME FUND 2016 T
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data, percentages and as otherwise indicated;
for example, with the word “million” or otherwise)
Note 1. Principal Business and Organization
Guggenheim Credit Income Fund 2016 T (the "Company") was formed as a Delaware statutory trust on September 5, 2014. The Company's investment objectives are to provide its shareholders with current income, capital preservation and, to a lesser extent, long-term capital appreciation by investing substantially all of its equity capital in Guggenheim Credit Income Fund (the "Master Fund", or "GCIF"). The Company is a non-diversified, closed-end management investment company that elected to be treated as a business development company (a "BDC") under the Investment Company Act of 1940, as amended (the "1940 Act").
The Master Fund has elected to be treated as a BDC under the 1940 Act and it has the same investment objectives as the Company. The Master Fund commenced investment operations on April 2, 2015. The Master Fund's consolidated financial statements are an integral part of the Company's financial statements and should be read in their entirety.
From inception through September 10, 2017, theThe Master Fund wasis externally managed by Carey Credit Advisors, LLC ("CCA") and Guggenheim Partners Investment Management, LLC ("Guggenheim" or the "Advisor"), which wereis responsible for sourcing potential investments, analyzing and conducting due diligence on prospective investment opportunities, structuring investments and ongoing monitoring of the Master Fund’s investment portfolio. On August 10, 2017, CCA resigned as the Master Fund's investment advisor and administrator, and the Master Fund's Board of Trustees ("Master Fund's Board") selected Guggenheim to perform the Master Fund's investment advisory and administrative responsibilities, both events concurrently effective on September 11, 2017. As of September 30, 2017, Guggenheim serves as investment advisor pursuant to an interim investment advisory agreement which commenced on September 11, 2017. The Master Fund's Board set a shareholder meeting date of October 20, 2017 and a record date of August 25, 2017 for Master Fund shareholders to consider the approval of a new investment advisory agreement between Guggenheim and the Master Fund.
Between July 24, 2015 and April 28, 2017, the Company was offeringoffered and sellingsold its common shares ("Shares" or "Common Shares") pursuant to a registration statement on Form N-2 (the “Registration Statement”) covering its continuous public offering of up to $1.0 billion (the “Public Offering”). The Company initially sold and issued Shares on October 8, 2015 and then commenced investment operations. On April 28, 2017, the Company's Public Offering was terminated, resulting in a gross capital raise of approximately $164$164.0 million from the sale and issuance of Common Shares in the the Public Offering. The Company may continue to acquire Master Fund common shares in a continuous series of private placement transactions with the proceeds from its distribution reinvestment program, subject to the availability of surplus cash available for investment (see(See Note 5. Common Shares). As of September 30, 2017,2020, the Company owned 64.6%65.60% of the Master Fund's outstanding common shares.
Note 2. Significant Accounting Policies
Basis of Presentation
Management has determined that the Company meets the definition of an investment company and follows the accounting and reporting guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946 — Financial Services — Investment Companies (“ASC Topic 946”).
The Company's interim financial statements have been prepared pursuant to the requirements for reporting on Form 10-Q and the disclosure requirements stipulated in Articles 6 and 10 of Regulation S-X, and therefore do not necessarily include all information and notes necessary for a fair statement of financial position and results of operations in accordance with accounting principles generally accepted in the U.S. ("GAAP"). In the opinion of management, the unaudited financial information for the interim period presented in this Report reflects all normal and recurring adjustments necessary for a fair statement of financial position and results from operations. Operating results for interim periods are not necessarily indicative of operating results for an entire year. The Company's unaudited financial statements should be read in conjunction with the Master Fund's unaudited consolidated financial statements; the Master Fund's quarterly report on Form 10-Q is incorporated by reference and filed as an exhibit to this Report.
Reclassifications
Certain prior period amounts have beenmay be reclassified to conform to the current presentation with no effect on the Company's financial condition, results of operations or cash flows.
Notes to Financial Statements (Unaudited)
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities at the date of the financial statements, (ii) the reported amounts of income and expenses during the reported period and (iii) disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ materially from those estimates under different assumptions and conditions.
Notes to Financial Statements (Unaudited)
Cash
Cash consists of demand deposits held at a major U.S. financial institution and the amount recorded on the statements of assets and liabilities may exceed the Federal Deposit Insurance Corporation insured limit. Management believes the credit risk related to its demand deposits is minimal.
Valuation of Investments
The Company invests substantially all of its equity capital in the purchase of the Master Fund's common shares and its primary investment position is common shares of the Master Fund. The Company determines the fair value of the Master Fund's common shares as the Master Fund's net asset value per common share (as determined by the Master Fund) multiplied by the number of Master Fund common shares owned by the Company. The Company has implemented Accounting Standards Update ("ASU") 2015-07, which permits a reporting entity, as a practical expedient, to measure the fair value of certain investments using the net asset value per share of the investment.
Transactions with the Master Fund
Distributions received from the Master Fund are recorded on the record date. Distributions received from the Master Fund are generally recognized as dividend income or distributions of long term gains in the current period, a portion of which may be subject to a change in characterization in future periods, including the potential for reclassification to realizedbetween dividend income, long term gains and return of capital. The Company's transactions with the Master Fund are recorded on the effective date of the subscription in, or the redemption of, the Master Fund shares. Realized gains and losses resulting from the Company's share repurchase transactions with the Master Fund are calculated on the specific share identification basis.
Organization and Offering Expenses
Organization expenses are expensed on the Company's statements of operations. Continuous offering expenses are capitalized monthly on the Company's statements of assets and liabilities as deferred offering costs and thereafter expensed to the Company's statements of operations over a 12-month period.period on a straight-line basis commencing at the later of (i) when the expense was incurred or (ii) when operations began.
Distribution and Shareholder Servicing Fees
Beginning in the fourth quarter of 2017 (the second calendar quarter after the close of the Company's Public Offering), the Company will commence quarterly paymentsThe purpose of the distribution and shareholder servicing fee (the "DSS("DSS Fee") at an annual rate of 0.90% of the average net purchase price per share sold in the Public Offering. The purpose of the DSS Fee is to reimburse Guggenheim Funds Distributors, LLC, a Delaware limited liability company (the "Dealer Manager" or "GFD"), an affiliate of Guggenheim, for costs incurred by selected dealers and investment representatives for (i) distribution of the Company's Common Shares (the "Distribution Services Component") and (ii) providing ongoing shareholder services (the "Shareholder Services Component"). Beginning in the third quarter of 2017 (the first calendar quarter after the close of the Company's Public Offering), the Company commenced recognition of the Shareholder Services Component as an expense on the Company's statements of operations as the services are provided. The Company has allocated 0.25% per annum of the average net purchase price per share sold in the Public Offering to thisthe Shareholder Services Component. As the Distribution Services Component, representing 0.65% per annum of the average net purchase price per share sold in the Public Offering, pertains to the sale of the Company's Common Shares, the Company estimates the present value of all future Distribution Services Component payments, employing a discount rate equal to the prevailing effective yield on 5-year US Treasuries as observed on December 30, 2016. The Company records a liability equal to the estimated present value of the Distribution Services Component payments, recorded as part of "Due to Dealer Manager" with an offsetting charge to “Paid-in-capital in excess of par value” on the statements of assets and liabilities and recorded as a "Distribution services charge" on the statements of changes in net assets.
The quarterly payment of the DSS Fee is computed at the daily rate of 0.002466% (i.e. annual rate of 0.90%) of the product of (i) $9.12 per share (the average net purchase price of Common Shares sold in the Public Offering, excluding Common Shares issued under the Company's distribution reinvestment plan ("DRP Shares")), and (ii) the number of Common Shares outstanding on each day during the recording period, excluding (a) DRP Shares and (b) Shares owned by shareholders that are not recipients of ongoing shareholder services from eligible selected dealers. The Company will cease to pay the DSS Fee at the earlier of: (i) the date at which the second amended and restated dealer manager agreement (the "Dealer Manager Agreement") is terminated; (ii) the date at which the underwriting compensation from all sources, including the DSS Fee, any organization and offering fees paid to the Dealer Manager for underwriting, underwriting compensation, and shareholder servicing paid directly by the shareholders and the Company or its affiliates, equals 10% of the gross proceeds from the Company's Public Offering, excluding proceeds from DRP Share sales; and (iii) the date at which a liquidity event occurs.
Notes to Financial Statements (Unaudited)
During the three and nine months ended September 30, 2017, $0.1 million and $1.3 million, respectively, of DSS Fees were charged to “Paid-in-capital in excess of par value”, $0.1 million and $0.1 million, respectively were charged to "Shareholder servicing component expenses" and less than $0.1 million and $0.1 million, respectively, were charged to interest expense, included in other expenses, for the accretion of the present value discount. As of September 30, 2017, the Company had recognized a liability to the Dealer Manager of $3.7 million, representing (i) the present value of all future payments of the Distribution Services Component, or $3.7 million discounted at a rate of 1.93% and (ii) the current period accrued portion of the Shareholder Services Component, or $0.1 million. The following table presents the timing of future payments of the estimated $3.7 million of the DSS Fee: Distribution Services Component (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2017 |
| | | Total | | < 1 year | | 1-3 years | | 3-5 years | | > 5 years |
| DSS Fee: Distribution Services Component | | $ | 3,747 |
| | $ | 1,014 |
| | $ | 1,684 |
| | $ | 1,049 |
| | $ | — |
|
Earnings per Common Share
Earnings per Common Share is calculated based upon the weighted average number of Common Shares outstanding during the reporting period.
Distributions to the Company's Shareholders
DistributionsDeclared distributions to the Company's shareholders are recorded as a liability as of the record date.
Notes to Financial Statements (Unaudited)
Federal Income Taxes
The Company has elected to be treated for federal income tax purposes, and intends to maintain its qualification, as a Regulated Investment Company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). Generally, a RIC is not subject to federal income taxes on distributed income and gains if it distributes dividends in a timely manner out of assets legally available for distributions to its shareholders of an amount generally at least equal to 90% of its “Investment Company Taxable Income,” determined without regard to any dividend paid, as defined in the Code. The Company intends to distribute sufficient dividends to maintain its RIC status each year and it does not anticipate incurring a material level of federal income taxes.
The Company is generally subject to nondeductible federal excise taxes if it does not distribute dividends to its shareholders in respect of each calendar year of an amount at least equal to the sum of (i) 98% of its net ordinary income (taking into account certain deferrals and elections) for the calendar year, (ii) 98.2% of its capital gain net income (i.e., capital gains in excess of capital losses), adjusted for certain ordinary losses, for the one-year period generally ending on October 31st of the calendar year and (iii) any net ordinary income and capital gain net income for preceding calendar years that were not distributed during such calendar years and on which the Company incurred no federal income tax. The Company may, at its discretion, incur a 4% nondeductible federal excise tax on under-distribution of taxable ordinary income and capital gains.
The Company follows ASC 740, Income Taxes (“ASC 740”). ASC 740 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing our tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold are recorded as a tax benefit or expense in the current year. Penalties or interest, if applicable, that may be assessed relating to income taxes would be classified as other expenses in the statements of operations. Management has reviewed all open tax years and concluded that there is no effect to the Company’s financial positions or results of operations and no tax liability was required to be recorded resulting from unrecognized tax benefits relating to uncertain income tax position taken or expected to be taken on a tax return. During this period, the Company did not incur any material interest or penalties. Open tax years are those years that are open for examination by the relevant income taxing authority. As of September 30, 2020, open U.S. Federal and state income tax years include the tax years ended September 30, 2017 through September 30, 2020. The Company has no examinations in progress. Management’s determinations regarding ASC 740 may be subject to review and adjustment at a later date based upon factors including, but not limited to, an on-going analysis of tax laws, regulations and interpretations thereof. SEC Disclosure Update and Simplification
In August 2020, the U.S. Securities and Exchange Commission (“SEC”) issued Final Rule Release No. 33-10825 and No.34-89670, collectively referred to as 'Modernization of Regulation S-X Items 101, 103 and 105’. These rules amend certain SEC disclosure requirements to improve disclosure for investors and to simplify compliance for registrants, including new requirements for human capital disclosures and a summary of risk factors. The final rules are effective for all filings on or after November 9, 2020. The Company has evaluated the impact of the amendments and determined the effect of the adoption of the simplification rules on the financial statements would mostly affect the Form 10-K.
Note 3. Investments
Below is a summary of the Company's investment in the Master Fund, a related party (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | End of Period | | Weighted Average Shares Owned | | | | | | % of Net |
| Period Ended | | No. of Shares | | Quarter to Date | | Year to Date | | Cost | | Fair Value | | Assets |
| September 30, 2020 | | 17,722,125 | | | 17,798,319 | | | 17,891,722 | | | $ | 147,298 | | | $ | 128,829 | | | 100.3 | % |
| December 31, 2019 | | 18,122,416 | | | 18,445,894 | | | 18,742,374 | | | $ | 150,509 | | | $ | 140,933 | | | 100.9 | % |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| Investment | | As of: | | No. of Shares | | Weighted Average Shares Owned (1) | | Cost | | Fair Value | | % of Net Assets |
| Guggenheim Credit Income Fund | | September 30, 2017 | | 18,836 |
| | 17,582 |
| | $ | 156,091 |
| | $ | 161,126 |
| | 101.7 | % |
| Guggenheim Credit Income Fund | | December 31, 2016 | | 13,105 |
| | 5,860 |
| | $ | 107,184 |
| | $ | 111,030 |
| | 99.9 | % |
Notes to Financial Statements (Unaudited)
___________________
| |
(1) | "Weighted average shares owned" of the Master Fund is computed as the weighted average shares owned from January 1st of the year noted to the corresponding as of date.
|
Restricted Securities
The Master Fund does not currently intend to list its common shares on any securities exchange, and it does not expect a secondary market to develop for its issued and outstanding common shares. As a result, the Company's ability to sell its Master Fund common shares is limited. Because the Master Fund common shares are being acquired in one or more transactions not involving a public offering, they are "restricted securities" and may be required to be held indefinitely. Master Fund common shares may not be sold, transferred, assigned, pledged or otherwise disposed of unless (i) the Master Fund's consent is granted, and (ii) the Master Fund common shares are registered under applicable securities laws or specifically exempted from registration (in which case the Master Fund's shareholder may, at the Master Fund's option, be required to provide the Master Fund with a legal opinion, in form and substance satisfactory to the Master Fund, that registration is not required). Accordingly, a shareholder in the Master Fund, including the Company, must be willing to bear the economic risk of investing in the Master Fund.Fund common shares. No sale,
Notes to Financial Statements (Unaudited)
transfer, assignment, pledge or other disposition, whether voluntary or involuntary, of the Master Fund's common shares may be made except by registration of the transfer on the Master Fund's books. Each transferee will be required to execute an instrument agreeing to be bound by these restrictions and the other restrictions imposed on the Master Fund common shares and to execute such other instruments or certifications as are reasonably required by the Master Fund.
From October 15, 2015 through August 11, 2020, the Company acquired its investment in the Master Fund at prices ranging from $7.06 per share to $8.59 per share.
Share Repurchase Program
The Master Fund has implemented a share repurchase program, whereby each calendar quarter it conducts tender offers to repurchase up to 2.5% of the weighted average number of common shares outstanding in the prior four calendar quarters at a price estimated to be equal to its net asset value per common share as of the end of the precedingeach calendar quarter. The Master Fund's Board may amend, suspend or terminate the share repurchase program upon 30 days' notice.program.
Note 4. Related Party Agreements and Transactions
OfThe Company has entered into agreements with Guggenheim whereby the Company’s executive officers, Kevin Robinson, Senior Vice President,Company agrees to (i) receive expense support payments, (ii) reimburse certain expenses of, and Dina DiLorenzo, Senior Vice President, serve as executive officersto pay for, administrative, expense support, organization and offerings costs incurred by Guggenheim on the Company's behalf and (iii) pay DSS Fees payments to GFD, an affiliate of Guggenheim.
The memberships of the Company's Board of Trustees (the "Company's Board" or the "Board of Trustees") and the Master Fund's Board are identical and consequently the Company and the Master Fund are related parties. All of the Company's executive officers also serve as executive officers of the Master Fund.
The Company has entered into agreements with Guggenheim whereby Two of the Company agrees to (i) receive expense support paymentsCompany’s executive officers, Kevin Robinson, Senior Vice President, and (ii) reimburse certain expensesBrian Binder, Senior Vice President, serve as executive officers of and to pay for, administrative, expense support, organization and offerings costs incurred by Guggenheim on the Company's behalf. The Company has also approved an assignment and assumption agreement with respect to the Dealer Manager Agreement. Pursuant to the assigned Dealer Manager Agreement, GFD receives DSS Fees payments from the Company and distributes collected DSS Fees to eligible selected dealers that have elected to receive DSS Fees.Guggenheim.
Administrative Services Agreement
Prior to September 11, 2017, theThe Company wasis party to an amended and restated administrative services agreement with CCAGuggenheim (the "Prior Administrative"Administrative Services Agreement") whereby CCAGuggenheim, serving as the administrator (the "Administrator"), has agreed to provide administrative services, to the Company, including office facilities and equipment and clerical, bookkeeping and record-keeping services. More specifically, CCA, serving as the administrator (the "Prior Administrator"), performedAdministrator performs and oversawoversees the Company's required administrative services, which include financial and corporate record-keeping, preparing and disseminating the Company's reports to its shareholders and filing reports with the SEC. In addition, the Prior Administrator assistedassists in determining net asset value, overseeing the preparation and filing of tax returns, overseeing the payment of expenses and distributions and overseeing the performance of administrative and professional services rendered by others. For providing these services, facilities and personnel, the Company reimbursedreimburses the Prior Administrator the allocable portion of overhead and other expenses incurred by the Prior Administrator in performing its obligations under the Prior Administrative Services Agreement. On September 5, 2017 the Company entered into an administrative services agreement with Guggenheim (the "Administrative Services Agreement") whereby Guggenheim, serving as the administrator (the "Administrator") agreed to provide administrative services, similar to those previously provided by CCA, commencing on September 11, 2017.
The Administrative Services Agreement may be terminated at any time, without the payment of any penalty: (i) by the Company upon 60 days' written notice to Guggenheim upon the vote of the Company's independent trustees or (ii) by the Guggenheim upon not less than 120 days' written notice to the Company. Unless earlier terminated, the Administrative Services Agreement will remain in effect year to yearfor two years, and thereafter shall continue automatically for successive one-year periods if approved annually by a majority of the Company's Board of Trustees and the Company's Independent Trustees.Master Fund's independent trustees.
Notes to Financial Statements (Unaudited)
Dealer Manager Agreement
On July 17, 2015, theThe Company initially entered into the Dealeris party to a dealer manager agreement with GFD (the "Dealer Manager Agreement with Carey Financial, LLC ("Carey Financial"Agreement") and the Master Fund. On August 10, 2017, Carey Financial assigned the Dealer Manager Agreement to GFD and the assignment and assumption agreement was approved by the Company's Board.. Under the terms of the Dealer Manager Agreement, GFD is to act on a best efforts basis as the exclusive dealer manager for (i) the administration of the Company's DSS Fee payments to selected dealers and (ii) the public offering of common shares for future feeder funds affiliated with the Master Fund. The Company, not the Master Fund, is responsible for the compensation of GFD pursuant to the terms of the Dealer Manager Agreement. GFD does not receive any compensation to manage the Company's DSS Fees program and it is not entitled to retain any of the DSS Fees payments. The Dealer Manager Agreement may be terminated by the Company or GFD upon 60 calendercalendar days' written notice to the other party. In the event that the Company or GFD terminates the Dealer Manager Agreement with respect to the Company, the Dealer Manager Agreement will continue with respect to any other feeder fund.
Beginning in the fourth quarter of 2017 (the second calendar quarter after the close of the Company's Public Offering), the Company will initiatecommenced quarterly payments of the DSS Fee payments to reimburse GFD for costs incurred by selected dealers and investment representatives for providing distribution and shareholder services.at an annual rate of 0.90% of the average net purchase price per share sold in the Public Offering. The quarterly payment of the DSS Fee quarterly paymentsis computed at the daily rate of 0.002466% (i.e. annual rate of 0.90%) of the product of (i) $9.12 per Common Share (the average net purchase price of Common Shares sold in the Public Offering, excluding Common Shares issued under the Company's distribution reinvestment plan ("DRP Shares")) and (ii) the number of Common Shares outstanding on each day during the recording period, excluding (a) DRP Shares and (b) Shares owned by shareholders that are not recipients of ongoing shareholder services from eligible selected dealers. The Company will cease into pay the event thatDSS Fee at the earlier of: (i) the date at which the second amended and restated dealer manager agreement (the "Dealer Manager Agreement") is terminated; (ii) the date at which the underwriting compensation from all sources, including the DSS Fee, any organization and offering fees paid to the Dealer Manager Agreement is terminatedfor underwriting, underwriting compensation and shareholder servicing paid directly by the shareholders and the Company or GFD.its affiliates, equals 10% of the gross proceeds from the Company's Public Offering, excluding proceeds from DRP Share sales; and (iii) the date at which a liquidity event occurs.
During the three months ended September 30, 2020, less than $0.1 million of DSS Fees was booked to “Paid-in-capital in excess of par value”, less than $0.1 million was charged to "Shareholder servicing component expenses" and less than $0.1 million was charged to interest expense, included in other expenses, for the accretion of the present value discount. During the nine months ended September 30, 2020, $0.0 million of DSS Fees was booked to “Paid-in-capital in excess of par value”, $0.2 million was charged to "Shareholder servicing component expenses" and less than $0.1 million was charged to interest expense, included in other expenses, for the accretion of the present value discount. As of September 30, 2020, the Company had recognized a liability to the Dealer Manager of $1.2 million representing (i) the present value of all future estimated payments of the Distribution Services Component amounting to $1.0 million, or $1.0 million discounted at a rate of 1.93% and (ii) the current period accrued and unpaid portion of the Distribution and Shareholder Services Component, or $0.3 million. The following table presents the timing of future payments of the estimated $1.0 million of the DSS Fee: Distribution Services Component:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 |
| | Total | | ≤ 1 year | | > 1 - 3 years | | 3 - 5 years | | 5 years |
| DSS Fee: Distribution Services Component | | $ | 975 | | | $ | 784 | | | $ | 191 | | | $ | — | | | $ | — | |
Organization and Offering Expense Reimbursement Agreement
On August 17, 2015, theThe Company initially entered intois party to an organization and offering expense reimbursement agreement, as may be amended (the "O&O Agreement"), with CCA and Guggenheim. Under the O&O Agreement the Company reimbursed
Notes to Financial Statements (Unaudited)
CCA and Guggenheim for organization and offering costsexpenses incurred on the Company's behalf, including, but not limited to, legal services, audit services, printer services and the registration of securities under the Securities Act. The reimbursement of organization and offering expenses was conditional on the Company's receipt of equity capital from the sale of its Common Shares. Any such reimbursement could not exceed actual expenses incurred by CCA and Guggenheim and their affiliates. The Advisors were ultimately responsible for the payment of the Company's cumulative organization and offering expenses to the extent they exceedexceeded 1.5% of the aggregate proceeds from the sale of the Company's Common Shares, without recourse against or reimbursement by the Company. Under the terms of the O&O Agreement, the Company is no longernot obligated to reimburse CCA and Guggenheim for any unreimbursed offering expenses after the close of the Company's Public Offering on April 28, 2017.
Notes to Financial Statements (Unaudited)
Expense Support and Conditional Reimbursement Agreement
The Company initially entered into an expense support and conditional reimbursement agreement with CCACarey Credit Advisors, LLC ("CCA"), one of the Company's prior investment advisors, and Guggenheim executed on July 24, 2015, as amended (the "Prior Expense Support Agreement"). According to the terms of the Prior Expense Support Agreement, CCA and Guggenheim agreed to reimburse the Company for expenses in an amount that is sufficient to ensure that no portion of the Company's distributions to shareholders will be paid from Common Share offering proceeds. CCA and Guggenheim agreed to reimburse the Company monthly for expenses in an amount equal to the difference between the Company's cumulative distributions paid to its shareholders in each month less the sum of the Company's estimated investment company taxable income and net capital gains in each month. On September 5, 2017 the Company entered into an amended and restated expense support and conditional reimbursement agreement (the "Expense Support Agreement") with Guggenheim and CCA, for a limited purpose, effective as of September 11, 2017. The amended terms of the Expense Support Agreement: (i) releasereleased CCA from all obligations to make further expense payments, (ii) terminateterminated all of CCA's rights under the Expense Support Agreement, including any right to reimbursement for prior period expense payments made under the terms of the Prior Expense Support Agreement and (iii) permitpermitted the Company the option to limit or reduce the reimbursement of expensesGuggenheim expense payments in any manner so that the Company will comply with IRC Section 851 in each of its future tax years. As a result, 100% of all CCA's prior periods' unreimbursed expense support payments were classed as ineligible for future reimbursement, and going forward, Guggenheim is the sole source of expense support payments and solely eligible for reimbursement of prior periods' expense support payments.
Pursuant to the Expense Support Agreement, the Company has a conditional obligation to reimburse Guggenheim for any amounts funded by Guggenheim under this arrangement or the Prior Expense Support Agreement if (and only to the extent that), during any month occurring within three years of the date on which Guggenheim funded such amount, the sum of the Company's estimated investment company taxable income and net capital gains exceeds the ordinary cash distributions paid by the Company to its shareholders; provided, however, that (i) the Company will only reimburse Guggenheim for expense support payments made by Guggenheim to the extent that the payment of such reimbursement (together with any other reimbursement paid during such fiscal year) does not cause "other operating expenses" (as defined below) (on an annualized basis and net of any expense support reimbursement payments received by the Company during such fiscal year) to exceed the lesser of (A) 1.75% of the Company's average net assets attributable to its Common Shares for the fiscal year-to-date period after taking such reimbursement payments into account and (B) the percentage of the Company's average net assets attributable to its Common Shares represented by "other operating expenses" during the fiscal year in which such expense support payment from Guggenheim was made (provided, however, that this clause (B) will not apply to any reimbursement payment which relates to an expense support payment from the AdvisorsGuggenheim made during the same fiscal year); and (ii) the Company will not reimburse Guggenheim for expense support payments made by Guggenheim if the annualized rate of regular cash distributions declared by the Company at the time of such reimbursement payment is less than the annualized rate of regular cash distributions declared by the Company at the time Guggenheim made the expense support payment to which such reimbursement payment relates. "Other operating expenses" means the Company's total "operating expenses" (as defined below), excluding any investment advisory fee, a performance-based incentive fee,fees, organization and offering expenses, shareholder servicing fees, interest expense, brokerage commissions and extraordinary expenses. "Operating expenses" means all operating costs and expenses incurred, as determined in accordance with GAAP for investment companies.
The Company or Guggenheim may terminate the Expense Support Agreement at any time. The Expense Support Agreement will automatically terminate if (i) the Master Fund terminates the investment advisory agreementInvestment Advisory Agreement with Guggenheim or (ii) the Company's Board of Trustees makes a determination to dissolve or liquidate the Company.
The specific amount of Guggenheim's expense supportpayment obligation is determined at the end of each month. Upon termination of the Expense Support Agreement by Guggenheim, they areit is required to fund any amounts accrued thereunder as of the date of termination. Similarly, the conditional obligation of the Company to reimburse Guggenheim pursuant to the terms of the Expense Support Agreement shall survive the termination of such agreementthe Expense Support Agreement by either party. There can be no assurance that the Expense Support Agreement will remain in effect or that Guggenheim will reimburse any portion of the Company's expenses in future months.
Notes to Financial Statements (Unaudited)
The table below presents a summary of allunreimbursed monthly expenses supported by CCAGuggenheim:
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| Month Ended | Expense Support from CCA and Guggenheim | CCA Waiver of Expense Support Reimbursement | Expense Support Reimbursement | Expired Expense Support | Unreimbursed Expense Support | Minimum of 1.75% and Annualized Fiscal Year to Date Other Operating Expense Ratio (1) | Annualized Regular Cash Distribution Rate/Share, Declared (2) | Eligible for Reimbursement through |
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| April 2017 | 179 | | (89) | | (90) | | — | | — | | 0.64% | 0.63700 | | April 30, 2020 |
| May 2017 | 254 | | (127) | | (12) | | (115) | | — | | 0.64% | 0.63076 | | May 31, 2020 |
| June 2017 | 315 | | (157) | | — | | (158) | | — | | 0.64% | 0.63076 | | June 30, 2020 |
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| April 2018 | 57 | | — | | — | | — | | 57 | | 0.43% | 0.67571 | | April 30, 2021 |
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| March 2020 | 255 | | — | | — | | — | | 255 | | 0.54% | 0.67397 | | March 31, 2023 |
| April 2020 | 96 | | — | | — | | — | | 96 | | 0.54% | 0.57463 | | April 30, 2023 |
| May 2020 | 98 | | — | | — | | — | | 98 | | 0.54% | 0.57526 | | May 31, 2023 |
| June 2020 | 21 | | — | | — | | — | | 21 | | 0.54% | 0.57364 | | June 30, 2023 |
| July 2020 | 126 | | — | | — | | — | | 126 | | 0.54% | 0.57479 | | July 31, 2023 |
| August 2020 | 101 | | — | | — | | — | | 101 | | 0.54% | 0.57474 | | August 31, 2023 |
| September 2020 | 96 | | — | | — | | — | | 96 | | 0.54% | 0.57401 | | September 30, 2023 |
| Total | | | | | $ | 850 | | | | |
______________________
(1)Other operating expenses include all expenses borne by the Company excluding organization and Guggenheim,offering costs, a management fee, a performance-based incentive fee, financing fees and costs and interest expense.
(2)"Annualized Regular Cash Distribution Rate/Share, Declared" equals the waived amountsannualized rate of average weekly or monthly distributions per Share that were declared with record dates in connection with CCA's termination of its rightsthe subject month immediately prior to reimbursement of itsthe date the expense support payment obligation was incurred by CCA and Guggenheim. Regular cash distributions do not include declared special cash or share distributions, if any. Regular distributions are grossed up to disregard the associated dates through which such expenses are eligible for reimbursement byexpense impact of the Company (in thousands, except per share amounts):
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| Month Ended | Expense Support from CCA and Guggenheim(3) | CCA Waiver of Expense Support Reimbursement | Expense Support Reimbursement | Unreimbursed Expense Support | Ratio of Other Operating Expenses to Average Net Assets for the Period (1) | Minimum of 1.75% and Annualized Fiscal Year to Date Other Operating Expense Ratio (1) | Annualized Regular Cash Distribution Rate/Share, Declared (2) | Eligible for Reimbursement through |
| July 2015 | $ | 11 |
| $ | — |
| $ | (11 | ) | $ | — |
| NM | NM | $ | — |
| July 31, 2018 |
| August 2015 | 32 |
| (14 | ) | (18 | ) | — |
| NM | NM | $ | 0.33436 |
| August 31, 2018 |
| September 2015 | 30 |
| (15 | ) | — |
| 15 |
| NM | NM | $ | 0.66872 |
| September 30, 2018 |
| October 2015 | 30 |
| (15 | ) | — |
| 15 |
| 135.82% | 1.75% | $ | 0.66872 |
| October 31, 2018 |
| November 2015 | 33 |
| (16 | ) | — |
| 17 |
| 9.29% | 1.75% | $ | 0.66872 |
| November 30, 2018 |
| December 2015 | (19 | ) | 10 |
| — |
| (9 | ) | 0.47% | 1.75% | $ | 0.66872 |
| December 31, 2018 |
| January 2016 | 44 |
| (22 | ) | — |
| 22 |
| 0.97% | 1.75% | $ | 0.66872 |
| January 31, 2019 |
| February 2016 | 56 |
| (28 | ) | — |
| 28 |
| 0.52% | 1.75% | $ | 0.66872 |
| February 28, 2019 |
| March 2016 | 73 |
| (37 | ) | — |
| 36 |
| 0.72% | 1.75% | $ | 0.64792 |
| March 31, 2019 |
| April 2016 | 164 |
| (82 | ) | — |
| 82 |
| 0.20% | 1.75% | $ | 0.65520 |
| April 30, 2019 |
| May 2016 | 267 |
| (133 | ) | — |
| 134 |
| 0.15% | 1.75% | $ | 0.65520 |
| May 31, 2019 |
| June 2016 | 280 |
| (140 | ) | — |
| 140 |
| 0.12% | 1.75% | $ | 0.65520 |
| June 30, 2019 |
| July 2016 | 330 |
| (165 | ) | — |
| 165 |
| 0.10% | 1.75% | $ | 0.65520 |
| July 31, 2019 |
| August 2016 | 80 |
| (40 | ) | — |
| 40 |
| 0.08% | 1.75% | $ | 0.65520 |
| August 31, 2019 |
| September 2016 | (670 | ) | 335 |
| — |
| (335 | ) | 0.06% | 1.65% | $ | 0.65520 |
| September 30, 2019 |
| October 2016 | 507 |
| (254 | ) | — |
| 253 |
| 0.05% | 1.43% | $ | 0.65520 |
| October 31, 2019 |
| November 2016 | 693 |
| (347 | ) | — |
| 346 |
| 0.04% | 1.25% | $ | 0.65520 |
| November 30, 2019 |
| December 2016 | 254 |
| (127 | ) | — |
| 127 |
| 0.03% | 1.10% | $ | 0.64480 |
| December 31, 2019 |
| January 2017 | 424 |
| (212 | ) | — |
| 212 |
| 0.06% | 0.66% | $ | 0.64480 |
| January 31, 2020 |
| February 2017 | 260 |
| (130 | ) | — |
| 130 |
| 0.05% | 0.60% | $ | 0.64480 |
| February 28, 2020 |
| March 2017 | 348 |
| (174 | ) | — |
| 174 |
| 0.06% | 0.65% | $ | 0.64480 |
| March 31, 2020 |
| April 2017 | 178 |
| (89 | ) | — |
| 89 |
| 0.04% | 0.61% | $ | 0.63700 |
| April 30, 2020 |
| May 2017 | 254 |
| (127 | ) | (15 | ) | 112 |
| 0.04% | 0.58% | $ | 0.63076 |
| May 31, 2020 |
| June 2017 | 316 |
| (158 | ) | — |
| 158 |
| 0.13% | 0.75% | $ | 0.63076 |
| June 30, 2020 |
| July 2017 | — |
| — |
| — |
| — |
| 0.07% | 0.76% | $ | 0.63076 |
| July 31, 2020 |
| August 2017 | — |
| — |
| — |
| — |
| 0.07% | 0.77% | $ | 0.63076 |
| August 31, 2020 |
| September 2017 | 2 |
| — |
| — |
| 2 |
| 0.01% | 0.70% | $ | 0.63076 |
| September 31, 2020 |
| Total | $ | 3,977 |
| $ | (1,980 | ) | $ | (44 | ) | $ | 1,953 |
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______________________
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(1) | Other operating expenses include all expenses borne by the Company excluding organization and offering costs, an investment advisory fee, a performance-based incentive fee, financing fees and costs, and interest expense. "NM" means not measurable in these months due to the absence of a positive value for Average Net Assets. |
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(2) | "Annualized Regular Cash Distribution Rate/Share, Declared" equals the annualized rate of average weekly distributions per Share that were declared with record dates in the subject month immediately prior to the date the expenses support payment obligation was incurred by CCA and Guggenheim. Regular cash distributions do not include declared special cash or share distributions, if any. |
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(3) | In December 2015 and September 2016, CCA and Guggenheim's year-to-date expense support obligation was reduced after adjusting for the Master Fund's periodic distributions to the Company and a decrease in estimated professional services fees in those same months. |
DSS Fees on the statement of operations.
Summary of Related Party Transactions for the Three and Nine Months Ended September 30, 2017 and 2016
The following table presents the related party fees, expenses and transactions for the three and nine months ended September 30, 20172020 and 2016;September 30, 2019; related party transactions between the Company and the Master Fund in connection with Common Shares purchases, sales and distributions are disclosed elsewhere in the financial statements:
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| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
Related Party (1) | Source Agreement & Description | | 2020 | | 2019 | | 2020 | | 2019 |
| Related Party Expenses: | | | | | | | | |
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| Guggenheim | Administrative Services Agreement - expense reimbursement | | $ | 43 | | | $ | 56 | | | $ | 144 | | | $ | 160 | |
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| Guggenheim | Expense Support Agreement - expense support reimbursement | | — | | | 72 | | | 27 | | | 194 | |
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| Related Party Income: | | | | | | | | |
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| Guggenheim | Expense Support Agreement - expense support received from related party | | 324 | | | — | | | 795 | | | — | |
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____________________
Notes to Financial Statements (Unaudited)
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| | | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| Related Party | | Source Agreement & Description | | 2017 | | 2016 | | 2017 | | 2016 |
| CCA | | Prior Administrative Services Agreement - expense reimbursement | | $ | 64 |
| | $ | 61 |
| | $ | 250 |
| | $ | 220 |
|
| Guggenheim | | Administrative Services Agreement - expense reimbursement | | $ | 15 |
| | $ | — |
| | $ | 15 |
| | $ | — |
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| Carey Financial | | Dealer Manager Agreement - sales commissions and dealer manager fees | | $ | — |
| | $ | 1,579 |
| | $ | 2,311 |
| | $ | 3,520 |
|
| Dealer Manager | | Dealer Manager Agreement - DSS Fee (Distribution Services Component only) | | $ | 80 |
| | $ | — |
| | $ | 1,308 |
| | $ | — |
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| Dealer Manager | | Dealer Manager Agreement - DSS Fee (Shareholder Services Component) | | $ | 97 |
| | $ | — |
| | $ | 97 |
| | $ | — |
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| CCA & Guggenheim | | O&O Agreement - organization expenses reimbursements | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 94 |
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| CCA & Guggenheim | | O&O Agreement - offering expenses reimbursements | | $ | — |
| | $ | 474 |
| | $ | 738 |
| | $ | 827 |
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| CCA & Guggenheim | | Prior Expense Support Agreements - net expense support (to) from related parties | | $ | (13 | ) | | $ | (261 | ) | | $ | 1,768 |
| | $ | 623 |
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| Guggenheim | | Expense Support Agreement - expense reimbursement to related parties | | $ | 29 |
| | $ | — |
| | $ | 29 |
| | $ | — |
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Indemnification
The Administrative Services Agreement provides certain indemnification to the Administrator,Guggenheim, its directors, officers, persons associated with the Administrator,Guggenheim and its affiliates. In addition, the Company's Declaration of Trust, as amended, provides certain indemnifications to its officers, trustees, agents and certain other persons. The Dealer Manager Agreement provides for certain indemnifications from the Company (with respect to the primary offering of its Common Shares) to the Dealer Manager,GFD, any selected dealers and their respective officers, directors, employees, members, affiliates, agents, representatives and, if any, each person who controls such person or entity within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act. Such indemnifications are subject to certain limitations as provided for in the Company’s Declaration of Trust and the North American Securities Administrators Association Guidelines and are considered customary by management. As of September 30, 2017,2020, management believes that the risk of incurring any losses for such indemnification is remote.
Note 5. Common Shares
Issuance of Common Shares
The Company's Registration Statement pertaining to its Public Offering of 104,712,041 Common Shares at an initial public offering price of $9.55 per Share was declared effective on July 24, 2015. For the nine months ended September 30, 2017, the public offering price of the Company's Common Shares ranged from a low of $9.90 per Common Share to a high of $9.95 per Common Share when the Public Offering was terminated on April 28, 2017. For the nine months ended September 30, 2016, the public offering price of the Company's Common Shares ranged from a low of $9.25 per Common Share to a high of $9.80 per Common Share. The Company's Public Offering was terminated on April 28, 2017.
The following table summarizes (i) the total Common Shares issued before share repurchase activity, and proceeds received in connection with the Company's Public Offering and (ii) reinvestment of distributions for (i)(a) the nine months ended September 30, 20172020 and (ii)(b) the period commencing on July 24, 2015 (inception) and endingthrough September 30, 2017 (in thousands, except share and per share amounts):2020:
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| Nine Months Ended | | Inception through |
| September 30, 2020 | | September 30, 2020 |
| Shares | | Amount | | Shares | | Amount |
| Gross proceeds from Public Offering | — | | | $ | — | | | 16,970,408 | | | $ | 164,194 | |
| Commission paid outside escrow | — | | | — | | | — | | | (1,924) | |
| Dealer Manager fees and commissions | — | | | — | | | — | | | (7,462) | |
| Net proceeds to the Company from Public Offering | — | | | — | | | 16,970,408 | | | 154,808 | |
| Reinvestment of shareholders' distributions | 380,667 | | | 2,863 | | | 2,347,269 | | | 20,395 | |
| Net proceeds from all issuance of Common Shares | 380,667 | | | $ | 2,863 | | | 19,317,677 | | | $ | 175,203 | |
| Average net proceeds per Common Share | $7.52 | | $9.07 |
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| | Nine Months Ended September 30, 2017 | | Inception through September 30, 2017 |
| | Shares | | Amount | | Shares | | Amount |
| Gross proceeds from Public Offering | 4,951,760 |
| | $ | 49,197 |
| | 16,970,404 |
| | $ | 164,194 |
|
| Commissions paid outside escrow | — |
| | (496 | ) | | — |
| | (1,924 | ) |
| Dealer Manager fees and commissions | — |
| | (2,311 | ) | | — |
| | (7,462 | ) |
| Net proceeds to the Company from Public Offering | 4,951,760 |
| | 46,390 |
| | 16,970,404 |
| | 154,808 |
|
| Reinvestment of distributions | 404,899 |
| | 3,732 |
| | 592,638 |
| | 5,450 |
|
| Net proceeds from all issuance of Common Shares | 5,356,659 |
| | $ | 50,122 |
| | 17,563,042 |
| | $ | 160,258 |
|
| Average net proceeds per Common Share | $9.36 | | $9.12 |
Notes to Financial Statements (Unaudited)
Repurchase of Common Shares
The following table is a summary of the quarterly tender offers, completed pursuant to the share repurchases programs completedrepurchase program, during the two years ended September 30, 2020:
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| Tender Offer Termination Date | | Total Number of Shares Offered to Repurchase | | Total Number of Shares Repurchased | | Total Consideration | | Price Paid per Share | | No. of Shares Repurchased / Total Shares Offered | | No. of Shares Repurchased / Weighted Average Shares (1) |
| 2020: | | | | | | | | | | | | |
| March 9, 2020 | | 436,352 | | | 298,522 | | | $ | 2,469 | | | $ | 8.27 | | | 68.4 | % | | 1.71 | % |
June 8, 2020 (2) | | 160,035 | | | 187,479 | | | 1,361 | | | 7.26 | | | 117.1 | % | | 1.08 | % |
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| September 8, 2020 | | 135,448 | | | 135,447 | | | 1,036 | | | 7.65 | | | 100.0 | % | | 0.79 | % |
| Total | | 731,835 | | | 621,448 | | | $ | 4,866 | | | | | 84.9 | % | | |
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| 2019: | | | | | | | | | | | | |
| March 8, 2019 | | 438,164 | | | 207,679 | | | $ | 1,797 | | | $ | 8.65 | | | 47.4 | % | | 1.18 | % |
| June 5, 2019 | | 439,278 | | | 323,596 | | | 2,792 | | | 8.63 | | | 73.7 | % | | 1.84 | % |
| October 11, 2019 | | 439,656 | | | 396,895 | | | 3,322 | | | 8.37 | | | 90.3 | % | | 2.26 | % |
| December 6, 2019 | | 438,630 | | | 293,787 | | | 2,442 | | | 8.31 | | | 67.0 | % | | 1.67 | % |
| Total | | 1,755,728 | | | 1,221,957 | | | $ | 10,353 | | | | | 69.6 | % | | |
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| 2018: | | | | | | | | | | | | |
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| December 6, 2018 | | 437,336 | | | 159,421 | | | $ | 1,438 | | | $ | 9.02 | | | 36.5 | % | | 0.91 | % |
| Total | | 437,336 | | | 159,421 | | | $ | 1,438 | | | | | 36.5 | % | | |
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________________
(1)Weighted average shares is based on the weighted average number of common shares outstanding in the prior four calendar quarters.
(2)The Company filed a tender offer to purchase up to 160,035 Shares on May 1, 2020. In accordance with Rule 13e-4(f), the Company determined to accept for purchase up to an additional 0.2% of our then outstanding Shares, increasing the offer to 187,479 Shares. The Company repurchased 187,479 Shares which represents approximately 100% of all Shares that were validly tendered.
Notes to Financial Statements (Unaudited)
Note 6. Distributions
Declared distributions are paid monthly. The following table summarizes the distributions that the Company declared on its Common Shares during the nine months ended September 30, 2017 (dollars in thousands):2020 and September 30, 2019:
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| Record Date | | Payment Date | | Distribution Per Common Share at Record Date | | Distribution Per Common Share at Payment Date | | Distribution Amount |
| For Fiscal Year 2020 | | | | | | | | |
| January 6, 13, 20, 27 | | January 29 | | $ | 0.01258 | | | $ | 0.05032 | | | $ | 853 | |
| February 3, 10, 17, 24 | | February 26 | | 0.01258 | | | 0.05032 | | | 856 | |
| March 2, 9, 16, 23, 30 | | April 1 | | 0.01258 | | | 0.06290 | | | 1,068 | |
| April 6, 13, 20, 27 | | April 29 | | 0.01069 | | | 0.04276 | | | 719 | |
| May 4, 11, 18, 25, June 1, 8 | | June 9 | | 0.01069 | | | 0.06414 | | | 1,081 | |
| June 15, 22, 29, July 6 | | July 9 | | 0.01069 | | | 0.04276 | | | 719 | |
| July 13, 20, 27, August 3, 10 | | August 11 | | 0.01069 | | | 0.05345 | | | 896 | |
| August 17, 24, 31, September 7 | | September 9 | | 0.01069 | | | 0.04276 | | | 719 | |
| September 14, 21, 28 | | October 1 | | 0.01069 | | | 0.03207 | | | 537 | |
| | | | | | $ | 0.44148 | | | $ | 7,448 | |
| | | | | | | | |
| For Fiscal Year 2019 | | | | | | | | |
| January 7, 14, 21, 28 | | January 30 | | $ | 0.01258 | | | $ | 0.05032 | | | $ | 883 | |
| February 4, 11, 18, 25 | | February 27 | | 0.01258 | | | 0.05032 | | | 889 | |
| March 4, 11, 18, 25 | | March 27 | | 0.01258 | | | 0.05032 | | | 889 | |
| April 1, 8, 15, 22, 29 | | May 1 | | 0.01258 | | | 0.06290 | | | 1,103 | |
| May 6, 13, 20, 27 | | May 29 | | 0.01258 | | | 0.05032 | | | 885 | |
| June 3, 10, 17, 24 | | June 26 | | 0.01258 | | | 0.05032 | | | 884 | |
| July 1, 8, 15, 22, 29 | | July 29 | | 0.01258 | | | 0.06290 | | | 1,092 | |
| August 5, 12, 19, 26 | | August 28 | | 0.01258 | | | 0.05032 | | | 877 | |
| September 2, 9, 16, 23, 30 | | October 2 | | 0.01258 | | | 0.06290 | | | 1,098 | |
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| | | | | | $ | 0.49062 | | | $ | 8,600 | |
|
| | | | | | | | | | | | | | | | | |
| Tender Offer Termination Date | | Total Number of Shares Offered to Repurchase | | Total Number of Shares Repurchased | | Total Consideration | | No. of Shares Repurchased / Total Offer | | Price Paid per Share |
| 2017: | | | | | | | | | | |
| March 3, 2017 | | 136,060 |
| | 9,718 |
| | $ | 90 |
| | 7.1 | % | | $ | 9.29 |
|
| June 19, 2017 | | 221,543 |
| | 26,043 |
| | $ | 239 |
| | 11.8 | % | | $ | 9.17 |
|
| September 20, 2017 | | 307,448 |
| | 119,167 |
| | $ | 1,088 |
| | 38.8 | % | | $ | 9.13 |
|
| Total | | 665,051 |
| | 154,928 |
| | $ | 1,417 |
| | 23.3 | % | |
|
Note 6. Distributions
The Company's Board declared distributions for 3 and 13 record dates, respectively, for the three months ended September 30, 2017 and 2016. Declared distributions are paid monthly. The total and the sources of declared distributions on a GAAP basis for the three months ended September 30, 2017 and 2016 are presented in the table below (in thousands, except per share amounts).
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, |
| | | 2017 | | 2016 |
| | | Per Share | | Amount | | Allocation | | Per Share | | Amount | | Allocation |
| Total Declared Distributions | | $ | 0.16 |
| | $ | 2,748 |
| | 100.0 | % | | $ | 0.16 |
| | $ | 1,129 |
| | 100.0 | % |
| From net investment income | | 0.13 |
| | 2,318 |
| | 84.4 | % | | 0.14 |
| | 991 |
| | 87.8 | % |
| Distributions in excess of net investment income | | 0.03 |
| | 430 |
| | 15.6 | % | | 0.02 |
| | 138 |
| | 12.2 | % |
The Company's Board declared distributions for 29 and 39 record dates, respectively, for the nine months ended September 30, 2017 and 2016. Declared distributions are paid monthly. The total and the sources of declared distributions on a GAAP basis for the nine months ended September 30, 2017 and 2016 are presented in the table below (in thousands, except per share amounts).
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Nine Months Ended September 30, |
| | | 2017 | | 2016 |
| | | Per Share | | Amount | | Allocation | | Per Share | | Amount | | Allocation |
| Total Declared Distributions | | $ | 0.48 |
| | $ | 7,810 |
| | 100.0 | % | | $ | 0.49 |
| | $ | 1,819 |
| | 100.0 | % |
| From net investment income | | 0.39 |
| | 6,470 |
| | 82.8 | % | | 0.41 |
| | 1,547 |
| | 85.0 | % |
| Distributions in excess of net investment income | | 0.09 |
| | 1,340 |
| | 17.2 | % | | 0.08 |
| | 272 |
| | 15.0 | % |
Note 7. Earnings Per Common Share
The following information sets forth the computation of basic and diluted net increase in net assets resulting from operations (i.e., earnings per Common Share) for the three and nine months ended September 30, 2017 and 2016 (in thousands, except share and per share data):
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Net increase in net assets resulting from operations | | $ | 2,458 |
| | $ | 2,413 |
| | $ | 7,705 |
| | $ | 3,633 |
|
| Weighted average Common Shares outstanding - basic and diluted | | 17,432,402 |
| | 6,956,110 |
| | 16,443,891 |
| | 3,752,921 |
|
Earnings per Common Share - basic and diluted (1) | | $ | 0.14 |
| | $ | 0.35 |
| | $ | 0.47 |
| | $ | 0.97 |
|
______________________
| |
(1) | Earnings per Common Share, both basic and diluted, were equivalent in all periods because there were no outstanding Common Share equivalents. |
Notes to Financial Statements (Unaudited)
Note 8.7. Financial Highlights
The following per Common Share data and financial ratios have been derived from information provided in the financial statements. The following is a schedule of financial highlights during the nine months ended September 30, 20172020 and 2016:September 30, 2019:
| | | | Nine Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2017 | | 2016 | | 2020 | | 2019 | |
| PER COMMON SHARE OPERATING PERFORMANCE | | | | PER COMMON SHARE OPERATING PERFORMANCE | | | | |
| Net asset value, beginning of period | $ | 9.11 |
| | $ | 8.68 |
| Net asset value, beginning of period | $ | 8.24 | | | $ | 8.65 | | |
Net investment income (1) | 0.39 |
| | 0.41 |
| Net investment income (1) | 0.43 | | | 0.40 | | |
Net unrealized gains (2) | 0.10 |
| | 0.47 |
| |
| Net increase resulting from operations | 0.49 |
| | 0.88 |
| |
Net realized gains (losses) from investment in GCIF (1) | | Net realized gains (losses) from investment in GCIF (1) | (0.01) | | | 0.05 | | |
Net unrealized depreciation from investment in GCIF (2) | | Net unrealized depreciation from investment in GCIF (2) | (0.54) | | | (0.22) | | |
| Net increase (decrease) resulting from operations | | Net increase (decrease) resulting from operations | (0.12) | | | 0.23 | | |
| Distributions to common shareholders | | | | Distributions to common shareholders | | |
Distributions from net investment income (3) | (0.39 | ) | | (0.41 | ) | Distributions from net investment income (3) | (0.43) | | | (0.40) | | |
Distributions from realized gains on investment (3) | | Distributions from realized gains on investment (3) | — | | | (0.09) | | |
Distributions in excess of net investment income (3) | (0.09 | ) | | (0.08 | ) | Distributions in excess of net investment income (3) | (0.01) | | | — | | |
| Net decrease resulting from distributions | (0.48 | ) | | (0.49 | ) | |
Distributions from earnings (3) | | Distributions from earnings (3) | (0.44) | | | (0.49) | | |
| Capital Share Transactions | | | | Capital Share Transactions | | |
Issuance of Common Shares above net asset value (4) | 0.07 |
| | 0.06 |
| |
Distribution services charge (9) | (0.08 | ) | | — |
| |
| Net increase (decrease) in net assets resulting from Capital Share transactions | (0.01 | ) | | 0.06 |
| |
| Distribution services charge (7) | | Distribution services charge (7) | — | | | 0.01 | | |
| Net increase in net assets resulting from Capital Share transactions | | Net increase in net assets resulting from Capital Share transactions | — | | | 0.01 | | |
| Net asset value, end of period | $ | 9.11 |
| | $ | 9.13 |
| Net asset value, end of period | $ | 7.68 | | | $ | 8.40 | | |
| | | | | | | | | |
| INVESTMENT RETURNS | | | | INVESTMENT RETURNS | | |
Total investment return-net price (5) | 2.74 | % | | 10.63 | % | |
Total Investment return-net asset value(6) | 5.27 | % | | 11.06 | % | |
| | | | | |
| RATIOS/SUPPLEMENTAL DATA (all amounts in thousands except share amounts and ratios) | | | | |
Total investment return-net asset value (4) | | Total investment return-net asset value (4) | (1.13) | % | | 2.79 | % | |
| | RATIOS/SUPPLEMENTAL DATA | | RATIOS/SUPPLEMENTAL DATA | | |
| Net assets, end of period | $ | 158,500 |
| | $ | 80,951 |
| Net assets, end of period | $ | 128,435 | | | $ | 146,638 | | |
Average net assets (7) | $ | 148,236 |
| | $ | 34,440 |
| |
Average net assets (5) | | Average net assets (5) | $ | 128,620 | | | $ | 150,704 | | |
| Common Shares outstanding, end of period | 17,407,514 |
| | 8,869,491 |
| Common Shares outstanding, end of period | 16,720,299 | | | 17,455,826 | | |
| Weighted average Common Shares outstanding | 16,443,891 |
| | 3,752,921 |
| Weighted average Common Shares outstanding | 16,867,744 | | | 17,531,132 | | |
Ratios-to-average net assets:(7)(8) | | | | |
Ratios-to-average net assets: (5) (6) | | Ratios-to-average net assets: (5) (6) | | |
| Total expenses | 1.38 | % | | 2.04 | % | Total expenses | 0.60 | % | | 0.55 | % | |
| Effect of expense reimbursement from Advisors | (1.17 | )% | | (1.81 | )% | |
| Effect of expense support reimbursement to (received from) the Advisor | | Effect of expense support reimbursement to (received from) the Advisor | (0.60) | % | | 0.13 | % | |
| Net expenses | 0.21 | % | | 0.23 | % | Net expenses | — | % | | 0.68 | % | |
| Net investment income | 4.36 | % | | 4.49 | % | Net investment income | 5.68 | % | | 4.68 | % | |
_____________________
| |
(1) | The per Common Share data was derived by using the weighted average Common Shares outstanding during the period. |
| |
(2) | The amount shown at this caption is the balancing figure derived from the other figures in the schedule. The amount shown at this caption for a Common Share outstanding throughout the period may not agree with the change in the aggregate gains and losses in portfolio securities for the period because of the timing of sales of the Company’s Common Shares in relation to fluctuating market values for the portfolio. |
| |
(3) | The per Common Share data for distributions is the actual amount of distributions paid or payable per Common Share outstanding during the entire period; distributions per Common Share are rounded to the nearest $0.01. |
| |
(4) | The continuous issuance of Common Shares may cause an incremental increase in net asset value per Share due to the sale of Shares at the then prevailing public offering price and the receipt of net proceeds per share by the Company in excess of net asset value 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 net asset value per share on each share transaction date, divided by (ii) the total shares outstanding at the end of the period. |
(1)The per Common Share data was derived by using the weighted average Common Shares outstanding during the period presented.
(2)The amounts shown at this caption are the balancing figures derived from the other figures in the schedule. The amounts shown at this caption for a Common Share outstanding throughout the period may not agree with the change in the aggregate gains and losses in portfolio securities for the period because of the timing of sales of the Company’s Common Shares in relation to fluctuating market values for the portfolio.
(3)The per Common Share data for distributions is the actual amount of distributions paid or payable per Common Share outstanding during the entire period; distributions per Common Share are rounded to the nearest $0.01. For income tax purposes, distributions made to shareholders are reported as ordinary income, capital gains, non-taxable return of capital or a combination thereof. The tax character of distribution is determined based on taxable income calculated in accordance with income tax regulations which may differ from amounts determined under GAAP. The tax character of distribution shown above is an estimate since the exact amount cannot be determined at this point. As of September 30, 2020, the Company estimated distributions to be composed of either ordinary income or capital gains. The final determination of the tax character of distributions will not be made until we file our tax return.
Notes to Financial Statements (Unaudited)
(4)Total investment return-net asset value is a measure of the change in total value for shareholders who held the Company’s Common Shares at the beginning and end of the period, including distributions declared during the period. Total investment return-net asset value is based on (i) net asset value per share on the first day of the period, (ii) the net asset value per share on the last day of the period, plus any shares issued in connection with the reinvestment of monthly distributions and (iii) distributions payable relating to the ownership of shares, if any, on the last day of the period. The total investment return-net asset value calculation assumes that distributions are reinvested in accordance with the Company’s distribution reinvestment plan. Because there is no public market for the Company’s shares, terminal market value per share is assumed to be equal to the net asset value per share on the last day of the period presented. Investment performance is presented without regard to sales load that may be incurred by shareholders in the purchase of the Company’s Common Shares. The Company’s performance changes over time and currently may be different than that shown above. Past performance is no guarantee of future results. Total investment return-net asset value is not annualized.
| |
(5) | Total investment return-net price is a measure of total return for shareholders, assuming the purchase of the Company’s Common Shares at the beginning of the period and the reinvestment of all distributions declared during the period. More specifically, total investment return-net price is based on (i) the purchase of Common Shares at the net offering price on the first day of the period, (ii) the sale at the net asset value per Common Share on the last day of the period, of (A) purchased Common Shares plus (B) any Common Shares issued in connection with the reinvestment of distributions, and (iii) distributions payable relating to the ownership of Common Shares, if any, on the last day of the period. The total investment return-net price calculation assumes that (i) cash distributions are reinvested in accordance with the Company’s distribution reinvestment plan and (ii) the Common Shares issued pursuant to the distribution reinvestment plan are issued at the then net offering price per Common Share on each distribution payment date. Since there is no public market for the Company’s Common Shares, then the terminal sales price per Common Share is assumed to be equal to net asset value per Common Share on the last day of the period presented. Total investment return-net price is not annualized. Investment performance is presented without regard to sales load that may be incurred by shareholders in the purchase of the Company’s Common Shares. The Company’s performance changes over time and currently may be different than that shown above. Past performance is no guarantee of future results. |
| |
(6) | Total investment return-net asset value is a measure of the change in total value for shareholders who held the Company’s Common Shares at the beginning and end of the period, including distributions declared during the period. Total investment return-net asset value is based on (i) net asset value per share on the first day of the period, (ii) the net asset value per share on the last day of the period, plus any shares issued in connection with the reinvestment of monthly distributions, and (iii) distributions payable relating to the ownership of shares, if any, on the last day of the period. The total investment return-net asset value calculation assumes that (i) monthly cash distributions are reinvested in accordance with the Company’s distribution reinvestment plan and (ii) the shares issued pursuant to the distribution reinvestment plan are issued at the then current public offering price, net of sales load, on each monthly distribution payment date. Since there is no public market for the Company’s shares, terminal market value per share is assumed to be equal to the net asset value per share on the last day of the period presented. Total investment return-net asset value is not annualized. Investment performance is presented without regard to sales load that may be incurred by shareholders in the purchase of the Company’s Common Shares. The Company’s performance changes over time and currently may be different than that shown above. Past performance is no guarantee of future results. |
| |
(7) | The computation of average net assets during the period is based on averaging the amount on the first day of the first month of the period and the last day of each month during the period. Ratios-to-average net assets, expressed as a percentage, are not annualized. |
| |
(8) | The ratios-to-average net assets do not include any proportionate allocation of income and expenses incurred at the Master Fund. |
| |
(9) | The per share impact of the distribution services component of the DSS Fee is calculated as the amount of the incremental distribution services component of the DSS Fee charged to “Paid-in-capital in excess of par value” divided by common shares outstanding at the end of the period. |
(5)The computation of average net assets during the period is based on averaging the amount on the first day of the first month of the period and the last day of each month during the period. Ratios-to-average net assets, expressed as a percentage, are not annualized. (6)The ratios-to-average net assets do not include any proportionate allocation of income and expenses incurred at the Master Fund. The Master Fund's total expenses-to-average net assets for the nine months ended September 30, 2020 and September 30, 2019, were 5.64% and 5.85%, respectively.
(7)The per share impact of the distribution services component of the DSS Fee is calculated as the amount of the adjustment to distribution services component of the DSS Fee charged to “Paid-in-capital in excess of par value” divided by common shares outstanding at the end of the period. For the nine months ended September 30, 2020, the per share impact of the distribution services component of the DSS Fee is less than 0.01.
Note 9.8. Subsequent Events
On October 20, 2017, a new investment advisory agreement betweenManagement has evaluated subsequent events through the Master Funddate of issuance of these financial statements and Guggenheim was approved by a majority (as such term is definedhas determined that there are no subsequent events outside the ordinary scope of business that require adjustment to, or disclosure in, the 1940 Act)financial statements except for the one below.
To facilitate the orderly liquidation of the votes castCompany and in light of the disruption caused by shareholders. The new investment advisory agreement replaced the Interim Investment Advisory Agreement effectiveCOVID-19 pandemic, the Board of Trustees of the Company, as permitted by the terms of October 20, 2017.the offering, has approved extending the liquidity event date recommendation deadline to on or before December 31, 2022.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
(in thousands, except share and per share data, percentages and as otherwise indicated; for example, with the word "million" or otherwise)
The information contained in this item should be read in conjunction with our financial statements and related notes thereto appearing elsewhere in this Report. Unless otherwise noted, the terms "we," "us,""us" and "our" refer to Guggenheim Credit Income Fund 2016 T. The Term "Master Fund" refers to Guggenheim Credit Income Fund. Capitalized terms used in this Item 2 have the same meaning as in the accompanying financial statements presented in Part I. Item I.Item. I Financial Statements (Unaudited), unless otherwise defined herein. Overview
We are a feeder fund and we are affiliated with the Master Fund, which is a specialty finance investment company that has elected to be treated as a BDC under the 1940 Act. The Master Fund is externally managed by Guggenheim, which is responsible for sourcing potential investments, conducting due diligence on prospective investments, analyzing investment opportunities, structuring investments, determining the securities and other assets that we will purchase, retain or sell and monitoring ourthe Master Fund's portfolio on an ongoing basis. The Master Fund's management discussion and analysis of financial condition and results of operations as presented in its quarterly report should be read in its entirety.
Investment Objectives and Investment Program
Our investment objectives are to provide our shareholders with current income, capital preservation and, to a lesser extent, long-term capital appreciation.
We intend to meet our investment objectives by investing substantially all of our equity capital in the Master Fund. The Master Fund's investment objectives are the same as our own. The Master Fund's investment strategy is focused on creating and growing an investment portfolio that generates superior risk-adjusted returns by carefully selecting investments through rigorous due diligence and actively managing and monitoring our investment portfolio. When evaluating an investment and the related portfolio company, the Master Fund uses the resources of Guggenheimits Advisor to develop an investment thesis and a proprietary view of a potential portfolio company’s intrinsic value. We believe the Master Fund's flexible approach to investing allows it to take advantage of opportunities that offer favorable risk/reward characteristics.
The Master Fund primarily focuses on the following range of investment types that may be available within the capital structure of portfolio companies:
•Senior Debt. Senior debt investments generally take a security interest in the available assets of the portfolio company, including equity interests in any of its subsidiaries. These senior debt classifications include senior secured first lien loans, senior secured second lien loans, senior secured bonds and senior unsecured debt. In some circumstances, the secured lien could be subordinated to the claims of other creditors. While there is no specific collateral associated with senior unsecured debt, such positions are senior in payment and priority over subordinated debt creditors.
•Subordinated Debt.Subordinated debt investments are generally subordinated to senior debt investments and are generally unsecured. These investments are generally structured with interest-only payments throughout the life of the security, with the principal due at maturity.
•Equity Investments. Preferred and/or common equity investments may be acquired alongside senior and subordinated debt investment activities or through the exercising of warrants or options attached to debt investments. Income is generated primarily through regular or sporadic dividends and realized gains on dispositions of such investments.
The Master Fund's investment activities may vary substantially from period to period depending on many factors, including: the demand for capital from creditworthy privately owned U.S. companies, the level of merger, acquisition and refinancing activity involving private companies, the availability of credit to finance transactions, the general economic environment, the competitive investment environment for the types of investments the Master Fund currently seeks and intends to seek in the future, the amount of equity capital the Master Fund raises from the sale of its common shares to us and any other feeder funds and the amount and cost of capital that the Master Fund may borrow.
The Master Fund acquires its portfolio investments through the following investment access channels:
•Direct OriginationsOriginations: : The Master Fund sourcesThis channel consists of investments that are directly originated investments through theGuggenheim's relationship networks of Guggenheim.network. Such investments are originated and/or structured for the Master Fund or made by the Master FundGuggenheim and are not generally available to the broader investment market. These investments may include both debt and equity investment components.
Primary Issuance•: The Master Fund also participatesSyndicated Transactions: This channel primarily includes investments in private placement transactions that are made available to,broadly syndicated loans and become closely held by, a relatively small group of institutional investors. These transactions arehigh yield bonds, typically originated and arranged by other investment intermediaries other than Guggenheim.
Secondary Market Transactions: In certain circumstances These investments may be purchased at the Master Fund will also investoriginal syndication or in broadly syndicated loans, high yield credit markets, and other investments that are generally owned by a wide range of investors and made availablethe secondary through various trading markets.
Revenue
Revenues
We generate revenues primarily in the form of dividendDividend income derived from our ownership of the Master Fund's common shares.shares is our source of investment income. Our revenuesrevenue will fluctuate with the operating performance of the Master Fund and its distributions paid to us.
Operating Expenses
Our primary operating expenses include administrative services, related party reimbursements, custodian and accounting services, independent audit services, compliance services, tax services, fees, legal services, transfer agent services, shareholder servicing component expenses, organization expenses and offering expenses. Additionally, we indirectly bear the operating expenses of the Master Fund through our ownership of its common shares, such as an investment advisory fee, a performance-based incentive fee, independent audit services, third-party valuation services and various other professional services fees.
Public Offering Wrap-up
Our Public Offering commenced on July 24, 2015Impact of COVID-19
In late 2019 and closed on April 28, 2017. Overearly 2020, a novel coronavirus (SARS-CoV-2) and related respiratory disease ("COVID-19") emerged and spread rapidly across the courseworld, including to the U.S., bringing with it one of the 21-month offering period,most volatile quarters for the leveraged loan market in history.
The Master Fund has and continues to assess the impact of COVID-19 on its portfolio companies. We cannot predict the full impact of the COVID-19 pandemic, including its duration in the United States and worldwide, and the magnitude of the economic impact of the outbreak, including with respect to the travel restrictions, business closures and other quarantine measures imposed on service providers and other individuals by various local, state, and federal governmental authorities, as well as non-U.S. governmental authorities. As such, we raised $164.2 millionare unable to predict the duration of any business disruptions, the extent to which COVID-19 will negatively affect operating results of the Master Fund's portfolio companies or the impact that such disruptions may have on our results of operations and financial condition. Though the magnitude of the impact remains to be seen, we expect the Master Fund's portfolio companies and, by extension, our operating results to be adversely impacted by COVID-19 and depending on the duration and extent of the disruption to the operations of the Master Fund's portfolio companies, we expect that certain portfolio companies will experience financial distress. We also expect that some portfolio companies may significantly curtail business operations, furlough or lay off employees and terminate service providers, and defer capital expenditures if subjected to prolonged and severe financial distress, which could impair their business on a permanent basis. The impacts of these events may include, but are not limited to, (i) amendments and waivers being granted to borrowers permitting deferral of loan payments or allowing for payment-in-kind (“PIK”) interest payments, (ii) additional borrower defaults and non-payments on their loans or inability of borrowers to refinance their loans at maturity, or (iii) permanent business closure. Such events, to the extent experienced, could result in gross proceeds, resultinga decrease in net proceedsthe value of $154.8 million forthe Master Fund's investment in any such portfolio company, or interest thereon. In addition, to the extent that the impact to the Master Fund. AtFund's portfolio companies results in reduced interest payments or permanent impairments on its investments, we could see a decrease in our net investment income and could require us to reduce the commencementfuture amount of distributions to our shareholders.
With respect to its investments, the Master Fund is taking steps in actively overseeing all of its individual portfolio companies. These measures include, among other things, enhanced monitoring/credit analysis of its portfolio, assessment of each portfolio company’s operational and liquidity exposure and outlook, and frequent communication with its portfolio company management teams, industry consultants, and other lenders to understand the expected financial performance impact of the Public Offering, the initial public offer price was $9.55 per Share ($9.00COVID-19 pandemic.
The reduction in our net price per Share after sales load); at the last subscription closing before the conclusion of the Public Offering, the public offering price was $9.95 per Share ($9.38 net price per Share after sale load). Asasset value as of September 30, 2017, we have invested $156.1 million2020 as compared to our net asset value as of December 31, 2019 is the result of significant unrealized depreciation in the fair value of our investments in the Master Fund includingdue primarily to the proceeds from our distribution reinvestment program.
We reimbursed CCAnegative economic impact and Guggenheim for organization and offering expenses equivalent to 1.3% of gross proceeds of $164.2 million, or $2.1 million, throughout the life of the Public Offering.
With the completion of the Public Offering, the DSS Fee payments will commence in the fourth quarter of 2017 as follows: over each twelve month period the DSS Fee payment may not exceed $1.4 million, or 0.9% of $154.8 million in net proceeds from our Public Offering of Common Shares. The total of all DSS Fee payments over our remaining life will not exceed $5.8 million, or 3.6% of the gross proceeds from our Public Offering.
increased uncertainty caused by COVID-19 pandemic. Results of Operations
Operating results for the three and nine months ended September 30, 20172020 and 2016September 30, 2019 were as follows (in thousands):follows:
| | | | For The Three Months Ended September 30, | | For The Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2020 | | 2019 | | 2020 | | 2019 |
| Total investment income | $ | 2,968 |
| | $ | 1,539 |
| | $ | 6,773 |
| | $ | 1,626 |
| Total investment income | $ | 2,256 | | | $ | 2,571 | | | $ | 7,317 | | | $ | 8,079 | |
| Net expenses | 650 |
| | 548 |
| | 303 |
| | 79 |
| Net expenses | (72) | | | 334 | | | 8 | | | 1,021 | |
| Net investment income | 2,318 |
| | 991 |
| | 6,470 |
| | 1,547 |
| Net investment income | 2,328 | | | 2,237 | | | 7,309 | | | 7,058 | |
Net realized gain on investment
| 46 |
| | — |
| | 46 |
| | — |
| |
| Net change in unrealized appreciation on investment | 94 |
| | 1,422 |
| | 1,189 |
| | 2,086 |
| |
| Net increase in net assets resulting from operations | $ | 2,458 |
| | $ | 2,413 |
| | $ | 7,705 |
| | $ | 3,633 |
| |
| Net realized gain (loss) from redemption of investment in GCIF | | Net realized gain (loss) from redemption of investment in GCIF | 25 | | | — | | | (218) | | | 45 | |
| Long term gain distributions from investment in GCIF | | Long term gain distributions from investment in GCIF | — | | | — | | | — | | | 849 | |
| | Net change in unrealized appreciation (depreciation) from investment in GCIF | | Net change in unrealized appreciation (depreciation) from investment in GCIF | 4,074 | | | (2,837) | | | (8,893) | | | (3,867) | |
| Net increase (decrease) in net assets resulting from operations | | Net increase (decrease) in net assets resulting from operations | $ | 6,427 | | | $ | (600) | | | $ | (1,802) | | | $ | 4,085 | |
Investment Income
Investment income consisted solely of distributions from the Master Fund for the three and nine months ended September 30, 20172020 and 2016, respectively.September 30, 2019.
Operating Expenses
Operating expenses consisted of the following major components for the three and nine months ended September 30, 20172020 and 2016 (in thousands):September 30, 2019:
| | | | For The Three Months Ended September 30, | | For The Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2020 | | 2019 | | 2020 | | 2019 |
| Administrative services | $ | 4 |
| | $ | 4 |
| | $ | 12 |
| | $ | 12 |
| Administrative services | $ | 4 | | | $ | 4 | | | $ | 11 | | | $ | 12 | |
| Related party reimbursements | 81 |
| | 61 |
| | 265 |
| | 220 |
| Related party reimbursements | 43 | | | 56 | | | 144 | | | 160 | |
| Trustees fees | 1 |
| | 3 |
| | 2 |
| | 3 |
| |
| | Professional services fees | 9 |
| | 53 |
| | 263 |
| | 130 |
| Professional services fees | 32 | | | 23 | | | 96 | | | 92 | |
| Offering expenses | 371 |
| | 137 |
| | 1,247 |
| | 181 |
| |
| Organization expenses | — |
| | — |
| | — |
| | 94 |
| |
| Printing and mailing expenses | (1 | ) | | 18 |
| | 23 |
| | 40 |
| |
| Shareholder servicing component expenses | 97 |
| | — |
| | 97 |
| | — |
| |
| | Shareholder servicing expenses | | Shareholder servicing expenses | 78 | | | 85 | | | 236 | | | 258 | |
| | Transfer agent expense | | Transfer agent expense | 73 | | | 71 | | | 226 | | | 226 | |
| Other expenses | 46 |
| | 11 |
| | 133 |
| | 22 |
| Other expenses | 22 | | | 23 | | | 63 | | | 79 | |
| Total operating expenses | 608 |
| | 287 |
| | 2,042 |
| | 702 |
| Total operating expenses | 252 | | | 262 | | | 776 | | | 827 | |
| Reimbursement of expense support | 44 |
| | — |
| | 44 |
| | — |
| Reimbursement of expense support | — | | | 72 | | | 27 | | | 194 | |
| Less: Expense support to (from) related parties | (2 | ) | | 261 |
| | (1,783 | ) | | (623 | ) | |
| Less: Expense support from related parties | | Less: Expense support from related parties | (324) | | | — | | | (795) | | | — | |
| Net expenses | $ | 650 |
| | $ | 548 |
| | $ | 303 |
| | $ | 79 |
| Net expenses | $ | (72) | | | $ | 334 | | | $ | 8 | | | $ | 1,021 | |
Related party reimbursements are comprised of the Company's allocable share of administrative costs and expenses incurred by CCA or Guggenheim that were reimbursable. Reimbursable costs and expenses include, but are not limited to, the Company's share of salaries, rent, office administration, costs associated with regulatory reporting and filings and costs related to the preparation for, and conducting of, meetings of the Company's Board. An investment advisory fee is only incurred by the Master Fund, although it is incurred indirectly by the Company.Company through its ownership of Master Fund common shares.
Beginning on July 1, 2017, the Company incurred an additional operating expense, specifically the Shareholder Servicing Component of the DSS Fee, to reimburse the Dealer Manager of the Company's Public Offering for costs incurred by participating broker-dealers and investment representatives for providing ongoing shareholder services. The Shareholder Servicing Component will accrueaccrues daily and will beis recorded on the statementstatements of operations. The Shareholder Servicing Component will beis computed at the daily rate of 0.000685% (i.e. annual rate of 0.25%) of the product of (i) the weighted average net price of Common Shares sold in the Public Offering, excluding DRP Shares and (ii) the number of Common Shares outstanding on each day of the recording period, excluding (a) DRP Shares and (b) Common Shares owned by the Company's shareholders that are not receiving shareholder services from an eligible participating broker-dealer. This operatingThe Shareholder Servicing Component expense when incurred, will beis borne equally among all of the Company's outstanding Shares.Shares as incurred.
Beginning in the fourth quarter of 2017, the Company will initiate quarterly DSS Fee payments to reimburse the Dealer Manager for costs incurred by participating broker-dealers and investment representatives for providing distribution and shareholder services. The DSS Fee quarterly payments will cease in the event that the Dealer Manager Agreement is terminated by the Company or the Dealer Manager.
Net Realized Gain (Loss) onGains (Losses) from Investment
For both the three and nine months ended September 30, 2017,2020, we had net realized gains (losses) of less than $0.1$0.0 million and less than $0.1$(0.2) million, respectively, as a result of our sale of Master Fund Shares. For both the three and nine months ended September 30, 2019, we had net realized gains of less than $0.1 million as a result of our sale of Master Fund Shares.
During both the three and nine months ended September 30, 2020, there were no distributions received from the Master Fund that were classified as long term gains.
During the three and nine months ended September 30, 2019, $0.0 million and $0.8 million, respectively, of distributions received from Master Fund was classified as a long term gain distribution.
Changes in Unrealized Appreciation (Depreciation) from Investment
For the three and nine months ended September 30, 2016, we did not sell any shares of2020, the total net change in unrealized appreciation (depreciation) on our investment in the Master Fund therefore we incurred no realized gains or losses on our investment.
Changeswas $4.1 million and $(8.9) million, respectively. The increase in Unrealized Appreciationon Investmentnet unrealized appreciation for the three months ended September 30, 2020 was primarily due to partial market recovery from the negative economic impact and the increased uncertainty caused by COVID-19 to the Master Fund's portfolio companies from the early part of the year.
For the three and nine months ended September 30, 2017,2019, the total net change in unrealized appreciationdepreciation on our investment in the Master Fund was $0.1$(2.8) million and $1.2 million, respectively. For the three and nine months ended September 30, 2016, the total net change in unrealized appreciation on our investment in the Master Fund was $1.4 million and $2.1$(3.9) million, respectively.
Cash Flows for the Nine Months Ended September 30, 20172020 and 2016September 30, 2019
For the nine months ended September 30, 2017,2020 and September 30, 2019, net cash used inprovided by operating activities was $41.2 million. Cash flows used in operating activities for the nine months ended September 30, 2017 was primarily due to the Company's investment in$9.2 million and $10.2 million, respectively. In 2020 and 2019, redemption of shares and distributions from the Master Fund. Fund were the primary provider of cash.
For the nine months ended September 30, 2016,2020, net cash used in operatingfinancing activities was $74.1$(9.5) million and primarily consisted of cash outflows for repurchases of $(4.9) million to shareholders and payment of distribution of $(4.0) million. Cash flows used in operating operating activities forFor the nine months ended September 30, 2016 was primarily due to the Company's investment2019, net cash used in the Master Fund.
Net cash provided by financing activities was $40.9$(10.4) million during the nine months ended September 30, 2017,and primarily represented by proceeds from issuanceconsisted of Common Sharescash outflows for repurchase of $46.4 million. Net cash provided by financing activities was $75.2
common shares of $(4.6) million during the nine months ended September 30, 2016, primarily represented by proceeds from issuanceto shareholders and payment of Common Sharesdistribution of $76.1$(5.1) million.
Financial Condition, Liquidity and Capital Resources
Our primary sources of cash include (i) the sale of our Common Shares (until the end of our Public Offering on April 28, 2017), (ii) our shareholders' reinvestment of their distributions, (iii)(ii) distributions, including capital gains, if any, received from our ownership of the Master Fund's common shares, and (iv)(iii) expense reimbursementsupport payments from CCA (from July 2015 to August 2017) and Guggenheim pursuant to the Expense Support Agreement.Agreement and (iv) the sale of our owned Master Fund shares in conjunction with its share repurchase program. Our primary uses of cash include (i) investment in Master FundFund's common shares, (ii) payment of operating expenses and the DSS Fee Distribution Services Component, (iii) cash distributions to our shareholders and (iv) periodic repurchases of our Common Shares pursuant to our share repurchase program.program and (v) reimbursement payments for prior period expense support payments. We are not permitted to issue any senior securities, including preferred securities.
We manage our assets and liabilities such that current assets are sufficient to cover current liabilities. All remainingliabilities, and excess cash, in excess of net working capital, if any, is invested in the acquisition of Master FundFund's common shares.
Off-Balance Sheet Arrangements
We dodid not have any off-balance sheet arrangements as of September 30, 20172020 and December 31, 2016.2019.
Critical Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with GAAPaccounting principles generally accepted in the U.S. requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. We believe that the estimates and assumptions utilized in preparing the financial statements are reasonable. Actual results could differ from those estimates. Our significant accounting policies are described in Note 2. Significant Accounting Policies. Valuation of Investments
We invest substantially all of our equity capital in the purchase of Master Fund common shares of the Master Fund.shares. We determine the fair value of our investment in the Master Fund as the Master Fund's net asset value per common share (as determined by the Master Fund) multiplied by the number of Master Fund common shares that we own.
Distribution and Shareholder Servicing Fee (DSS Fee)
Beginning in the fourth quarter of 2017 (the second calendar quarter after the close of the Company's Public Offering), we will commence quarterly payments of the DSS Fee at an annual rate of 0.90% of the average net purchase price per share sold in the Public Offering. The purpose of the DSS Fee is to reimburse the Dealer Manager of our Public Offering for costs incurred by selected dealers and investment representatives for services related to (i) the Distribution Services Component and (ii) the Shareholder Services Component.
Beginning in the third quarter of 2017 (the first calendar quarter after the close of the Company'sour Public Offering), we commenced recognition of the Shareholder Services Component as an expense on the Company's statementstatements of operations as the services are provided. We allocated 0.25% per annum of the average net purchase price per share sold in the Public Offering to this component.the Shareholder Services Component. As the Distribution Services Component, representing 0.65% per annum of the average net purchase price per share sold in the Public Offering, pertains to the sale of our Common Shares, we estimate the present value of all future Distribution Services Component payments, employing a discount rate equal to the prevailing effective yield on 5-year US Treasuries as observed on December 30, 2016. We record a liability equal to the estimated present value of the Distribution Services Component, recorded as "Due to Dealer Manager" with an offsetting charge to “Paid-in-capital in excess of par value” on the statements of assets and liabilities, and recorded as a "Distribution services charge" on the statements of changes in net assets.
Beginning in the fourth quarter of 2017 (the second calendar quarter after the close of our Public Offering), we commenced quarterly payments of the DSS Fee at an annual rate of 0.90% of the average net purchase price per share sold in the Public Offering.
The table below reconciles the change in the Due to Dealer Manager from January 1, 20172020 to September 30, 2017 (in thousands):2020 and from January 1, 2019 to September 30, 2019:
| | | | | 2017 | | 2020 | | 2019 | |
| Balance as of January 1, | | $ | 2,300 |
| Balance as of January 1, | $ | 1,853 | | | $ | 2,907 | | |
Accretion of discount (1) | | 55 |
| Accretion of discount (1) | 21 | | | 35 | | |
Incremental charge to paid-in-capital (2) | | 1,253 |
| |
| Shareholder Services Component | | 97 |
| |
| Payments | | — |
| |
Incremental charge (reduction) to paid-in-capital (2) | | Incremental charge (reduction) to paid-in-capital (2) | — | | | (136) | | |
| Shareholder services component | | Shareholder services component | 236 | | | 258 | | |
| DSS fee payments | | DSS fee payments | (867) | | | (947) | | |
| Balance as of September 30, | | $ | 3,705 |
| Balance as of September 30, | $ | 1,243 | | | $ | 2,117 | | |
______________________
| |
(1) | As the present value discount of the Distribution Services Component is accreted it is recorded as interest expense and included in other expenses. |
| |
(2) | Incremental charge to paid-in-capital is the result of incremental equity share sales and changes in assumptions employed in estimating future cash payments. |
(1)As the present value discount of the Distribution Services Component is accreted, it is recorded as interest expense and included in other expenses on the statements of operations. (2)Incremental charge or reduction to paid-in-capital is the result of incremental equity share sales and/or changes in assumptions employed in estimating future cash payments.
Contractual Obligations
Commitments
We have not entered into any agreements under which we have material future commitments that cannot otherwise be terminated within a reasonable time period.
Obligations to Pay Distributions
Our Board of Trustees has declared distributions on Common Shares that are payable to shareholders of record after September 30, 2017.2020. The declared distribution rates per Share for the period after September 30, 20172020 are summarized as follows:
|
| | | | | | |
| 2017 Record Dates | | 2017 Payment Dates | | Declared Distribution per Share per Record Date |
| October 31 | | November 1 | | $ | 0.05453 |
|
| November 28 | | November 29 | | 0.05453 |
|
Obligation to Pay the Distribution Services Component of the Distribution and Shareholder Servicing Fee
The Distribution Services Component of the DSS Fee represents reimbursement to the Dealer Manager for costs incurred by participating broker-dealers and investment representatives for the distribution of our Common Shares. (See Note 2: Significant Accounting Policies - Distribution and Shareholder Servicing Feesregarding the obligation to pay the Distribution Services Component.) The DSS Fee quarterly payments will cease in the event that the Dealer Manager Agreement is terminated by us or the Dealer Manager. The table below presents the expected schedule of future payments of the Distribution Services Component of the DSS Fee (in thousands): |
| | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2017 |
| | | Total | | < 1 year | | 1-3 years | | 3-5 years | | > 5 years |
| DSS Fee: Distribution Services Component | | $ | 3,747 |
| | $ | 1,014 |
| | $ | 1,684 |
| | $ | 1,049 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | |
| 2020 Record Dates | | 2020 Payment Dates | | Distribution per Share per Record Date | | Distribution per Share per Payment Date |
| Oct. 12, 19, 26 & Nov. 2, 9, 2020 | | Nov. 10, 2020 | | $ | 0.01069 | | | $ | 0.05345 | |
| Nov. 16, 23, 30 & Dec 7, 2020 | | Dec. 9, 2020 | | 0.00855 | | | 0.03420 | |
| | | | | | |
Related Party Agreements and Transactions
Expense Support and Conditional Reimbursement Agreement
We have entered into agreements with Guggenheim and one of its affiliates, whereby we agreed to (i) receive expense support payments (ii)and to conditionally reimburse certain expenses of, and toit for prior period expense support payments, (ii) pay for administrative services expense support, organization and offerings costs, and(iii) periodically pay DSS Fees incurred on our behalf,to the Dealer Manager, an affiliate of Guggenheim. See Note 4. Related Party Agreements and Transactions for a discussion of related party agreements and expense reimbursement agreements. Reimbursement of CCA and Guggenheim for Organization and Offering Expenses
Under the terms of the O&O Agreement, we agreed to reimburse CCA and Guggenheim for our organization and offering expenses solely in connection with the capital raise of our Public Offering (see(See Note 4. Related Party Agreements and Transactions). Since theour Public Offering haswas terminated, CCA and Guggenheim are not eligible to receive any further reimbursement of offering expenses after April 28, 2017. Reimbursement of the Administrator for Administrative Services
We reimburse the Administrator for its expenses in connection with the provision of administrative services to us. These reimbursement expenses are periodically reviewed and approved by the Independent Trustees Committee of our Board of Trustees. See Note 4. Related Party Agreements and Transactions for a summary of reimbursable expenses as related to administrative services. Obligation to Pay the Distribution Services Component of Distribution and Shareholder Servicing Fee
The Distribution Services Component of the DSS Fee represents reimbursement to the Dealer Manager for costs incurred by participating broker-dealers and investment representatives for the distribution of our Common Shares. (See Note 2. Significant Accounting Policies - Distribution and Shareholder Servicing Fees regarding the obligation to pay the Distribution Services Component.) The DSS Fee quarterly payments will cease in the event that the Dealer Manager Agreement is terminated by us or the Dealer Manager. The table below presents the expected schedule of future payments of the Distribution Services Component of the DSS Fee: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 |
| | Total | | ≤ 1 year | | > 1 - 3 years | | 3 - 5 years | | 5 years |
| DSS Fee: Distribution Services Component | | $ | 975 | | | $ | 784 | | | $ | 191 | | | $ | — | | | $ | — | |
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
We are subject to financial market risks, including changes in interest rates through our investment in the Master Fund. As of September 30, 2017, 90.4%2020, 97.5% of the Master Fund's debt investments (95.0% of total investments), or $344.2$312.6 million measured at fair value, isare subject to variablefloating interest rates. The Master Fund's sole credit facility is also subject to changes in its 3-Month London Interbank Offered Rate (LIBOR) base rate. A rise in the general level of interest rates can be expected to lead to (i) higher interest income for the Master Fund's variablefloating rate debt investments, (ii) value declines for fixed rate investments the Master Fund may hold and (iii) higher interest expense in connection with the Master Fund's floating rate credit facility. To the extent that a majority of the Master Fund's investments may be in variablefloating rate investments, an increase in interest rates could also make it more difficult for borrowers to repay their loans, and a rise in interest rates may also make it easier for the AdvisorsAdvisor to meet or exceed the quarterly threshold for a performance basedperformance-based incentive fee as described in Note 4.6. Related Party Agreements and Transactions of the Master Fund's consolidated financial statements.
Based on our investment position in the Master Fund as of September 30, 2017,2020, the following table presents the approximate annualized increasein value per outstanding Common Share due to (i) interest income from the Master Fund's investment portfolio and (ii) interest expense on the Master Fund's floating rate borrowings, directly resulting from hypothetical changes in base rate interest rates (e.g., LIBOR), assuming no changes in (i) the number of outstanding Common Shares, (ii) the
number of outstanding Master Fund Shares and (iii) our percent ownership of Master Fund shares,shares:
| | | | | | | | |
Basis Points (bps) Increase (Decrease) | | Net Increase (Decrease) per Share |
| -50 bps | | $ | 0.01 | |
| +50 bps | | (0.01) | |
| +100 bps | | (0.01) | |
| +150 bps | | 0.03 | |
| +200 bps | | 0.06 | |
The Master Fund regularly measures its exposure to interest rate risk. The Master Fund assesses interest rate risk and (iv)manages its interest rate exposure on an ongoing basis by comparing its interest rate sensitive assets to its interest rate sensitive liabilities. Based on that review, the Master Fund determines whether or not any hedging transactions are necessary to mitigate exposure to changes in the Master Fund's net investment income are immediately passed on to the Master Fund's shareholders, including us:interest rates.
|
| | | | |
| Basis Points (bps) Increase | | Net Increase per Share |
| +50 bps | | $ | 0.03 |
|
| +100 bps | | 0.06 |
|
| +150 bps | | 0.09 |
|
| +200 bps | | 0.12 |
|
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures include internal controls and other procedures designed to provide reasonable assurance that information required to be disclosed in this and other reports filed under the Exchange Act, is recorded, processed, summarized and reported within the required time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our chief executive officerChief Executive Officer and chief financial officer,Chief Financial Officer, to allow timely decisions regarding required disclosures. It should be noted that no system of controls can provide complete assurance of achieving a company’s objectives and that future events may impact the effectiveness of a system of controls.
Our chief executive officerChief Executive Officer and chief financial officer,Chief Financial Officer, after conducting an evaluation, together with members of our management, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2017,2020, have concluded that our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act, were effective as of September 30, 20172020 at a reasonable level of assurance.
Changes in Internal Control over Financial Reporting
During the most recent fiscal quarter, there was no change in our internal controls over financial reporting, as defined under Rule 13a-15(f) under the Exchange Act, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
AtAs of November 9, 2017,10, 2020, we were not subject to any material legal proceedings, and, to our knowledge, there were no material legal proceedings threatened against us.
From time to time, we, or our administrator, may be a party to certain legal proceedings in the ordinary course of, or incidental to the normal course of, our business, including legal proceedings related to the enforcement of our rights under contracts with our portfolio companies. While legal proceedings, lawsuits, claims and regulatory proceedings are subject to many uncertainties and their ultimate outcomes are not predictable with assurance, the results of these proceedings are not expected to have a material adverse effect on our financial position or results of operations.
Item 1A. Risk Factors.
As of September 30, 2017,2020, there have been no material changes from the risk factors set forth in our annual report on Form 10-K dated April 17, 2017.and filed with the SEC on March 13, 2020, except for the additional risk disclosures related to COVID-19 included in the following sections.
Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information and/or damage to our business relationships, all of which could negatively impact our business, results of operations or financial condition.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen information, misappropriation of assets, increased cybersecurity protection and insurance costs, litigation and damage to our business relationships. Any such attack could result in significant losses, reputational damage, litigation, regulatory fines or penalties, or otherwise adversely affect our business, financial condition or results of operations. In addition, we may be required to expend significant additional resources to modify our protective measures and to investigate and remediate vulnerabilities or other exposures arising from operational and security risks. We face risks posed to our information systems, both internal and those provided to us by third-party service providers. We, Guggenheim and its affiliates have implemented processes, procedures and internal controls to help mitigate cybersecurity risks and cyber intrusions, but these measures, as well as our increased awareness of the nature and extent of a risk of a cyber incident, may be ineffective and do not guarantee that a cyber incident will not occur or that our financial results, operations or confidential information will not be negatively impacted by such an incident.
Third parties with which we do business (including those that provide services to us) may also be sources or targets of cybersecurity or other technological risks. We outsource certain functions and these relationships allow for the storage and processing of our information and assets, as well as certain investor, counterparty, employee and borrower information. While we engage in actions to reduce our exposure resulting from outsourcing, ongoing threats may result in unauthorized access, loss, exposure or destruction of data, or other cybersecurity incidents, with increased costs and other consequences, including those described above. Privacy and information security laws and regulation changes, and compliance with those changes, may also result in cost increases due to system changes and the development of new administrative processes. The Company and its service providers are currently impacted by quarantines and similar measures being enacted by governments in response to COVID-19, which are obstructing the regular functioning of business workforces (including requiring employees to work from external locations and their homes). Accordingly, the risks described above are heightened under current conditions.
Global capital markets could enter a period of severe disruption and instability. These conditions have historically affected and could again materially and adversely affect debt and equity capital markets in the United States and around the world and could negatively impact our business, financial condition and results of operations.
Market and macro-economic disruptions may, in the future, affect the U.S. capital markets, which could adversely affect our business and that of our portfolio companies. These market disruptions may also affect the broader financial and credit markets and may reduce the availability of debt and equity capital for the market as a whole and to financial firms, in particular. At various times, these macro-disruptions have resulted in, and may in the future result in, a lack of liquidity in parts of the debt capital markets, significant write-offs in the financial services sector and the repricing of credit risk. These conditions may reoccur for a prolonged period of time again or materially worsen in the future, including as a result of further downgrades to the U.S. government’s sovereign credit rating or the perceived credit worthiness of the United States or other large global economies. Unfavorable macro-economic conditions, including future recessions, also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. We may in the future have difficulty accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may cause us to reduce the volume of loans we originate and/or fund, adversely affect the value of our portfolio investments or otherwise have a material adverse effect on our business, financial condition, results of operations and cash flows. There has been ongoing discussion and commentary regarding potential significant changes to U.S. trade policies, treaties and tariffs. The current U.S. presidential administration, along with the U.S. Congress, has created significant uncertainty about the future relationship between the United States and other countries with respect to trade policies, treaties and tariffs. These developments, or the perception that any of them could occur, may have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global trade and, in particular, trade between the impacted nations and the United States. The spread of an epidemic or pandemic and efforts to contain it may result in severe disruptions to financial markets, supply chains, availability of raw materials, goods, and services. For example, the outbreak of COVID-19 is causing materially reduced consumer demand and economic output, disrupting supply chains, resulting in market closures, travel restrictions and quarantines, and adversely impacting local and global economies. As with other serious economic disruptions, governmental authorities and regulators are responding to this crisis with significant fiscal and monetary policy changes, including by providing direct capital infusions into companies, introducing new monetary programs and considerably lowering interest rates, which, in some cases resulted in negative interest rates. These actions, including their possible unexpected or sudden reversal or potential ineffectiveness, could further increase volatility in securities and other financial markets, reduce market liquidity, heighten investor uncertainty and adversely affect the value of our investments and our overall performance. In addition, uncertainty arising from the United Kingdom's decision to leave the European Union ("Brexit") could lead to further market disruptions and currency volatility, potentially weakening consumer, corporate and financial confidence and resulting in lower economic growth for companies that rely significantly on Europe for their business activities and revenues. Any of these factors could depress economic activity and restrict our portfolio companies' access to suppliers or customers and have a material adverse effect on their business, financial condition and results of operations, which in turn would negatively impact us.
The lack of liquidity in our investments may adversely affect our business.
We may acquire a significant percentage of our portfolio company investments from privately-held companies in directly negotiated transactions. The securities of private companies are not publicly traded or actively traded on the secondary market and are, instead, traded on a privately-negotiated, over-the-counter secondary market for institutional investors, if at all. These over-the-counter secondary markets may be inactive during an economic downturn or a credit crisis. In addition, the securities in these companies will be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly-traded securities. We typically would be unable to exit these investments unless and until the portfolio company has a liquidity event such as a sale, refinancing, or initial public offering.
The illiquidity of our investments may make it difficult or impossible for us to sell such investments if the need arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our investments, which could have a material adverse effect on our business, financial condition, and results of operations.
Moreover, securities purchased by us that are liquid at the time of purchase may subsequently become illiquid due to events relating to the issuer of the securities, market events, economic conditions, or investor perceptions.
We may also face other restrictions on our ability to liquidate an investment in a portfolio company to the extent that we, Guggenheim, or any of its affiliates have material nonpublic information regarding such portfolio company, or where the sale would be an impermissible joint transaction. The reduced liquidity of our investments may make it difficult for us to dispose of them at a favorable price, and, as a result, we may suffer losses.
Dislocations in certain parts of markets are resulting in reduced liquidity for certain investments. It is uncertain when financial markets will improve. Liquidity of financial markets may also be affected by government intervention.
We may not have the funds or ability to make additional investments in our portfolio companies or to fund our unfunded commitments.
After our initial investment in a portfolio company, we may be called upon from time to time to provide additional funds to such company or have the opportunity to increase our investment through the exercise of a warrant or other right to purchase common stock. There is no assurance that we will make, or will have sufficient funds to make, follow-on investments. Even if we have sufficient capital to make a desired follow-on investment, we may elect not to make a follow-on investment because we may not want to increase our level of risk, we prefer other opportunities, we are limited in our ability to do so by compliance with BDC requirements, or we desire to maintain our RIC status. Our ability to make follow-on investments may also be limited by Guggenheim's allocation policies. Any decisions not to make a follow-on investment or any inability on our part to make such an investment may have a negative impact on a portfolio company in need of such an investment, may result in a missed opportunity for us to increase our participation in a successful operation, or may reduce the expected return on the investment. During periods of market disruption, portfolio companies may be more likely to seek to draw on unfunded commitments we have made, and the risk of being unable to fund such commitments is heightened during such periods.
Item 2. Unregistered Sales of Equity Securities and Use of ProceedsProceeds.
(a) NoneNone.
(b) NoneNone.
(c) The following table provides information concerning our repurchases of Common Shares pursuant to our share repurchase program during the quarter ended September 30, 2017:2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
| July 1, 2020 to July 31, 2020 | | — | | | — | | | — | | | — | |
| August 1, 2020 to August 31, 2020 | | — | | | — | | | — | | | — | |
September 1, 2020 to September 30, 2020 (1) | | 135,447 | | | 7.65 | | | 135,447 | | | — | |
| Total | | 135,447 | | | | | 135,447 | | | — | |
|
| | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1) |
| July 1, 2017 to July 31, 2017 | | — |
| | — |
| | — |
| | — |
|
| August 1, 2017 to August 31, 2017 | | — |
| | — |
| | — |
| | — |
|
| September 1, 2017 to September 30, 2017 | | 119,167 |
| | $ | 9.13 |
| | 119,167 |
| | — |
|
| Total | | 119,167 |
| |
| | 119,167 |
| | — |
|
| |
(1) | The maximum number of shares available for repurchase on September 20, 2017 was 307,448.(1)The maximum number of Shares available for repurchase on September 8, 2020 was 135,448. A description of the maximum number of Common Shares that may be repurchased under our share repurchase program is set forth in Note 5. Common Shares to our unaudited financial statements included herein. |
Item 5. Other Information.
NoneNone.
Item 6. ExhibitsExhibits.
The exhibits required by this item are set forth in the Exhibit Index attached hereto and are filed or incorporated as part of this Report.
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.
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| | | GUGGENHEIM CREDIT INCOME FUND 2016 T |
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| Date: | November 9, 201716, 2020 | By: | /s/ Matthew S. Bloom |
| | | MATTHEW S. BLOOM |
| | | Chief Executive Officer and President |
| | | (Principal Executive Officer) |
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| Date: | November 9, 201716, 2020 | By: | /s/ Paul S. Saint-PierreCielo M. Ordonez |
| | | PAUL S. SAINT-PIERRECIELO M. ORDONEZ |
| | | Chief Financial Officer |
| | | (Principal Financial Officer) |
EXHIBIT INDEX
The following exhibits are filed or incorporated as part of this Report.
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| 3.1 |
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| 3.2 |
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| 3.3 |
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| 3.4 |
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| 4.1 |
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| 10.1 |
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10.2 |
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10.310.2 |
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10.4 |
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10.510.3 |
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10.610.4 |
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10.7 |
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10.810.5 |
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10.910.6 |
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10.10 |
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10.1110.7 |
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10.1210.8 |
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10.1310.9 |
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| 10.10 | | | |
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| 10.11 | | | |
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| 14.1 |
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14.231.1 |
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14.3 |
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31.1 |
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| 31.2 |
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| 32 |
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| 99 |
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* These items were effective during a portion of the reporting period; however, as of the date of this filing, these items are no longer effective with respect to the Company.
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