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SCP Private Credit Income BDC

Filed: 4 Aug 20, 4:51pm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarter Ended June 30, 2020

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 814-01294

 

 

SCP Private Credit Income BDC LLC

(Exact name of registrant as specified in its charter)

 

 

 

Delaware 83-0634992
(State of Incorporation) 

(I.R.S. Employer

Identification No.)

500 Park Avenue

New York, N.Y.

 10022
(Address of principal executive offices) (Zip Code)

(212) 993-1670

(Registrant’s telephone number, including area code)

 

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

Title of Each Class

 

Trading Symbol

 

Name of Each Exchange on Which Registered

N/A N/A N/A

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☐    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   Accelerated filer 
Non-accelerated filer   Smaller Reporting company 
   Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

The number of the Registrant’s common units outstanding as of July 31, 2020 was 9,586,174.

 

 

 


Table of Contents

SCP PRIVATE CREDIT INCOME BDC LLC

FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2020

TABLE OF CONTENTS

 

  Index  Page
No.
 
PART I. 

FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements

  
 

Consolidated Statements of Assets and Liabilities as of June  30, 2020 (unaudited) and December 31, 2019

   3 
 

Consolidated Statement of Operations for the three and six months ended June 30, 2020 (unaudited), the three months ended June 30, 2019 (unaudited) and the period March 12, 2019* to June 30, 2019 (unaudited)

   4 
 

Consolidated Statement of Changes in Unitholders’ Capital for the three and six months ended June 30, 2020 (unaudited), the three months ended June 30, 2019 (unaudited) and the period March 12, 2019* to June 30, 2019 (unaudited)

   5 
 

Consolidated Statement of Cash Flows for the six months ended June  30, 2020 (unaudited) and the period March 12, 2019* to June 30, 2019 (unaudited)

   6 
 

Consolidated Schedule of Investments as of June 30, 2020 (unaudited)

   7 
 

Consolidated Schedule of Investments as of December 31, 2019

   10 
 

Notes to Consolidated Financial Statements (unaudited)

   13 
 

Report of Independent Registered Public Accounting Firm

   29 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   30 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

   40 

Item 4.

 

Controls and Procedures

   41 

PART II.

 

OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

   41 

Item 1a.

 

Risk Factors

   41 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

   47 

Item 3.

 

Defaults Upon Senior Securities

   47 

Item 4.

 

Mine Safety Disclosures

   47 

Item 5.

 

Other Information

   47 

Item 6.

 

Exhibits

   47 

SIGNATURES

   48 

 

*

Commencement of operations


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SCP Private Credit Income BDC LLC

Consolidated Statements of Assets and Liabilities (unaudited)

(in thousands, except unit amounts)

 

   June 30, 2020
(unaudited)
  December 31, 2019 

Assets

   

Investments at fair value:

   

Non-controlled/non-affiliated investments (cost: $151,654 and $119,828, respectively)

  $151,157  $120,482 

Cash

   2,918   4,217 

Cash equivalents (cost: $19,997 and $29,969, respectively)

   19,997   29,969 

Interest receivable

   1,087   813 

Receivable for investments sold

   44   110 

Other receivable

   —     57 

Prepaid expenses

   75   20 
  

 

 

  

 

 

 

Total assets

  $175,278  $155,668 
  

 

 

  

 

 

 

Liabilities

   

Revolving credit facility due March 2021 (the “Subscription Facility”) ($9,500 and $44,100 face amounts, respectively, reported net of unamortized debt issuance costs of $147 and $252, respectively. See note 5)

  $9,353  $43,848 

Revolving credit facility due February 2023 (the “SPV Facility”) ($47,750 and $31,950 face amounts, respectively, reported net of unamortized debt issuance costs of $1,033 and $1,227, respectively. See note 5)

   46,717   30,723 

Payable for cash equivalents purchased

   19,997   29,969 

Management fee payable (see note 3)

   919   401 

Administration fee payable (see note 3)

   29   34 

Interest payable (see note 5)

   586   754 

Other liabilities and accrued expenses

   265   243 
  

 

 

  

 

 

 

Total liabilities

  $77,866  $105,972 
  

 

 

  

 

 

 

Commitments and contingencies (see note 6)

   

Unitholders’ Capital

   

Common Unitholders’ commitment:

  $326,000  $326,001 

Common Unitholders’ undrawn commitment:

   (229,500  (276,500

Offering costs

   (308  (308
  

 

 

  

 

 

 

Common Unitholders’ capital (9,586,174 and 4,955,621 units, respectively, issued and outstanding)

   96,192   49,193 

Accumulated distributable net gain

   1,220   503 
  

 

 

  

 

 

 

Total unitholders’ capital

  $97,412  $49,696 
  

 

 

  

 

 

 

Total liabilities and unitholders’ capital

  $175,278  $155,668 
  

 

 

  

 

 

 

Net asset value per unit

  $10.16  $10.03 
  

 

 

  

 

 

 

See notes to consolidated financial statements.

 

3


Table of Contents

SCP Private Credit Income BDC LLC

Consolidated Statement of Operations (unaudited)

(in thousands, except unit amounts)

 

   Three months
ended
June 30, 2020
  Three months
ended
June 30, 2019
  Six months
ended
June 30, 2020
  For the period
March 12,
2019*

to
June 30, 2019
 

Investment Income:

     

Interest income from non-controlled/non-affiliated investments

  $2,725  $1,322  $5,763  $1,511 

Other income from non-controlled/non-affiliated investments

   36   —     57   1 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total investment income

   2,761   1,322   5,820   1,512 
  

 

 

  

 

 

  

 

 

  

 

 

 

Expenses:

     

Management fees (see note 3)

  $395  $327  $919  $361 

Administration fees (see note 3)

   30   12   56   13 

Interest and other credit facility expenses (see note 5)

   854   989   2,038   1,111 

Other general and administrative expenses

   173   338   334   504 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total expenses

   1,452   1,666   3,347   1,989 
  

 

 

  

 

 

  

 

 

  

 

 

 

Net investment income (loss)

  $1,309  $(344 $2,473  $(477
  

 

 

  

 

 

  

 

 

  

 

 

 

Realized and unrealized gain (loss) on investments and cash equivalents and unfunded commitments:

     

Net realized loss on non-controlled/non-affiliated investments and cash equivalents

  $(1 $—    $(3 $—   

Net change in unrealized gain (loss) on non-controlled/non-affiliated investments, cash equivalents and unfunded commitments

   3,675   4   (1,151  273 
  

 

 

  

 

 

  

 

 

  

 

 

 

Net realized and unrealized gain (loss) on non-controlled/non-affiliated investments, cash equivalents and unfunded commitments

   3,674   4   (1,154  273 
  

 

 

  

 

 

  

 

 

  

 

 

 

Net Increase (Decrease) in Unitholders’ Capital Resulting From Operations

  $4,983  $(340 $1,319  $(204
  

 

 

  

 

 

  

 

 

  

 

 

 

Net Income (Loss) Per Unit

  $0.52  $(0.12 $0.17  $(0.07
  

 

 

  

 

 

  

 

 

  

 

 

 

 

*

Commencement of operations

See notes to consolidated financial statements.

 

4


Table of Contents

SCP Private Credit Income BDC LLC

Consolidated Statement of Changes in Unitholders’ Capital (unaudited)

(in thousands, except unit amounts)

 

   Three months
ended
June 30, 2020
  Three months
ended
June 30, 2019
  Six months
ended
June 30, 2020
  For the period
March 12,
2019*

to
June 30, 2019
 

Increase (decrease) in unitholders’ capital resulting from operations:

     

Net investment income (loss)

  $1,309  $(344 $2,473  $(477

Net realized loss

   (1  —     (3  —   

Net change in unrealized gain (loss)

   3,675   4   (1,151  273 
  

 

 

  

 

 

  

 

 

  

 

 

 

Net increase (decrease) in unitholders’ capital resulting from operations

   4,983   (340  1,319   (204
  

 

 

  

 

 

  

 

 

  

 

 

 

Distributions to unitholders:

     

From net investment income

   (602  10,000   (602  38,000 
  

 

 

  

 

 

  

 

 

  

 

 

 

Increase (decrease) in unitholders’ capital resulting from capital activity:

     

Contributions

   —     10,000   47,000   38,000 

Less offering costs

   —     (308  —     (308

Cancellation

   —     —     (1  —   
  

 

 

  

 

 

  

 

 

  

 

 

 

Net increase in unitholders’ capital resulting from capital activity

   —     9,692   46,999   37,692 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total increase in unitholders’ capital

   4,381   9,352   47,716   37,488 

Unitholders’ capital, beginning of period

   93,031   28,137   49,696   1 
  

 

 

  

 

 

  

 

 

  

 

 

 

Unitholders’ capital, end of period

  $97,412  $37,489  $97,412  $37,489 
  

 

 

  

 

 

  

 

 

  

 

 

 

Capital unit activity (see note 7):

     

Units issued

   —     1,012,146   4,630,653   3,812,146 

Units canceled

   —     —     (100  —   
  

 

 

  

 

 

  

 

 

  

 

 

 

Net increase from capital unit activity

   —     1,012,146   4,630,553   3,812,146 
  

 

 

  

 

 

  

 

 

  

 

 

 

 

*

Commencement of operations

See notes to consolidated financial statements.

 

5


Table of Contents

SCP Private Credit Income BDC LLC

Consolidated Statement of Cash Flows (unaudited)

(in thousands)

 

   Six months ended
June 30, 2020
  For the period
March 12, 2019* to
June 30, 2019
 

Cash Flows from Operating Activities:

   

Net increase (decrease) in unitholders’ capital resulting from operations

  $1,319  $(204

Adjustments to reconcile net increase in unitholders’ capital resulting from operations to net cash used in operating activities:

   

Net realized loss on investments and cash equivalents

   3   —   

Net change in unrealized (gain) on investments

   1,151   (273

(Increase) decrease in operating assets:

   

Purchase of investments

   (50,275  (67,339

Net accretion of discount on investments

   (334  (84

Proceeds from disposition of investments

   18,780   937 

Receivable for investments sold

   66   (11

Interest receivable

   (274  (453

Other receivable

   57   (113

Prepaid expenses

   (55  (176

Increase (decrease) in operating liabilities:

   

Payable for cash equivalents purchased

   (9,972  24,936 

Management fee payable

   518   361 

Administration fee payable

   (5  13 

Interest payable

   (168  561 

Due to affiliate

   —     496 

Other liabilities and accrued expenses

   22   323 
  

 

 

  

 

 

 

Net Cash Used in Operating Activities

   (39,167  (41,026
  

 

 

  

 

 

 

Cash Flows from Financing Activities:

   

Contributions from unitholders

   47,000   38,000 

Cancellation of units

   (1  —   

Cash distributions paid

   (602  —   

Offering costs

   —     (308

Deferred financing costs

   299   133 

Proceeds from borrowings

   93,000   79,404 

Repayments of borrowings

   (111,800  (16,500
  

 

 

  

 

 

 

Net Cash Provided by Financing Activities

   27,896   100,729 
  

 

 

  

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

   (11,271  59,703 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

   34,186   1 
  

 

 

  

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

  $22,915  $59,704 
  

 

 

  

 

 

 

Supplemental disclosure of cash flow information:

   

Cash paid for interest

  $2,206  $550 
  

 

 

  

 

 

 

 

*

Commencement of operations

See notes to consolidated financial statements.

 

6


Table of Contents

SCP Private Credit Income BDC LLC

Consolidated Schedule of Investments (unaudited)

June 30, 2020

(in thousands, except share/unit amounts)

 

Description 

 Industry Spread
above
Index (3)
  Libor
Floor 
  Interest
Rate (1)
  Acquisition
Date
  Maturity
Date
  Par Amount  Cost  Fair
Value
 

Bank Debt/Senior Secured Loans — 155.2%

 

Alimera Sciences, Inc.(2)

 Pharmaceuticals  L+765   1.78  9.43  12/31/2019   7/1/2024  $3,929  $3,948  $3,929 

Apollo Endosurgery, Inc.(2)

 Health Care
Equipment &
Supplies
  L+750   1.36  8.86  3/15/2019   9/1/2023   4,004   4,040   3,984 

Centrexion Therapeutics, Inc.

 Pharmaceuticals  L+725   2.45  9.70  6/28/2019   1/1/2024   2,465   2,464   2,474 

Cerapedics, Inc. (2)

 Health Care
Equipment &
Supplies
  L+695   2.50  9.45  3/22/2019   3/1/2024   3,936   3,976   3,965 

Drilling Info Holdings, Inc.(2)

 IT Services  L+450   —     4.68  1/31/2020   

7/30/2023-

7/30/2025

 

 

  13,886   13,527   13,539 

Edgewood Partners Holdings, LLC(2)

 Insurance  L+425   1.00  5.25  3/12/2019   9/8/2024   25,087   24,707   24,585 

Enhanced Capital Group, LLC(2)

 Capital Markets  L+550   1.00  6.50  6/28/2019   6/28/2024   3,697   3,651   3,660 

ENS Holdings III Corp. & ES Opco USA LLC (BlueFin)(2)

 Trading
Companies &
Distributors
  L+475   1.00  5.75  12/31/2019   12/31/2025   7,680   7,537   7,527 

Kindred Biosciences, Inc.(2)(6)

 Pharmaceuticals  L+675   2.17  8.92  9/30/2019   9/30/2024   1,793   1,795   1,795 

Kingsbridge Holdings, LLC (2).

 Multi-Sector
Holdings
  L+700   1.00  8.44  3/12/2019   12/21/2024   12,938   12,777   12,938 

KORE Wireless Group, Inc.(2)

 Wireless
Telecommunication
Services
  L+550   —     5.81  3/12/2019   12/21/2024   14,326   14,091   14,040 

MRI Software LLC(2)

 Software  L+550   1.00  6.50  7/23/2019   2/10/2026   7,507   7,435   7,432 

MSHC, Inc. (Service Logic)(2)

 Commercial
Services &
Supplies
  L+425   1.00  5.25  6/27/2019   12/31/2024   5,957   5,930   5,719 

Neuronetics, Inc.(2).

 Health Care
Equipment &
Supplies
  L+765   1.66  9.31  3/2/2020   2/28/2025   3,056   3,052   3,040 

Pinnacle Treatment Centers, Inc.(2)

 Health Care
Providers &
Services
  L+625   1.00  7.25  1/22/2020   12/31/2022   4,465   4,427   4,420 

Rubius Therapeutics, Inc. (2)(4)

 Pharmaceuticals  L+550   —     5.68  3/12/2019   12/21/2023   7,872   7,907   7,941 

Rxsense Holdings LLC(2)

 Diversified
Consumer Services
  L+525   1.00  6.25  3/17/2020   3/13/2026   10,391   10,191   10,235 

scPharmaceuticals, Inc.(2)

 Pharmaceuticals  L+795   2.23  10.18  9/17/2019   9/17/2023   915   920   920 

SI-BONE, Inc.(4)

 Health Care
Equipment &
Supplies
  L+940   0.33  9.73  5/29/2020   6/1/2025   3,492   3,485   3,483 

Southern Auto Finance Company(2)(4)

 Diversified
Financial Services
  —     —     11.15  4/5/2019   12/4/2021   3,000   2,999   2,940 

US Radiology Specialists, Inc.(2)

 Health Care
Providers &
Services
  L+475   1.00  5.82  3/12/2019   1/1/2024   4,479   4,455   4,300 

Worldwide Facilities, LLC (2)

 Insurance  L+450   —     4.67  9/13/2019   9/5/2026   8,435   8,280   8,266 
        

 

 

  

 

 

 

Total Bank Debt/Senior Secured Loans

 

 $151,594  $151,132 
  

 

 

  

 

 

 

 

See notes to consolidated financial statements.

 

7


Table of Contents

SCP Private Credit Income BDC LLC

Consolidated Schedule of Investments (unaudited) (continued)

June 30, 2020

(in thousands)

 

Description 

 Industry  Spread
above
Index (3)
  Libor
Floor 
  Interest
Rate (1)
  Acquisition
Date
  Maturity
Date
  Par Amount  Cost  Fair
Value
 
                    Shares/
Units
       
Common Equity/Equity Interests/Warrants — 0.0%         

Centrexion Therapeutics, Inc. Warrants†

  Pharmaceuticals      6/28/2019    41,078   21   22 

Senseonics Holdings, Inc. Warrants†

  

Health Care
Equipment &
Supplies
 
 
 
     7/25/2019    102,942   23   3 

Tetraphase Pharmaceuticals, Inc. Warrants

  Pharmaceuticals      3/12/2019    2,762   16   —   
        

 

 

  

 

 

 

Total Common Equity/Equity Interests/Warrants.

 

 $60  $25 
        

 

 

  

 

 

 

Total Investments(5) —155.2%.

 

 $151,654  $151,157 
        

 

 

  

 

 

 
                    Par Amount       
Cash Equivalents — 20.5%         

U.S. Treasury Bill

  Government     6/30/2020   8/27/2020   $20,000  $19,997  $19,997 
        

 

 

  

 

 

 

Total Investments & Cash Equivalents — 175.7%

 

 $171,651  $171,154 

Liabilities in Excess of Other Assets (75.7%)

 

   (73,742
         

 

 

 

Net Assets —100.0%

 

    $97,412 
         

 

 

 

 

(1)

Floating rate debt investments typically bear interest at a rate determined by reference to either the London Interbank Offered Rate (“LIBOR” or “L”) index rate or the prime index rate (PRIME or “P”), and which typically reset monthly, quarterly or semi-annually. For each debt investment we have provided the current interest rate in effect as of June 30, 2020.

(2)

Indicates an investment that is wholly or partially held by SCP Private Credit Income BDC LLC through its wholly-owned financing subsidiary SCP Private Credit Income BDC SPV LLC (the “SPV”). Such investments are pledged as collateral under the SPV Facility (see Note 7 to the consolidated financial statements) and are not generally available to creditors, if any, of the Company.

(3)

Floating rate instruments accrue interest at a predetermined spread relative to an index, typically the LIBOR or PRIME rate. These instruments are often subject to a LIBOR or PRIME rate floor.

(4)

Indicates assets that the Company believes may not represent “qualifying assets” under Section 55(a) of the Investment Company Act of 1940, as amended (“1940 Act”). If we fail to invest a sufficient portion of our assets in qualifying assets, we could be prevented from making follow-on investments in existing portfolio companies or could be required to dispose of investments at inappropriate times in order to comply with the 1940 Act. As of June 30, 2020, on a fair value basis, non-qualifying assets in the portfolio represented 8.2% of the total assets of the Company.

(5)

Aggregate net unrealized depreciation for U.S. federal income tax purposes is $1,413; aggregate gross unrealized appreciation and depreciation for U.S. federal tax purposes is $272 and $1,685, respectively, based on a tax cost of $152,570. The Company generally acquires its investments in private transactions exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”). These investments are generally subject to certain limitations on resale, and may be deemed to be “restricted securities” under the Securities Act. All investments are Level 3 unless otherwise indicated.

(6)

Kindred Biosciences, Inc., KindredBio Equine, Inc. and Centaur Biopharmaceutical Services, Inc. are co-borrowers.

Non-income producing security.

See notes to consolidated financial statements.

 

8


Table of Contents

SCP Private Credit Income BDC LLC

Consolidated Schedule of Investments (unaudited) (continued)

June 30, 2020

(in thousands)

 

Industry Classification

  Percentage of Total
Investments (at
fair value) as of
June 30, 2020
 

Insurance

   21.7

Pharmaceuticals

   11.3

Health Care Equipment & Supplies

   9.6

Wireless Telecommunication Services

   9.3

IT Services

   8.9

Multi-Sector Holdings

   8.6

Diversified Consumer Services

   6.8

Health Care Providers & Services

   5.8

Trading Companies & Distributors

   5.0

Software

   4.9

Commercial Services & Supplies

   3.8

Capital Markets

   2.4

Diversified Financial Services

   1.9
  

 

 

 

Total Investments

   100.0
  

 

 

 

See notes to consolidated financial statements.

 

9


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SCP Private Credit Income BDC LLC

Consolidated Schedule of Investments

December 31, 2019

(in thousands, except share/unit amounts)

 

Description

 

Industry

 S Spread
above
Index (3)
  Libor
Floor 
  Interest
Rate (1)
  Acquisition
Date
  Maturity
Date
  Par Amount  Cost  Fair
Value
 

Bank Debt/Senior Secured Loans — 242.3%

 

Alimera Sciences, Inc.(2)

 Pharmaceuticals  L+765   1.78  9.43  12/31/2019   7/1/2024  $3,710  $3,710  $3,710 

Apollo Endosurgery, Inc.(2)

 Health Care Equipment & Supplies  L+750   1.36  9.19  3/15/2019   9/1/2023   4,004   4,013   4,004 

Centrexion Therapeutics, Inc.

 Pharmaceuticals  L+725   2.45  9.70  6/28/2019   1/1/2024   2,465   2,449   2,443 

Cerapedics, Inc. (2)

 Health Care Equipment & Supplies  L+695   2.50  9.45  3/22/2019   3/1/2024   3,674   3,691   3,692 

Edgewood Partners Holdings, LLC(2)

 Insurance  L+425   1.00  6.05  3/12/2019   9/8/2024   25,215   24,796   24,963 

Enhanced Capital Group, LLC(2)

 Capital Markets  L+550   1.00  7.20  6/28/2019   6/28/2024   3,968   3,914   3,968 

ENS Holdings III Corp. & ES Opco USA LLC (BlueFin)(2)

 Trading Companies & Distributors  L+475   1.00  6.69  12/31/2019   12/31/2025   6,582   6,450   6,450 

Kindred Biosciences, Inc.(2)(4)(6)

 Pharmaceuticals  L+675   2.17  8.92  9/30/2019   9/30/2024   1,793   1,787   1,788 

Kingsbridge Holdings, LLC (2).

 Multi-Sector Holdings  L+700   1.00  9.09  3/12/2019   12/21/2024   12,938   12,763   12,938 

KORE Wireless Group, Inc.(2)

 Wireless Telecommunication Services  L+550   —     7.44  3/12/2019   12/21/2024   14,399   14,142   14,291 

MRI Software LLC(2)

 Software  L+575   1.00  7.55  7/23/2019   6/30/2023   12,798   12,679   12,798 

MSHC, Inc. (Service Logic)(2)

 Commercial Services & Supplies  L+425   1.00  5.96  6/27/2019   12/31/2024   4,346   4,325   4,324 

Rubius Therapeutics, Inc. (2)(4)

 Pharmaceuticals  L+550   —     7.19  3/12/2019   12/21/2023   5,248   5,266   5,274 

scPharmaceuticals, Inc.(2)

 Pharmaceuticals  L+795   2.23  10.18  9/17/2019   9/17/2023   915   917   917 

Senseonics Holdings, Inc.(2)

 Health Care Equipment & Supplies  L+650   2.48  8.98  7/25/2019   7/1/2024   4,118   4,101   4,118 

Southern Auto Finance Company(2)(4)

 Diversified Financial Services  —     —     11.15  4/5/2019   12/4/2021   3,000   2,999   3,000 

US Radiology Specialists, Inc.(2)

 Health Care Providers & Services  L+475   1.00  6.55  3/12/2019   1/1/2024   4,502   4,474   4,412 

Worldwide Facilities, LLC (2)

 Insurance  L+450   —     6.21  9/13/2019   9/5/2026   7,437   7,292   7,363 
        

 

 

  

 

 

 

Total Bank Debt/Senior Secured Loans

 

 $119,768  $120,453 
        

 

 

  

 

 

 

 

See notes to consolidated financial statements.

 

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SCP Private Credit Income BDC LLC

Consolidated Schedule of Investments (unaudited) (continued)

June 30, 2020

(in thousands)

 

Description

 

Industry

 S Spread
above
Index (3)
  Libor
Floor 
  Interest
Rate (1)
  Acquisition
Date
  Maturity
Date
  Par Amount  Cost  Fair
Value
 
                   Shares/
Units
       

Common Equity/Equity Interests/Warrants — 0.1%

         

Centrexion Therapeutics, Inc. Warrants†

 Pharmaceuticals     6/28/2019    41,078   21   15 

Senseonics Holdings, Inc. Warrants†

 Health Care Equipment & Supplies     7/25/2019    102,942   23   14 

Tetraphase Pharmaceuticals, Inc. Warrants(4)

 Pharmaceuticals     3/12/2019    2,762   16   —   
        

 

 

  

 

 

 

Total Common Equity/Equity Interests/Warrants.

 

 $60  $29 
        

 

 

  

 

 

 

Total Investments(5) — 242.4%.

 

 $119,828  $120,482 
 

 

 

  

 

 

 
                   Par Amount       

Cash Equivalents — 60.3%

         

U.S. Treasury Bill

   Government     12/31/2019   1/28/2020  $30,000  $29,969  $29,969 
        

 

 

  

 

 

 

Total Investments & Cash Equivalents — 302.7%

 

 $149,797  $150,451 

Liabilities in Excess of Other Assets (202.7%)

 

   (100,755
  

 

 

 

Net Assets — 100.0%

 

  $49,696 
  

 

 

 

 

(1)

Floating rate debt investments typically bear interest at a rate determined by reference to either the London Interbank Offered Rate (“LIBOR” or “L”) index rate or the prime index rate (PRIME or “P”), and which typically reset monthly, quarterly or semi-annually. For each debt investment we have provided the current interest rate in effect as of December 31, 2019.

(2)

Indicates an investment that is wholly or partially held by SCP Private Credit Income BDC LLC through its wholly-owned financing subsidiary SCP Private Credit Income BDC SPV LLC (the “SPV”). Such investments are pledged as collateral under the SPV Facility (see Note 7 to the consolidated financial statements) and are not generally available to creditors, if any, of the Company.

(3)

Floating rate instruments accrue interest at a predetermined spread relative to an index, typically the LIBOR or PRIME rate. These instruments are often subject to a LIBOR or PRIME rate floor.

(4)

Indicates assets that the Company believes may not represent “qualifying assets” under Section 55(a) of the Investment Company Act of 1940, as amended (“1940 Act”). If we fail to invest a sufficient portion of our assets in qualifying assets, we could be prevented from making follow-on investments in existing portfolio companies or could be required to dispose of investments at inappropriate times in order to comply with the 1940 Act. As of December 31, 2019, on a fair value basis, non-qualifying assets in the portfolio represented 6.5% of the total assets of the Company.

(5)

Aggregate net unrealized depreciation for U.S. federal income tax purposes is $262; aggregate gross unrealized appreciation and depreciation for U.S. federal tax purposes is $893 and $1,155, respectively, based on a tax cost of $120,744. The Company generally acquires its investments in private transactions exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”). These investments are generally subject to certain limitations on resale, and may be deemed to be “restricted securities” under the Securities Act. All investments are Level 3 unless otherwise indicated.

(6)

Kindred Biosciences, Inc., KindredBio Equine, Inc. and Centaur Biopharmaceutical Services, Inc. are co-borrowers.

Non-income producing security.

See notes to consolidated financial statements.

 

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SCP Private Credit Income BDC LLC

Consolidated Schedule of Investments (unaudited) (continued)

June 30, 2020

(in thousands)

 

Industry Classification

  Percentage of Total
Investments (at
fair value) as of
December 31,
2019
 

Insurance

   26.8

Wireless Telecommunication Services

   11.9

Pharmaceuticals

   11.7

Multi-Sector Holdings

   10.7

Software

   10.6

Health Care Equipment & Supplies

   9.8

Trading Companies & Distributors

   5.4

Health Care Providers & Services

   3.7

Commercial Services & Supplies

   3.6

Capital Markets

   3.3

Diversified Financial Services

   2.5
  

 

 

 

Total Investments

   100.0
  

 

 

 

See notes to consolidated financial statements.

 

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SCP Private Credit Income BDC LLC

Notes to Consolidated Financial Statements (unaudited)

June 30, 2020

(in thousands, except unit amounts)

Note 1. Organization

SCP Private Credit Income BDC LLC (the “Company”, “we”, “us” or “our”) is a Delaware limited liability company formed on May 18, 2018. The Company has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (“the 1940 Act”). Furthermore, as the Company is an investment company, it applies the guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946. In addition, for U.S. federal income tax purposes, the Company intends to elect to be treated, and intends to qualify annually, as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Company was formed primarily to provide investors with attractive long-term returns through investments made pursuant to the investment strategy of the Company described below (the Company’s investments in portfolio companies are referred to herein as “Portfolio Investments”).

On October 5, 2018 (the “Initial Closing Date”), the Company closed on $326,000 in capital commitments. On March 12, 2019, the sale and issuance of 2,800,000 units, at an aggregate purchase price of $28,000 ($10.00 per unit) occurred and the Company commenced material operations.

The Company expects to implement a corporate lending strategy focused on sourcing, underwriting and managing a diverse portfolio of private senior secured loans primarily to upper middle market companies (generally, loan sizes of $100,000 to $300,000 to companies with earnings before interest, tax, depreciation and amortization (“EBITDA”) between approximately $25,000 and $100,000) across the United States. In addition to senior secured loans to upper middle market companies, the Company intends to invest a portion of its assets in non-traditional asset-based loans and first lien loans to rapidly growing healthcare companies. The Company also expects that some of its investments will contain delayed-draw term loan type features and/or other types of unfunded commitments.

The offering period of the Company ended on April 5, 2019 (the “Offering Period”). The term of the Company will be six years from the end of the Offering Period unless the Company is liquidated earlier as set forth in the Limited Liability Company Agreement of the Company (as amended, restated or otherwise modified from time to time, the “LLC Agreement”), but may be extended by the board of directors for up to two consecutive one year periods upon approval of the Company’s independent directors and the approval of unitholders of the Company (“Unitholders”), which approval will be obtained through a non-1940 Act vote as described in the LLC Agreement. The Company may be dissolved and its affairs wound up prior to the end of the term under the circumstances set forth in the LLC Agreement. The fiscal year end of the Company is December 31.

Note 2. Summary of Significant Accounting Policies

The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“GAAP”), and include the accounts of the Company and certain wholly-owned subsidiaries. The consolidated financial statements reflect all adjustments and reclassifications which, in the opinion of management, are necessary for the fair presentation of the results of the operations and financial condition for the periods presented. All significant intercompany balances and transactions have been eliminated. Certain prior period amounts may have been reclassified to conform to current period presentation.

Interim consolidated financial statements are prepared in accordance with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Regulation S-X, as appropriate.

 

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SCP Private Credit Income BDC LLC

Notes to Consolidated Financial Statements (unaudited) (continued)

June 30, 2020

(in thousands, except unit amounts)

 

Accordingly, they may not include all of the information and notes required by GAAP for annual consolidated financial statements. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reported periods. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending on December 31, 2020.

In the opinion of management, all adjustments which are of a normal recurring nature considered necessary for the fair presentation of financial statements, have been included.

The significant accounting policies consistently followed by the Company are:

 

 (a)

Investment transactions are accounted for on the trade date;

 

 (b)

In accordance with GAAP and the 1940 Act, the Company’s assets will generally be valued as follows:

 

 (i)

securities or other instruments (other than as referred to in clauses (ii) and (iii) below) for which market quotes are readily available will be valued based on quotes obtained from a quotation reporting system, market makers or pricing services (when deemed to represent fair value under U.S. GAAP);

 

 (ii)

exchange-traded options, futures and options on futures will be valued at the settlement price determined by the exchange or through the use of a model such as Black-Scholes;

 

 (iii)

short-term investments with maturities of sixty (60) days or less generally will be valued at amortized cost; and

 

 (iv)

securities, loans or other instruments for which market quotes are not readily available will be valued as described below:

 

 a.

the quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of the Adviser responsible for the portfolio investment;

 

 b.

preliminary valuation conclusions are then documented and discussed with senior management of the Adviser;

 

 c.

the audit committee of the Board of Directors ( the “Board”) reviews the preliminary valuations of the Adviser and third party valuation specialist, if any, and responds to the valuation recommendations to reflect any comments; and

 

 d.

the Board discusses valuations and determines the fair value of each investment in the Company’s portfolio in good faith based on the input of the Adviser, the audit committee, and third party valuation specialist, if any, that may from time to time be engaged.

The valuation principles set forth above may be modified from time to time without notice to Unitholders, in whole or in part, as determined by the Board in its sole discretion.

When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the Company will consider the pricing indicated by the external event to corroborate the valuation. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the investments may differ significantly from the

 

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SCP Private Credit Income BDC LLC

Notes to Consolidated Financial Statements (unaudited) (continued)

June 30, 2020

(in thousands, except unit amounts)

 

values that would have been used had a readily available market value existed for such investments, and the differences could be material.

Investments are valued utilizing a market approach, an income approach, or both approaches, as appropriate. However, in accordance with ASC 820-10, certain investments that qualify as investment companies in accordance with ASC 946, may be valued using net asset value as a practical expedient for fair value. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation approaches to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, and enterprise values, among other factors. When available, broker quotations and/or quotations provided by pricing services are considered as an input in the valuation process. For the six months ended June 30, 2020, there has been no change to the Company’s valuation approaches or techniques and the nature of the related inputs considered in the valuation process.

ASC Topic 820 classifies the inputs used to measure these fair values into the following hierarchy:

Level 1: Quoted prices in active markets for identical assets or liabilities, accessible by the Company at the measurement date.

Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.

Level 3: Unobservable inputs for the asset or liability.

In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each investment. The exercise of judgment is based in part on our knowledge of the asset class and our prior experience.

 

 (c)

Gains or losses on investments are calculated by using the specific identification method.

 

 (d)

The Company records dividend income and interest, adjusted for amortization of premium and accretion of discount, on an accrual basis. Loan origination fees, original issue discount, and market discounts are capitalized and we amortize such amounts into income using the effective interest method. Upon the prepayment of a loan, any unamortized loan origination fees are recorded as interest income. We record call premiums on loans repaid as interest income when we receive such amounts. Capital structuring fees, amendment fees, consent fees, and any other non-recurring fee income as well as management fee and other fee income for services rendered, if any, are recorded as other income when earned.

 

 (e)

The Company intends to comply with the applicable provisions of the Code pertaining to regulated investment companies to make distributions of taxable income sufficient to relieve it of substantially all

 

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SCP Private Credit Income BDC LLC

Notes to Consolidated Financial Statements (unaudited) (continued)

June 30, 2020

(in thousands, except unit amounts)

 

 U.S. federal income taxes. The Company, at its discretion, may carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. The Company will accrue excise tax on such estimated excess taxable income as appropriate.

 

 (f)

Book and tax basis differences relating to Unitholder distributions and other permanent book and tax differences are typically reclassified among the Company’s capital accounts annually. In addition, the character of income and gains to be distributed is determined in accordance with income tax regulations that may differ from GAAP.

 

 (g)

Distributions to Unitholders are recorded as of the record date. The amount to be paid out as a distribution is determined by the Board. Net realized capital gains, if any, are generally distributed or deemed distributed at least annually.

 

 (h)

In accordance with Regulation S-X and ASC Topic 810—Consolidation, the Company consolidates its interest in controlled investment company subsidiaries, financing subsidiaries and certain wholly-owned holding companies that serve to facilitate investment in portfolio companies. In addition, the Company may also consolidate any controlled operating companies substantially all of whose business consists of providing services to the Company.

 

 (i)

The accounting records of the Company are maintained in U.S. dollars. Any assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the rate of exchange of such currencies against the U.S. dollar on the date of valuation. The Company will not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations would be included with the net unrealized gain or loss from investments. The Company’s investments in foreign securities, if any, may involve certain risks, including without limitation: foreign exchange restrictions, expropriation, taxation or other political, social or economic risks, all of which could affect the market and/or credit risk of the investment. In addition, changes in the relationship of foreign currencies to the U.S. dollar can significantly affect the value of these investments in terms of U.S. dollars and therefore the earnings of the Company.

 

 (j)

In accordance with ASC 835-30, the Company reports origination and other expenses related to certain debt issuances, if any, as a direct deduction from the carrying amount of the debt liability. Applicable expenses are deferred and amortized using either the effective interest method or the straight-line method over the stated life. The straight-line method may be used on revolving facilities and/or when it approximates the effective yield method.

 

 (k)

The Company records expenses related to applicable equity offering costs as a charge to capital upon utilization, in accordance with ASC 946-20-25.

 

 (l)

Investments that are expected to pay regularly scheduled interest in cash are generally placed on non-accrual status when principal or interest cash payments are past due 30 days or more and/or when it is no longer probable that principal or interest cash payments will be collected. Such non-accrual investments are restored to accrual status if past due principal and interest are paid in cash, and in management’s judgment, are likely to continue timely payment of their remaining principal and interest obligations. Cash interest payments received on such investments may be recognized as income or applied to principal depending on management’s judgment.

 

 (m)

The Company records expenses directly related to its organization as incurred.

 

 (n)

The Company defines cash equivalents as securities that are readily convertible into known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of

 

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SCP Private Credit Income BDC LLC

Notes to Consolidated Financial Statements (unaudited) (continued)

June 30, 2020

(in thousands, except unit amounts)

 

 changes in interest rates. Generally, only securities with a maturity of three months or less would qualify, with limited exceptions. The Company believes that certain U.S. Treasury bills, repurchase agreements and other high-quality, short-term debt securities would qualify as cash equivalents.

Recent Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in ASU 2018-13 modify and eliminate certain disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company has adopted ASU 2018-13 and determined that the adoption has not had a material impact on its consolidated financial statements and disclosures.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). The amendments in ASU 2020-04 provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of adopting ASU 2020-04 on its consolidated financial statements and disclosures.

Note 3. Agreements and Related Party Transactions

The Company has entered into an investment management agreement with the Adviser (the “Investment Management Agreement”) pursuant to which it will pay management fees, administrative coordinator fees and incentive fees to the Adviser. The Company will pay the Adviser a fee for investment advisory and management services consisting of two components: a base management fee and an incentive fee. The Company will also pay the Adviser (in its capacity as Administrative Coordinator, defined herein) an administration fee for administrative and coordination services. The cost of the base management fee, the incentive fee, and the administration fee will be borne by the Unitholders.

Management Fees and Administration Fees

The Company will pay the Adviser a management fee (the “Management Fee”), calculated as of the close of business in New York, New York on the last day of each calendar quarter (each such date, the “Management Fee Calculation Date”), in an amount equal to 1.5% per annum of Invested Capital (defined as, as of any date, the sum of (i) capital contributions to the Company plus (ii) the total amount of credit drawn on subscription credit facilities), and payable quarterly in arrears after such Management Fee Calculation Date.

Pursuant to the Investment Management Agreement, the Adviser has also been appointed to provide administrative and coordination services to the Company (in such capacity, the “Administrative Coordinator”). The Company will pay the Administrative Coordinator, a fee (the “Administration Fee”), calculated as of the close of business in New York, New York on the last day of each calendar quarter (the “Administration Fee Calculation Date”), in an amount equal to 0.08% per annum of the average Cost Basis (defined as the aggregate accreted and amortized cost of all portfolio investments, including any amounts reinvested in investments and the cost of investments acquired using leverage), as measured on the last day of the preceding quarter and the last day of the current quarter for the period ended and payable quarterly in arrears after such Administration Fee

 

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SCP Private Credit Income BDC LLC

Notes to Consolidated Financial Statements (unaudited) (continued)

June 30, 2020

(in thousands, except unit amounts)

 

Calculation Date. The Administrative Coordinator will be responsible for all expenses of its own staff responsible for (i) certain on-going, routine, non-investment-related administrative services for the Company, (ii) the coordination of various third party services needed or required by the Fund and (iii) certain Unitholder servicing functions.

Each of the Management Fee and the Administration Fee will be appropriately adjusted for any stub period. Such fees will be paid out of net current income and/or disposition proceeds or, to the extent such amounts are not available, from unfunded capital commitments that will be drawn down, or borrowings of the Company. In the event that the Adviser arranges for the Company to pay any portion of a placement fee to a placement agent, the amount of management fees otherwise payable shall be reduced by an amount equal to 100% of such payment to the placement agent.

Incentive Fee

The Company will make distributions out of two categories: Current Proceeds and Disposition Proceeds (collectively referred to as “Investment Proceeds”). “Disposition Proceeds” means all amounts received by the Company upon the disposition of an investment, including full or partial repayments or amortization of principal (but excluding Current Proceeds). “Current Proceeds” means all proceeds from investments, including interest income, fee income, warrant gains, prepayment fees and exit fees, other than Disposition Proceeds. The Adviser will apportion each Unitholder’s pro rata share of Investment Proceeds between Disposition Proceeds and Current Proceeds. Amounts of Investment Proceeds apportioned to Unitholders will be divided between and distributed to Unitholders, on the one hand, and the Adviser, on the other hand, in the following amounts and order of priority:

(i) First, Return of Capital Contributions: 100% of amounts constituting Disposition Proceeds to Unitholders until each Unitholder has received cumulative distributions of Disposition Proceeds pursuant to this clause (i) equal to each Unitholder’s total capital contributions to the Company (including amounts contributed to pay Management Fees, Administration Fees, Organizational Expenses and other Company expenses). Amounts constituting Current Proceeds proceed to clause (ii) and are not returned under this clause (i);

(ii) Second, Unitholder Preferred Return: 100% of all remaining Investment Proceeds to Unitholders until they have each received distributions, without duplication, pursuant to this clause (ii) and clause (iv) below equal to a 6% per annum return, compounded annually, on Unitholders’ unreturned capital contributions to the Company (including amounts contributed to pay Management Fees, Administration Fees, Organizational Expenses and other Company expenses);

(iii) Third, Adviser Catch Up: 80% of all remaining Investment Proceeds to the Adviser, as a “catch up” distribution with respect to its incentive fee, until the Adviser has received distributions of Investment Proceeds with respect to Unitholders pursuant to this clause (iii) equal to 15% of the total amounts distributed to Unitholders and the Adviser with respect to Unitholders pursuant to clause (ii) above and this clause (iii); and

(iv) Fourth, 85%/15% units: 85% to Unitholders and 15% to the Adviser as an incentive fee.

In no event will the Adviser receive Disposition Proceeds that, as of any distribution date, exceeds 20% of cumulative realized capital gains net of all cumulative realized capital losses and unrealized capital depreciation.

 

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SCP Private Credit Income BDC LLC

Notes to Consolidated Financial Statements (unaudited) (continued)

June 30, 2020

(in thousands, except unit amounts)

 

The Adviser may also elect not to receive all or any portion of the incentive fee that would otherwise be distributed to it, and may cause any or all amounts subsequently available for distribution to the Unitholders to be distributed to the Adviser until it has received the same aggregate amount of incentive fees had it not previously waived receipt of incentive fees.

The Adviser will be entitled to withhold from any distributions, in its discretion, any required tax withholdings. Amounts of taxes paid or withheld from amounts otherwise distributable to a Unitholder will be deemed distributed for purposes of the calculations above.

Upon liquidation of the Fund, the Adviser will be required to restore funds to the Company for distribution to the Unitholders if and to the extent that the Adviser has received cumulative incentive fees in excess of the incentive fees that would have been payable to the Adviser on an aggregate basis covering all transactions of the Fund; provided, however, that in no event will the Adviser be required to contribute an aggregate amount in excess of 100% of the net amount distributed to the Adviser (net of taxes) on account of its incentive fees. In addition, the Adviser will apply an interim incentive fee adjustment at the end of each fiscal year so that, in the event of any over-distribution of incentive fee to the Adviser (measured with respect to each Unitholder using the fair value of the Company’s portfolio at the end of the applicable fiscal year as if the Company were to liquidate on such date), future distributions that would, absent such interim incentive fee adjustment, otherwise be distributed to the Adviser as an incentive fee, shall be distributed to such Unitholder until such over-distribution (net of taxes payable by the Adviser with respect to such incentive fee) has been eliminated.

For the three and six months ended June 30, 2020, the Company incurred $395 and $919, respectively in Management Fees, $30 and $56, respectively in Administration Fees and $0 and $0, respectively in Incentive Fees. For the three months ended June 30, 2019, the Company incurred $327 in Management Fees, $12 in Administration Fees and $0 in Incentive Fees. For the period March 12, 2019 (commencement of operations) to June 30, 2019, the Company incurred $361 in Management Fees, $13 in Administration Fees and $0 in Incentive Fees.

The aggregate amount of certain operating expenses relating to Unitholders investing directly in the Company will not exceed the Operating Expense Cap, calculated as follows: (A) if the Company has less than or equal to $400,000 in capital commitments, an amount equal to the sum of (x) the product of the capital commitments and 0.0025 and (y) $1,250, or (B) if the Company has greater than $400,000 in capital commitments, $2,250. Any amount in excess of the Operating Expense Cap for any fiscal year will be paid by the Adviser. For the avoidance of doubt, the Operating Expense Cap will not apply to any fees, costs, expenses and liabilities allocable to persons investing indirectly in the Company through any Unitholder.

The Adviser or Administrative Coordinator and/or their affiliates has advanced organizational and offering expenses to the Company, which include organizational fees, costs, expenses and liabilities of the Company, including legal expenses, incurred in connection with the initial offering of Units and the formation and establishment of the Company. The Adviser or Administrative Coordinator (or such affiliate) will be reimbursed by the Company for such advanced costs and expenses in an amount not to exceed $500. As of June 30, 2020 $308 of offering expenses were charged to capital and $84 of organizational costs were expensed.

Note 4. Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP establishes a framework for

 

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Table of Contents

SCP Private Credit Income BDC LLC

Notes to Consolidated Financial Statements (unaudited) (continued)

June 30, 2020

(in thousands, except unit amounts)

 

measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

Level 1. Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access.

Level 2. Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:

 

 a)

Quoted prices for similar assets or liabilities in active markets;

 

 b)

Quoted prices for identical or similar assets or liabilities in non-active markets;

 

 c)

Pricing models whose inputs are observable for substantially the full term of the asset or liability; and

 

 d)

Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability.

Level 3. Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s and, if applicable, an independent third-party valuation firm’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.

When the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3).

Gains and losses for assets and liabilities categorized within the Level 3 table below may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3).

A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. Such reclassifications involving Level 3 assets and liabilities are reported as transfers in/out of Level 3 as of the end of the quarter in which the reclassifications occur. Within the fair value hierarchy tables below, cash and cash equivalents are excluded but could be classified as Level 1.

 

20


Table of Contents

SCP Private Credit Income BDC LLC

Notes to Consolidated Financial Statements (unaudited) (continued)

June 30, 2020

(in thousands, except unit amounts)

 

The following table presents the balances of assets measured at fair value on a recurring basis, as of June 30, 2020 and December 31, 2019:

Fair Value Measurements

As of June 30, 2020

 

   Level 1   Level 2   Level 3   Total 

Assets:

        

Bank Debt/Senior Secured Loans

  $—    $—    $151,132   $151,132 

Common Equity/Equity Interests/Warrants

   —      —      25    25 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments

  $—    $—     $151,157   $151,157 
  

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value Measurements

As of December 31, 2019

 

   Level 1   Level 2   Level 3   Total 

Assets:

        

Bank Debt/Senior Secured Loans

  $—    $—    $120,453   $120,453 

Common Equity/Equity Interests/Warrants

   —      —      29    29 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments

  $—    $—     $120,482   $120,482 
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table provides a summary of the changes in fair value of Level 3 assets for the three and six months ended June 30, 2020, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets still held at June 30, 2020:

 

   Bank Debt/Senior
Secured Loans
   Common Equity/Equity
Interests/Warrants
   Total 

Fair value, March 31, 2020

  $140,677   $63   $140,740 

Total gains or losses included in earnings:

      

Net realized gain (loss)

   —      —      —   

Net change in unrealized gain (loss)

   3,533    (38   3,495 

Purchase of investment securities

   8,618    —      8,618 

Proceeds from dispositions of investment securities

   (1,696   —      (1,696

Transfers into Level 3

   —      —      —   

Transfers out of Level 3

   —      —      —   
  

 

 

   

 

 

   

 

 

 

Fair value, June 30, 2020

  $151,132   $25   $151,157 
  

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

SCP Private Credit Income BDC LLC

Notes to Consolidated Financial Statements (unaudited) (continued)

June 30, 2020

(in thousands, except unit amounts)

 

   Bank Debt/Senior
Secured Loans
   Common Equity/Equity
Interests/Warrants
   Total 

Unrealized gains (losses) for the period relating to those Level 3 assets that were still held by the Company at the end of the period:

      

Net change in unrealized gain (loss)

  $3,533   $(38  $3,495 

 

   Bank Debt/Senior
Secured Loans
   Common Equity/Equity
Interests/Warrants
   Total 

Fair value, December 31, 2019

  $120,453   $29   $120,482 

Total gains or losses included in earnings:

      

Net realized gain (loss)

   —      —      —   

Net change in unrealized loss

   (1,147   (4   (1,151

Purchase of investment securities

   50,609    —      50,609 

Proceeds from dispositions of investment securities

   (18,783   —      (18,783

Transfers into Level 3

   —      —      —   

Transfers out of Level 3

   —      —      —   
  

 

 

   

 

 

   

 

 

 

Fair value, June 30, 2020

  $151,132   $25   $151,157 
  

 

 

   

 

 

   

 

 

 

Unrealized losses for the period relating to those Level 3 assets that were still held by the Company at the end of the period:

      

Net change in unrealized loss

  $(1,147  $(4  $(1,151

The following table shows a reconciliation of the beginning and ending balances for fair valued liabilities measured using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2020:

 

Unfunded Commitments

  For the three months ended
June 30, 2020
 

Beginning fair value

  $180 

Net realized (gain) loss

   —   

Net change in unrealized (gain) loss

   (180

Borrowings

   —   

Repayments

   —   

Transfers in/out of Level 3

   —   
  

 

 

 

Ending fair value

  $—   
  

 

 

 

 

22


Table of Contents

SCP Private Credit Income BDC LLC

Notes to Consolidated Financial Statements (unaudited) (continued)

June 30, 2020

(in thousands, except unit amounts)

 

Unfunded Commitments

  For the six months ended
June 30, 2020
 

Beginning fair value

  $—   

Net realized (gain) loss

   —   

Net change in unrealized (gain) loss

   —   

Borrowings

   —   

Repayments

   —   

Transfers in/out of Level 3

   —   
  

 

 

 

Ending fair value

  $—   
  

 

 

 

The following table provides a summary of the changes in fair value of Level 3 assets for the period March 12, 2019 (commencement of operations) to December 31, 2019, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets and liabilities still held at December 31, 2019:

 

   Bank Debt/Senior
Secured Loans
   Common Equity/Equity
Interests/Warrants
   Total 

Fair value, March 12, 2019

  $—     $—     $—   

Total gains or losses included in earnings:

      

Net realized gain (loss)

   76    —      76 

Net change in unrealized gain (loss)

   685    (31   654 

Purchase of investment securities

   131,882    60    131,942 

Proceeds from dispositions of investment securities

   (12,190   —      (12,190

Transfers into Level 3

   —      —      —   

Transfers out of Level 3

   —      —      —   
  

 

 

   

 

 

   

 

 

 

Fair value, December 31, 2019

  $120,453   $29   $120,482 
  

 

 

   

 

 

   

 

 

 

Unrealized gains for the period relating to those Level 3 assets that were still held by the Company at the end of the period:

      

Net change in unrealized gain (loss)

  $685   $(31  $654 
  

 

 

   

 

 

   

 

 

 

Quantitative Information about Level 3 Fair Value Measurements

The Company typically determines the fair value of its performing debt investments utilizing a yield analysis. In a yield analysis, a price is ascribed for each investment based upon an assessment of current and expected market yields for similar investments and risk profiles. Additional consideration is given to current contractual interest rates, relative maturities and other key terms and risks associated with an investment. Among

 

23


Table of Contents

SCP Private Credit Income BDC LLC

Notes to Consolidated Financial Statements (unaudited) (continued)

June 30, 2020

(in thousands, except unit amounts)

 

other factors, a significant determinant of risk is the amount of leverage used by the portfolio company relative to the total enterprise value of the company, and the rights and remedies of our investment within each portfolio company.

Significant unobservable quantitative inputs typically used in the fair value measurement of the Company’s Level 3 assets and liabilities primarily reflect current market yields, including indices, and readily available quotes from brokers, dealers, and pricing services as indicated by comparable assets and liabilities, as well as enterprise values, returns on equity and earnings before income taxes, depreciation and amortization (“EBITDA”) multiples of similar companies, and comparable market transactions for equity securities.

Quantitative information about the Company’s Level 3 asset fair value measurements as of June 30, 2020 is summarized in the table below:

 

   Asset or
Liability
  Fair Value at
June 30, 2020
   Principal Valuation
Technique/Methodology
  Unobservable Input  Range (Weighted
Average)
 

Bank Debt / Senior Secured Loans

  Asset  $151,132   Income Approach  Market Yield   4.9% – 12.0% (7.2%) 
  

 

  

 

 

   

 

  

 

  

 

 

 

Common Equity/Equity Interests/Warrants

  Asset  $25   Market Approach  Volatility   30.1% - 30.1% (30.1%) 
  

 

  

 

 

   

 

  

 

  

 

 

 

Significant increases or decreases in any of the above unobservable inputs in isolation, including unobservable inputs used in deriving bid-ask spreads, if applicable, would result in a significantly lower or higher fair value measurement for such assets. Generally, an increase in market yields may result in a decrease in the fair value of certain of the Company’s investments.

Quantitative information about the Company’s Level 3 asset fair value measurements as of December 31, 2019 is summarized in the table below:

 

   Fair Value at
December 31,
2019
   Principal Valuation
Technique/Methodology
  Unobservable Input  Range (Weighted
Average)
 

Bank Debt / Senior Secured Loans

  $120,453   Income Approach  Market Yield   
6.3% – 11.2%
(8.0%)
 
 
  

 

 

   

 

  

 

  

 

 

 

Common Equity/Equity Interests/Warrants

  $29   Market Approach  Volatility   

14.6% – 14.6%

(14.6%)

 

 

  

 

 

   

 

  

 

  

 

 

 

Significant increases or decreases in any of the above unobservable inputs in isolation, including unobservable inputs used in deriving bid-ask spreads, if applicable, would result in a significantly lower or higher fair value measurement for such assets. Generally, an increase in market yields may result in a decrease in the fair value of certain of the Company’s investments.

Note 5. Debt

SPV Facility—During the first quarter of 2019, the Company, through its wholly-owned subsidiary, SCP Private Credit Income BDC SPV LLC (the “SPV”), entered into the $100,000 SPV Facility with JPMorgan

 

24


Table of Contents

SCP Private Credit Income BDC LLC

Notes to Consolidated Financial Statements (unaudited) (continued)

June 30, 2020

(in thousands, except unit amounts)

 

Chase Bank, N.A. acting as administrative agent. The commitment can also be expanded up to $400,000. The stated interest rate on the Credit Facility is LIBOR plus 2.75% with no LIBOR floor requirement and the current final maturity date is February 27, 2023. The Credit Facility is secured by all of the assets held by the SPV. Under the terms of the SPV Facility, the Company and SPV, as applicable, have made certain customary representations and warranties, and are required to comply with various covenants, including leverage restrictions, reporting requirements and other customary requirements for similar credit facilities. The SPV also includes usual and customary events of default for credit facilities of this nature. On November 18, 2019, the Company amended the SPV Facility, reducing commitments to $75,000. There were $47,750 of borrowings outstanding as of June 30, 2020 under the SPV Facility.

Subscription Facility—During the first quarter of 2019, the Company established the $35,000 Subscription Facility with East West Bank. The stated interest rate on the Subscription Facility is LIBOR plus 2.90% and the current final maturity date is March 12, 2021. On June 24, 2019, the Company entered into an amendment, increasing commitments from $35,000 to $50,000. Under the terms of the Subscription Facility, the Company has made certain customary representations and warranties, and is required to comply with various covenants, including reporting requirements and other customary requirements for similar credit facilities. The Subscription Facility also includes usual and customary events of default for credit facilities of this nature. There were $9,500 of borrowings outstanding as of June 30, 2020 under the Subscription Facility.

The average annualized interest cost for borrowings for the six months ended June 30, 2020 and for the period March 12, 2019 (commencement of operations) to December 31, 2019 was 4.50% and 5.17%, respectively. These costs are exclusive of other credit facility expenses such as unused fees and fees paid to the back-up servicer, if any. The maximum amount borrowed on the credit facilities during the six months ended June 30, 2020 and for the period March 12, 2019 (commencement of operations) to December 31, 2019 was $90,750 and $76,150, respectively.

Note 6. Commitments and Contingencies

The Company had unfunded debt commitments to various revolving and delayed draw loans. The total amount of these unfunded commitments as of June 30, 2020 and December 31, 2019 is $12,823 and $16,282, respectively, comprised of the following:

 

   June 30, 2020   December 31,
2019
 

Kindred Biosciences, Inc.

  $ 2,689   $2,689 

Worldwide Facilities, LLC.

   1,718    2,751 

Drilling Info Holdings, Inc.

   1,707    —   

Rxsense Holdings, LLC.

   1,515    —   

Neuronetics, Inc.

   1,310    —   

MRI Software LLC.

   1,109    1,527 

Pinnacle Treatment Centers, Inc.

   799    —   

Cerapedics, Inc.

   787   1,050

ENS Holdings III Corp. & ES Opco USA LLC

   696    1,811 

Enhanced Capital Group, LLC

   493   493

Rubius Therapeutics, Inc.

   —      2,624

MSHC, Inc.

   —      1,640

 

25


Table of Contents

SCP Private Credit Income BDC LLC

Notes to Consolidated Financial Statements (unaudited) (continued)

June 30, 2020

(in thousands, except unit amounts)

 

   June 30, 2020   December 31,
2019
 

Centrexion Therapeutics, Inc.

   —      1,479 

Alimera Sciences, Inc.

   —      218
  

 

 

   

 

 

 

Total Commitments

  $12,823   $16,282 
  

 

 

   

 

 

 

The credit agreements of the above loan commitments contain customary lending provisions and/or are subject to the portfolio company’s achievement of certain milestones that allow relief to the Company from funding obligations for previously made commitments in instances where the underlying company experiences materially adverse events that affect the financial condition or business outlook for the company. Since these commitments may expire without being drawn upon, unfunded commitments do not necessarily represent future cash requirements or future earning assets for the Company. As of June 30, 2020 and December 31, 2019, the Company had sufficient cash available and/or liquid securities available to fund its commitments.

In the normal course of its business, we invest or trade in various financial instruments and may enter into various investment activities with off-balance sheet risk, which may include forward foreign currency contracts. Generally, these financial instruments represent future commitments to purchase or sell other financial instruments at specific terms at future dates. These financial instruments contain varying degrees of off-balance sheet risk whereby changes in the market value or our satisfaction of the obligations may exceed the amount recognized in our Consolidated Statements of Assets and Liabilities.

Note 7. Unitholders’ Capital

Transactions in unitholders’ capital were as follows:

 

   Six months ended
June 30, 2020
   For the period
March 12,
2019* to

June 30, 2019
 

Units at beginning of period

   4,955,621    100 

Units issued

   4,630,653    3,812,146 

Units canceled

   (100   —   
  

 

 

   

 

 

 

Units issued and outstanding at end of period

   9,586,174    3,812,246 
  

 

 

   

 

 

 

 

*

Commencement of operations

Note 8. Financial Highlights

The following is a schedule of financial highlights for the six months ended June 30, 2020 and the period March 12, 2019 (commencement of operations) to June 30, 2019:

 

   Six months ended
June 30, 2020
   For the period
March 12, 2019* to
June 30, 2019
 

Per Share Data: (a)

    

Net asset value per unit, beginning of period

  $ 10.03   $ 10.00 
  

 

 

   

 

 

 

Net investment income (loss)

   0.33    (0.17

 

26


Table of Contents

SCP Private Credit Income BDC LLC

Notes to Consolidated Financial Statements (unaudited) (continued)

June 30, 2020

(in thousands, except unit amounts)

 

   Six months ended
June 30, 2020
  For the period
March 12, 2019* to
June 30, 2019
 

Net realized and unrealized gain (loss)

   (0.14  0.10 
  

 

 

  

 

 

 

Net increase (decrease) in unitholders’ capital resulting from operations

   0.19   (0.07

Offering costs

   —     (0.10

Distributions to unitholders:

   

From net investment income

   (0.06  —   
  

 

 

  

 

 

 

Net asset value per unit, end of period

  $10.16  $9.83 
  

 

 

  

 

 

 

Total Return (b)(c)

   1.36  (1.35%) 

Unitholders’ capital, end of period

  $97,412  $37,489 

Units outstanding, end of period

   9,586,174   3,812,246 
  

 

 

  

 

 

 

Ratios to average net assets of Unitholders’ Capital (c):

   

Net investment income (loss)

   3.22  (1.68)% 
  

 

 

  

 

 

 

Operating expenses

   1.71  3.09

Interest and other credit facility expenses

   2.65  3.90
  

 

 

  

 

 

 

Total expenses

   4.36  6.99
  

 

 

  

 

 

 

Average debt outstanding

  $66,507  $41,152 

Portfolio turnover ratio

   13.9  1.6

 

(a)

Calculated using the average units outstanding method. Weighted average units outstanding for the six months ended June 30, 2020 and the period March 12, 2019 through June 30, 2019 were 7,795,876 and 2,845,692, respectively.

(b)

Total return is based on the change in net asset value during the period. Total return does not include a sales load.

(c)

Not annualized for periods less than one year.

*

Commencement of operations

Note 9. Subsequent Events

The Company has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date the financial statements were issued.

Subsequent to June 30, 2020, the global outbreak of the COVID-19 pandemic, and the related effect on the U.S. and global economies, has continued to have adverse consequences for the business operations of some of the Company’s portfolio companies and, as a result, has had adverse effects on the Company’s operations. The ultimate economic fallout from the pandemic, and the long-term impact on economies, markets, industries and

 

27


Table of Contents

SCP Private Credit Income BDC LLC

Notes to Consolidated Financial Statements (unaudited) (continued)

June 30, 2020

(in thousands, except unit amounts)

 

individual issuers, remain uncertain. The operational and financial performance of the issuers of securities in which the Company invests depends on future developments, including the duration and spread of the outbreak, and such uncertainty may in turn adversely affect the value and liquidity of the Company’s investments and negatively impact the Company’s performance.

 

28


Table of Contents

Report of Independent Registered Public Accounting Firm

To the Unitholders’ and Board of Directors

SCP Private Credit Income BDC LLC:

Results of Review of Interim Financial Information

We have reviewed the consolidated statement of assets and liabilities of SCP Private Credit Income BDC LLC (and subsidiaries) (the Company), including the consolidated schedule of investments, as of June 30, 2020, the related consolidated statements of operations and changes in unitholders’ capital for the three-month and six-month periods ended June 30, 2020, the three-month period ended June 30, 2019 and the period March 12, 2019 (commencement of operations) to June 30, 2019, the related consolidated statements of cash flows for the six-month period ended June 30, 2020 and for the period March 12, 2019 (commencement of operations) to June 30, 2019, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statement of assets and liabilities, including the consolidated schedule of investments, of the Company as of December 31, 2019, and the related consolidated statements of operations, changes in unitholders’ capital, and cash flows for the period March 12, 2019 (commencement of operations) to December 31, 2019 (not presented herein); and in our report dated February 20, 2020, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated statement of assets and liabilities, including the consolidated schedule of investments, as of December 31, 2019, is fairly stated, in all material respects, in relation to the consolidated statement of assets and liabilities, including the consolidated schedule of investments, from which it has been derived.

Basis for Review Results

This consolidated interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ KPMG LLP

New York, New York

August 4, 2020

 

29


Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. Such statements involve known and unknown risks, uncertainties and other factors and undue reliance should not be placed thereon. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about SCP Private Credit Income BDC LLC (the “Company”, “we”, “us” or “our”), our current and prospective portfolio investments, our industry, our beliefs and opinions, and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “will,” “may,” “continue,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” “targets,” “projects,” “outlook,” “potential,” “predicts” and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:

 

  

our future operating results, including our ability to achieve objectives as a result of the current COVID-19 pandemic;

 

  

our business prospects and the prospects of our portfolio companies;

 

  

the impact of investments that we expect to make;

 

  

our contractual arrangements and relationships with third parties;

 

  

the dependence of our future success on the general economy and its impact on the industries in which we invest and the impact of the COVID-19 pandemic thereon;

 

  

the impact of any protracted decline in the liquidity of credit markets on our business and the impact of the COVID-19 pandemic thereon;

 

  

the ability of our portfolio companies to achieve their objectives, including as a result of the current COVID-19 pandemic;

 

  

the valuation of our investments in portfolio companies, particularly those having no liquid trading market, and the impact of the COVID-19 pandemic thereon;

 

  

market conditions and our ability to access alternative debt markets and additional debt and equity capital, and the impact of the COVID-19 pandemic thereon;

 

  

our expected financings and investments;

 

  

the adequacy of our cash resources and working capital;

 

  

the timing of cash flows, if any, from the operations of our portfolio companies and the impact of the COVID-19 pandemic thereon; and

 

  

the ability of our investment adviser to locate suitable investments for us and to monitor and administer our investments and the impacts of the COVID-19 pandemic thereon.

These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:

 

  

an economic downturn, including as a result of the current COVID-19 pandemic, could impair our portfolio companies’ ability to continue to operate, which could lead to the loss of some or all of our investments in such portfolio companies;

 

  

a contraction of available credit and/or an inability to access the equity markets, including as a result of the current COVID-19 pandemic, could impair our lending and investment activities;

 

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interest rate volatility could adversely affect our results, particularly because we use leverage as part of our investment strategy;

 

  

currency fluctuations could adversely affect the results of our investments in foreign companies, particularly to the extent that we receive payments denominated in foreign currency rather than U.S. dollars; and

 

  

the risks, uncertainties and other factors we identify in Item 1A. — Risk Factors contained in our Annual Report on Form 10-K for the year ended December 31, 2019, elsewhere in this Quarterly Report on Form 10-Q and in our other filings with the SEC.

Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this report should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in the section entitled “Item 1A. Risk Factors” and elsewhere in this report. These forward-looking statements apply only as of the date of this report. Moreover, we assume no duty and do not undertake to update the forward-looking statements.

The following analysis of our financial condition and results of operations should be read in conjunction with the financial statements and the related notes thereto contained elsewhere in this Quarterly Report on Form 10-Q.

Overview

The Company was formed as a limited liability company under the laws of the State of Delaware on May 18, 2018. We have elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), and have elected to be treated as a regulated investment company (“RIC”) for U.S. federal income tax purposes. As such, we are required to comply with various regulatory requirements, such as the requirement to invest at least 70% of our assets in “qualifying assets,” source of income limitations, asset diversification requirements, and the requirement to distribute annually at least 90% of our taxable income and tax-exempt interest. In addition, we expect that all of the Company’s total portfolio will be comprised of investments in the U.S.

Solar Capital Partners, LLC (the “Adviser”) serves as the Company’s investment adviser pursuant to an investment management agreement between the Company and the Adviser (as amended, restated or otherwise modified from time to time, the “Investment Management Agreement”). Subject to the overall supervision of the Company’s Board of Directors (the “Board”), the Adviser is responsible for managing the Company’s business and activities, including sourcing investment opportunities, conducting research, performing diligence on potential investments, structuring our investments, and monitoring our portfolio companies on an ongoing basis through a team of investment professionals. The managing members of the Adviser are Michael Gross and Bruce Spohler, who also comprise the Adviser’s investment committee. Pursuant to the Investment Management Agreement, the Adviser has also been appointed to provide administrative and coordination services to the Company (in such capacity, the “Administrative Coordinator”). The Administrative Coordinator supervises or provides the Company’s administrative services, including operational trade support, net asset value calculations, financial reporting, fund accounting, registrar and transfer agent services. The Administrative Coordinator also provides assistance to the Adviser in connection with communicating with investors and other persons with respect to the Company.

The Company is organized primarily for investors who may invest through one or more investment funds created by one or more financial institutions unaffiliated with the Company (collectively, the “Access Fund”). Certain other investors may also invest directly in the Company. For those investors who invest through the Access Fund, we expect the Access Fund will issue a pro rata interest to each investor in the Access Fund (the “Access Fund

 

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Investors”) that, with respect to each Access Fund Investor’s investment in the Access Fund, corresponds to the pro rata share of the units issued by the Company to the Access Fund. We also expect that units will only be sold (i) in the U.S. only to U.S. persons who are “accredited investors” within the meaning of Regulation D under the Securities Act of 1933, as amended (the “Securities Act”) and (ii) outside the U.S. in accordance with Regulation S under the Securities Act. Upon a sale of units to an investor, we expect the Access Fund will pass its voting rights in the Company through to the Access Fund Investors.

The Company’s principal focus is to invest in first lien and stretch first lien secured floating rate loans primarily to upper middle market private leveraged companies (generally, loan sizes of $100 million to $300 million to companies with earnings before interest, tax, depreciation and amortization (“EBITDA”) between approximately $25 million and $100 million) that have significant free cash flow and are in non-cyclical industries in which the Adviser has direct experience. In addition to senior secured loans to upper middle market companies, the Company intends to invest a portion of its assets in non-traditional asset-based loans and first lien loans to rapidly growing healthcare companies. The Company also expects that some of its investments will contain delayed-draw term loan type features (which is a legally binding commitment by the Company to fund additional term loans to a borrower in the future) and/or other types of unfunded commitments. The Company will seek to be the single source lender for the majority of its portfolio companies by leveraging the significant capital base at the Adviser for co-investment opportunities where appropriate. The Company believes many financial sponsors and individual corporate management teams are looking for a single lender to provide the entire debt financing to streamline and simplify the debt negotiation process. In order to provide a single source lender while maintaining the Company’s diversification objectives, the Company expects to co-invest with other vehicles managed by the Adviser. There can be no assurance that the Company will be able to co-invest with such other funds, including as a result of legal restrictions and contractual restrictions and, as a result, the Company may not be able to meet its investment objective. The Company believes the potential scale resulting from co-investments with vehicles managed by the Adviser will provide the Company a significant advantage to source loans over other lenders that do not have the capital base to provide the entire debt financing.

The Company is an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) and the Company may from time to time take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act.

Revenues

The Company’s principal focus is to invest in first lien and stretch first lien secured floating rate loans primarily to upper middle market private leveraged companies (generally, loan sizes of $100 million to $300 million to companies with EBITDA between approximately $25 million and $100 million) that have significant free cash flow and are in non-cyclical industries in which we have direct experience. In addition to senior secured loans to upper middle market companies, the Company intends to invest a portion of its assets in non-traditional asset-based loans and first lien loans to rapidly growing healthcare companies.

Expenses

The Company will (directly or indirectly) bear:

 

 (i)

all of its fees, costs, expenses and liabilities, all of its investment-related fees, costs, expenses and liabilities (including with respect to amounts incurred prior to the Company’s initial closing) and all of its other operating fees, costs, expenses and liabilities, including all fees, due diligence costs and other fees, costs, expenses and liabilities related to the identification, sourcing, evaluation, pursuit, acquisition, holding, appraisals, asset management, restructuring and disposing of investments, including all reasonable travel-related fees, costs, expenses and liabilities, including lodging and meals, all fees, costs, expenses and liabilities of legal counsel and financial and other advisers incurred in connection therewith, all fees, costs, expenses and liabilities of information technology services relating to the ongoing management of investments, and all other investment-related fees, costs, expenses and liabilities (to the extent not reimbursed by the relevant portfolio company);

 

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 (ii)

all fees, costs, expenses and liabilities related to any audits or agreed upon procedures, tax forms and return preparations and filings, custodian fees and expenses, fund accounting, administrator services, financial statement preparation and reporting, web services for the benefit of Unitholders, delivery costs and expenses in connection with reporting obligations and communications and compliance services;

 

 (iii)

all fees, costs, expenses and liabilities relating to insurance policies (including director and officer liability insurance) maintained by or for the Company, including in respect of Portfolio Investments and/or personnel of the Adviser, the Administrative Coordinator and their affiliates;

 

 (iv)

other administrative fees, costs, and liabilities;

 

 (v)

all fees, costs, expenses and liabilities of brokers, transaction finders and other intermediaries, including brokerage commissions and spreads, and all other transaction-related fees, costs, expenses and liabilities, including reverse break-up fees;

 

 (vi)

all fees, costs, expenses and liabilities relating to derivatives and hedging transactions;

 

 (vii)

all principal amounts of, and interest expense on, borrowings and guarantees, and all other fees, costs, expenses and liabilities arising out of borrowings and guarantees, including the arranging and maintenance thereof, whether incurred by the Company or incurred or facilitated by a special purpose vehicle that makes Portfolio Investments;

 

 (viii)

Management Fees;

 

 (ix)

Administration Fees;

 

 (x)

all fees, costs, expenses and liabilities incurred through the use or engagement of Service Providers;

 

 (xi)

all taxes, fees, penalties and other governmental charges levied against the Company and all fees, costs, expenses, penalties and liabilities related to tax compliance;

 

 (xii)

all fees, costs, expenses and liabilities of the Company’s legal counsel related to extraordinary matters, including expenses for any dispute resolution (including litigation and regulatory-related legal expenses);

 

 (xiii)

all fees, costs, expenses and liabilities relating to legal and regulatory filings, including securities law filings relating to Portfolio Investments;

 

 (xiv)

all fees, costs, expenses and liabilities related to the Company’s indemnification or contribution obligations;

 

 (xv)

all fees, costs, expenses and liabilities for subscription services (to the extent such subscription is required by the general partner of the Access Fund);

 

 (xvi)

any required regulatory filings and related legal fees;

 

 (xvii)

all fees, costs, expenses and liabilities of liquidating the Company;

 

 (xviii)

transfer agent services; and

 

 (xix)

any other fees, costs, expenses and liabilities not specifically assumed by the Adviser or the Administrative Coordinator.

In addition, the aggregate amount of the operating expenses relating to Unitholders investing directly in the Company set forth in clauses (ii)-(iv) and the operating expenses included in sub-clauses (xiii) and (xvi) related to U.S. regulatory bodies above borne by the Company (directly or indirectly) will not exceed the Operating Expense Cap, calculated as follows: (A) if the Company has less than or equal to $400 million in Commitments, an amount equal to the sum of (x) the product of the Commitments and 0.0025 and (y) $1.25 million, or (B) if the Company has greater than $400 million in Commitments, $2.25 million. Any amount in excess of the Operating

 

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Expense Cap for any fiscal year will be paid by the Adviser. Solely by way of example, if Commitments equal $350 million, the Operating Expense Cap will be equal to $2.125 million. For the avoidance of doubt, the Operating Expense Cap will not apply to any fees, costs, expenses and liabilities allocable to persons investing indirectly in the Company through any Unitholder.

Additionally, the Company will not bear the costs of any third-party valuation agent engaged solely for purposes of valuing the net asset value of the Company.

The Adviser or Administrative Coordinator and/or their affiliates has advanced organizational and offering expenses to the Company, which include organizational fees, costs, expenses and liabilities of the Company, including legal expenses, incurred in connection with the initial offering of Units and the formation and establishment of the Company. The Adviser or Administrative Coordinator (or such affiliate) will be reimbursed by the Company for such advanced costs and expenses in an amount not to exceed $0.5 million. Accordingly, as of June 30, 2020, $0.3 million of offering expenses were charged to capital and $0.1 million of organizational costs were expensed.

Portfolio and Investment Activity

During the three months ended June 30, 2020, we invested $8.4 million across 6 portfolio companies. This compares to investing $14.2 million in 7 portfolio companies for the three months ended June 30, 2019. Investments sold or prepaid during the three months ended June 30, 2020 totaled $1.7 million versus $0.7 million for the three months ended June 30, 2019.

At June 30, 2020, our portfolio consisted of 24 portfolio companies and was invested 100.0% directly in senior secured loans and 0.0% in common equity/equity interests/warrants, in each case, measured at fair value versus 14 portfolio companies invested 100% directly in senior secured loans and 0.0% in common equity/equity interests/warrants at June 30, 2019.

At June 30, 2020, 98.1% of our income producing investment portfolio was floating rate and 1.9% was fixed rate, measured at fair value. At June 30, 2019, 95.5% of our portfolio was floating rate and 4.5% was fixed rate, measured at fair value.

Critical Accounting Policies

The preparation of consolidated financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following items as critical accounting policies. Within the context of these critical accounting policies and disclosed subsequent events herein, we are not currently aware of any other reasonably likely events or circumstances that would result in materially different amounts being reported.

Valuation of Portfolio Investments

The Company’s NAV will be calculated periodically by the Adviser or its delegate, and approved by the Board, by taking the value of the Portfolio Investments and other assets of the Company and subtracting all liabilities, including accrued expenses.

It is anticipated that in respect of many of the Company’s assets, readily available market quotations will not be obtainable and that such assets will be valued at fair value.

 

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For purposes of calculating the NAV, the Company’s assets will generally be valued as follows:

 

 (i)

securities or other instruments (other than as referred to in clauses (ii) and (iii) below) for which market quotes are readily available will be valued based on quotes obtained from a quotation reporting system, market makers or pricing services (when deemed to represent fair value under U.S. GAAP);

 

 (ii)

exchange-traded options, futures and options on futures will be valued at the settlement price determined by the exchange or through the use of a model such as Black-Scholes;

 

 (iii)

short-term investments with maturities of sixty (60) days or less generally will be valued at amortized cost; and

 

 (iv)

securities, loans or other instruments for which market quotes are not readily available will be valued as described below:

 

 a.

the quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of the Adviser responsible for the portfolio investment;

 

 b.

preliminary valuation conclusions are then documented and discussed with senior management of the Adviser;

 

 c.

the audit committee of the Board reviews the preliminary valuations of the Adviser and third party valuation specialist, if any, and responds to the valuation recommendations to reflect any comments; and

 

 d.

the Board discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of the Adviser, the audit committee, and third party valuation specialist, if any, that may from time to time be engaged.

The valuation principles set forth above may be modified from time to time without notice to Unitholders, in whole or in part, as determined by the Board in its sole discretion.

Leverage

The Company is required to comply with the asset coverage requirements of the 1940 Act. The Company expects to employ leverage and otherwise incur indebtedness with respect to the portfolio both on a recourse and non-recourse basis (including and potentially through guarantees, derivatives, forward commitments and reverse repurchase agreements), but will not exceed the maximum amount permitted by the 1940 Act. Under the 1940 Act, historically BDCs such as the Company have only been permitted to incur indebtedness to the extent asset coverage, as defined under the 1940 Act, is at least 200% immediately after each such borrowing. However, recent legislation has modified the 1940 Act to permit a BDC to reduce its asset coverage ratio to 150%, if certain requirements are met. In connection with the organization of the Company, the Adviser, as the initial Unitholder, has authorized the Company to adopt the 150% asset coverage ratio as of August 2, 2018. In connection with their subscriptions of the Units, our Unitholders were required to acknowledge our ability to operate with an asset coverage ratio that may be as low as 150%. The Company will be exposed to the risks of leverage, which may be considered a speculative investment technique. The use of leverage magnifies the potential for gain and loss on amounts invested and therefore increases the risks associated with investing in our securities. In addition, the costs associated with our borrowings, including any increase in the management fee payable to the Adviser will be borne by our Unitholders. As of June 30, 2020, the Company held $57.3 million of senior securities, for an asset coverage ratio of 270.2%.

Taxation as a Regulated Investment Company (“RIC”)

The Company elected to be treated as a RIC under Subchapter M of the Code and intends to qualify for taxation as a RIC annually thereafter. As a RIC, the Company generally will not pay corporate-level U.S. federal

 

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income taxes on any ordinary income or capital gains that it timely distributes to Unitholders as dividends. In order to qualify for taxation as a RIC, the Company is required, among other things, to be diversified at each quarter end and to timely distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code, for each year. There is no guarantee the Company will be able to maintain its status as a RIC. Depending on the level of taxable income earned in a given tax year, the Company may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year distributions, the Company will accrue an estimated excise tax, if any, on estimated excess taxable income.

Recent Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in ASU 2018-13 modify and eliminate certain disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company has adopted ASU 2018-13 and determined that the adoption has not had a material impact on its consolidated financial statements and disclosures.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). The amendments in ASU 2020-04 provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of adopting ASU 2020-04 on its consolidated financial statements and disclosures.

Results of Operations

Results are shown for the three and six months ended June 30, 2020, the three months ended June 30, 2019 and the period March 12, 2019 (commencement of operations) to June 30, 2019:

Investment Income

For the three and six months ended June 30, 2020, gross investment income totaled $2.8 million and $5.8 million, respectively. For the three months ended June 30, 2019 and for the period March 12, 2019 (commencement of operations) to June 30, 2019, gross investment income totaled $1.3 million and $1.5 million, respectively. The increase in investment income for the year over year three and six month periods is due to an increase in the size of the income producing portfolio as the Company continues to ramp toward its targeted investment portfolio size.

Expenses

Net expenses totaled $1.5 million and $3.3 million, respectively, for the three and six months ended June 30, 2020, of which $0.4 million and $1.0 million, respectively, were management fees and administration fees and $0.9 million and $2.0 million, respectively, were interest and other credit facility expenses. Administrative services, organization and other general and administrative expenses totaled $0.2 million and $0.3 million, respectively, for the three and six months ended June 30, 2020. Net expenses totaled $1.7 million and $2.0 million, respectively, for the three months ended June 30, 2019 and for the period March 12, 2019 (commencement of operations) to June 30, 2019, of which $0.3 million and $0.4 million, respectively, were management fees and administration fees and $1.0 million and $1.1 million, respectively, were interest and other credit facility expenses. Administrative services, organization and other general and administrative expenses totaled $0.3 million and $0.5 million, respectively, for the three months ended June 30, 2019 and for the period

 

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March 12, 2019 (commencement of operations) to June 30, 2019. Expenses generally consist of management fees, administration fees, performance-based incentive fees, administrative services expenses, insurance, legal expenses, directors’ expenses, audit and tax expenses and other general and administrative expenses. Interest and other credit facility expenses generally consist of interest, unused fees, agency fees and loan origination fees, if any, among others. The decrease in net expenses for the three months ended June 30, 2020 versus the three months ended June 30, 2019 was generally due to a reduction in interest expense from lower average LIBOR as well as lower general and administrative expenses as some start-up costs were expensed in the year ago period.

Net Investment Income (Loss)

The Company’s net investment income totaled $1.3 million and $2.5 million, or $0.14 and $0.33 per average unit, respectively, for the three and six months ended June 30, 2020. The Company’s net investment loss totaled $0.3 million and $0.5 million, or $0.12 and $0.17 per average unit, respectively, for the three months ended June 30, 2019 and for the period March 12, 2019 (commencement of operations) to June 30, 2019.

Net Realized Loss

The Company had investment sales and prepayments totaling approximately $1.7 million and $18.9 million, respectively, for the three and six months ended June 30, 2020. Net realized loss over the same periods totaled $0 and $0, respectively. Net realized loss for the three and six months ended June 30, 2020 was immaterial. The Company had investment sales and prepayments totaling approximately $0.7 million and $0.9 million, respectively, for the three months ended June 30, 2019 and for the period March 12, 2019 (commencement of operations) to June 30, 2019. There were no realized gains during these periods.

Net Change in Unrealized Gain (Loss)

For the three and six months ended June 30, 2020, net change in unrealized gain (loss) on the Company’s assets totaled $3.7 million and ($1.2) million, respectively. Net unrealized gain for the three months ended June 30, 2020 was primarily due to appreciation on our investments in Kore Wireless Group, Inc., Drilling Info Holdings, Inc. and RxSense Holdings LLC, among others. Net unrealized loss for the six months ended June 30, 2020 was primarily due to depreciation on our investments in Edgewood Partners Holdings, LLC, MSHC, Inc. and Kore Wireless Group, Inc., among others. For the three months ended June 30, 2019 and the period March 12, 2019 (commencement of operations) to June 30, 2019, net change in unrealized gain on the Company’s assets totaled $0.0 million and $0.3 million, respectively. Net unrealized gain for the three months ended June 30, 2019 was unremarkable. Net unrealized gain for the period March 12, 2019 (commencement of operations) to June 30, 2019 is primarily due to appreciation on our investments in KORE Wireless Group, Inc., Kingsbridge Holdings, LLC and Edgewood Partners Holdings, LLC, among others. The year over year net change in unrealized loss for the six month period ended June 30, 2020 is impacted by uncertainty due to the COVID-19 pandemic and its effect on market yields and fundamental portfolio company performance.

Net Increase (Decrease) in Unitholders’ Capital Resulting From Operations

For the three and six months ended June 30, 2020, the Company had a net increase in unitholders’ capital resulting from operations of $5.0 million and $1.3 million, respectively. For the same period, net income per average unit was $0.52 and $0.17, respectively. For the three months ended June 30, 2019 and for the period March 12, 2019 (commencement of operations) to June 30, 2019, the Company had a net decrease in unitholders’ capital resulting from operations of $0.3 million and $0.2 million, respectively. For the same period, losses per average unit were $0.12 and $0.07, respectively.

Financial Condition, Liquidity and Capital Resources

Our primary uses of cash are for (i) investments in portfolio companies and other investments to comply with certain portfolio diversification requirements, (ii) the cost of operations (including paying the Adviser), (iii) debt service of any borrowings, and (iv) cash distributions to our Unitholders.

 

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Equity

During the period March 12, 2019 (commencement of operations) to June 30, 2020, on a net basis, the Company sold and issued 9,586,173 common units at an average price of $9.93 per unit, for net proceeds of $96.5 million. All of our outstanding units were issued and sold in reliance upon the available exemptions from registration requirements of Section 4(a)(2) of the Securities Act. Unfunded equity capital commitments totaled $229.5 million at June 30, 2020.

Debt

Revolving credit facility due February 2023 (theSPV Facility”)—On February 27, 2019, the Company, through its wholly-owned subsidiary, SCP Private Credit Income BDC SPV LLC (the “SPV”), entered into a $100 million SPV Facility with JPMorgan Chase Bank, N.A. acting as administrative agent. The commitment can also be expanded up to $400 million. The stated interest rate on the Credit Facility is LIBOR plus 2.75% with no LIBOR floor requirement and the current final maturity date is February 27, 2023. The Credit Facility is secured by all of the assets held by SPV. Under the terms of the SPV Facility, the Company and SPV, as applicable, have made certain customary representations and warranties, and are required to comply with various covenants, including leverage restrictions, reporting requirements and other customary requirements for similar credit facilities. The SPV also includes usual and customary events of default for credit facilities of this nature. On November 18, 2019, the Company amended the SPV Facility, reducing commitments to $75 million. There were $47.8 million of borrowings outstanding as of June 30, 2020 under the SPV Facility.

Revolving credit facility due March 2021 (theSubscription Facility”)—On March 12, 2019, the Company established the $35 million Subscription Facility with East West Bank. The stated interest rate on the Subscription Facility is LIBOR plus 2.90% and the current final maturity date is March 12, 2021. On June 24, 2019, the Company entered into an amendment, increasing commitments from $35 million to $50 million. Under the terms of the Subscription Facility, the Company has made certain customary representations and warranties, and is required to comply with various covenants, including reporting requirements and other customary requirements for similar credit facilities. The Subscription Facility also includes usual and customary events of default for credit facilities of this nature. There were $9.5 million of borrowings outstanding as of June 30, 2020 under the Subscription Facility.

Cash Equivalents

We deem certain U.S. Treasury bills, repurchase agreements and other high-quality, short-term debt securities as cash equivalents. The Company makes purchases that are consistent with its purpose of making investments in securities described in paragraphs 1 through 3 of Section 55(a) of the 1940 Act. From time to time, including at or near the end of each fiscal quarter, we consider using various temporary investment strategies for our business. One strategy includes taking proactive steps by utilizing cash equivalents as temporary assets with the objective of enhancing our investment flexibility pursuant to Section 55 of the 1940 Act. More specifically, from time-to-time we may purchase U.S. Treasury bills or other high-quality, short-term debt securities at or near the end of the quarter and typically close out the position on a net cash basis subsequent to quarter end. We may also utilize repurchase agreements or other balance sheet transactions, including drawing down on our credit facilities, as deemed appropriate. The amount of these transactions or such drawn cash for this purpose is excluded from total assets for purposes of computing the asset base upon which the management fee is determined. We held approximately $20 million of cash equivalents as of June 30, 2020.

Contractual Obligations

We have entered into certain contracts under which we have material future commitments. We have entered into the Investment Management Agreement with the Adviser in accordance with the 1940 Act. Under the Investment Management Agreement, the Company will pay the Adviser the Management Fee and the Incentive Fee, and the

 

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Administrative Coordinator the Administration Fee. Under the Investment Management Agreement, the Administrative Coordinator may engage or delegate certain administrative functions to third parties or affiliates on behalf of the Company. The Administrative Coordinator will be responsible for all expenses of its own staff responsible for (i) certain on-going, routine, non-investment-related administrative services for the Company, (ii) the coordination of various third party services needed or required by the Company, and (iii) certain Unitholder servicing functions.

 

   Payments due by Period as of June 30, 2020
(dollars in millions)
 
   Total   Less than
1 year
   1-3 years   3-5 years   More than
5 years
 

Credit facilities (1)

  $57.3   $9.5  $47.8  $—     $—  

 

(1)

At June 30, 2020, we had a total of $67.7 million of unused borrowing capacity under our credit facilities, subject to borrowing base limits.

If any of the contractual obligations discussed above are terminated, our costs under any new agreements that we enter into may increase. In addition, we would likely incur significant time and expense in locating alternative parties to provide the services we expect to receive under the Investment Management Agreement. Any new investment advisory agreement would also be subject to approval by our Unitholders.

Off-Balance Sheet Arrangements

From time-to-time and in the normal course of business, the Company may make unfunded capital commitments to current or prospective portfolio companies. Typically, the Company may agree to provide delayed-draw term loans or, to a lesser extent, revolving loan or equity commitments. These unfunded capital commitments always take into account the Company’s liquidity and cash available for investment, portfolio and issuer diversification, and other considerations. Accordingly, the Company had the following unfunded capital commitments at June 30, 2020:

 

   June 30,
2020
   December 31,
2019
 
(in millions)        

Kindred Biosciences, Inc.

  $2.7   $2.7 

Worldwide Facilities, LLC.

   1.7    2.8 

Drilling Info Holdings, Inc.

   1.7    —   

Rxsense Holdings, LLC.

   1.5    —   

Neuronetics, Inc.

   1.3    —   

MRI Software LLC.

   1.1    1.5 

Pinnacle Treatment Centers, Inc.

   0.8    —   

Cerapedics, Inc.

   0.8   1.1

ENS Holdings III Corp. & ES Opco USA LLC

   0.7    1.8 

Enhanced Capital Group, LLC

   0.5   0.5

Rubius Therapeutics, Inc.

   —      2.6

MSHC, Inc.

   —      1.6

Centrexion Therapeutics, Inc.

   —      1.5 

Alimera Sciences, Inc.

   —      0.2
  

 

 

   

 

 

 

Total Commitments

  $12.8   $16.3 
  

 

 

   

 

 

 

The credit agreements of the above loan commitments contain customary lending provisions and/or are subject to the portfolio company’s achievement of certain milestones that allow relief to the Company from funding obligations for previously made commitments in instances where the underlying company experiences materially adverse events that affect the financial condition or business outlook for the company. Since these

 

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commitments may expire without being drawn upon, unfunded commitments do not necessarily represent future cash requirements or future earning assets for the Company. As of June 30, 2020, the Company had sufficient cash available and/or liquid securities available to fund its commitments.

Related Parties

We have entered into the Investment Management Agreement with Solar Capital Partners. Mr. Gross, our Chairman, Co-Chief Executive Officer and President and Mr. Spohler, our Co-Chief Executive Officer, Chief Operating Officer and board member, are managing members and senior investment professionals of, and have financial and controlling interests in, the Adviser. In addition, Mr. Peteka, our Chief Financial Officer, Treasurer and Secretary serves as the Chief Financial Officer for Solar Capital Partners.

The Adviser may also manage other funds in the future that may have investment mandates that are similar, in whole and in part, with ours. For example, the Adviser presently serves as investment adviser to Solar Capital Ltd., a publicly traded BDC, which focuses on investing in senior secured loans, including stretch-senior loans, financing leases and to a lesser extent, unsecured loans and equity securities. In addition, Michael S. Gross, our Chairman, Co-Chief Executive Officer and President, Bruce Spohler, our Co-Chief Executive Officer and Chief Operating Officer, and Richard L. Peteka, our Chief Financial Officer, serve in similar capacities for Solar Capital Ltd. and Solar Senior Capital Ltd. The Adviser and certain investment advisory affiliates may determine that an investment is appropriate for us and for one or more of those other funds. In such event, depending on the availability of such investment and other appropriate factors, the Adviser or its affiliates may determine that we should invest side-by-side with one or more other funds. Any such investments will be made only to the extent permitted by applicable law and interpretive positions of the SEC and its staff, and consistent with the Adviser’s allocation procedures. On June 13, 2017, the Adviser received an exemptive order that permits the Company to participate in negotiated co-investment transactions with certain affiliates, in a manner consistent with the Company’s investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors, and pursuant to various conditions (the “Order”). If the Company is unable to rely on the Order for a particular opportunity, such opportunity will be allocated first to the entity whose investment strategy is the most consistent with the opportunity being allocated, and second, if the terms of the opportunity are consistent with more than one entity’s investment strategy, on an alternating basis. Although the Adviser’s investment professionals will endeavor to allocate investment opportunities in a fair and equitable manner, the Company and its Unitholders could be adversely affected to the extent investment opportunities are allocated among us and other investment vehicles managed or sponsored by, or affiliated with, our executive officers, directors and members of the Adviser.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are subject to financial market risks, including changes in interest rates. In addition, U.S. and global capital markets and credit markets have experienced a higher level of stress due to the global COVID-19 pandemic, which has resulted in an increase in the level of volatility across such markets and a general decline in value of the securities that we hold. Because we fund a portion of our investments with borrowings, our net investment income is affected by the difference between the rate at which we invest and the rate at which we borrow. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. In connection with the COVID-19 pandemic, the U.S. Federal Reserve and other central banks have reduced certain interest rates and LIBOR has decreased. In a prolonged low interest rate environment, including a reduction of LIBOR to zero, the difference between the total interest income earned on interest earning assets and the total interest expense incurred on interest bearing liabilities may be compressed, reducing our net interest income and potentially adversely affecting our operating results. During the six months ended June 30, 2020, certain of the investments in our comprehensive investment portfolio had floating interest rates. These floating rate investments were primarily based on floating LIBOR and typically have durations of one to three months after which they reset to current market interest rates. Additionally, some of these investments have LIBOR floors. The Company also has revolving credit facilities

 

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that are generally based on floating LIBOR. Assuming no changes to our balance sheet as of June 30, 2020 and no new defaults by portfolio companies, a hypothetical one percent decrease in LIBOR on our comprehensive floating rate assets and liabilities would increase our net investment income by one cent per average share over the next twelve months. Assuming no changes to our balance sheet as of June 30, 2020 and no new defaults by portfolio companies, a hypothetical one percent increase in LIBOR on our comprehensive floating rate assets and liabilities would increase our net investment income by approximately less than one cent per average share over the next twelve months. However, we may hedge against interest rate fluctuations from time-to-time by using standard hedging instruments such as futures, options, swaps and forward contracts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in any benefits of certain changes in interest rates with respect to our portfolio of investments. At June 30, 2020, we have no interest rate hedging instruments outstanding on our balance sheet.

 

Increase (Decrease) in LIBOR

   (1.00%)    1.00% 

Increase in Net Investment Income Per Share Per Year

  $0.01   $0.00 

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

As of June 30, 2020 (the end of the period covered by this report), our management, including our Co-Chief Executive Officers and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the 1934 Act). Based on that evaluation, our management, including the Co-Chief Executive Officers and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Co-Chief Executive Officers and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of such possible controls and procedures.

(b) Changes in Internal Controls Over Financial Reporting

Management has not identified any change in the Company’s internal control over financial reporting that occurred during the second quarter of 2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We and the Adviser are not currently subject to any material pending legal proceedings threatened against us. From time to time, we may be a party to certain legal proceedings incidental to the normal course of our business including the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our business, financial condition or results of operations beyond what has been disclosed within these financial statements.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Risk Factors” in the February 20, 2020 filing of our Annual Report on Form 10-K, which could

 

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materially affect our business, financial condition and/or operating results. The risks described in our Annual Report are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results. Aside from the below updated risk factors, there have been no material changes during the period ended June 30, 2020 to the risk factors discussed in “Risk Factors” in the February 20, 2020 filing of our Annual Report on Form 10-K.

Public Health Crises Risk. Periods of market volatility have occurred and could continue to occur in response to pandemics or other events outside of our control. These types of events have adversely affected and could continue to adversely affect operating results for us and for our portfolio companies. For example, in December 2019, a novel strain of coronavirus (also known as “COVID-19”) surfaced in China and has since spread and continues to spread to other countries, including the United States, This outbreak has led and for an unknown period of time will continue to lead to disruptions in local, regional, national and global markets and economies affected thereby. With respect to the U.S. credit markets (in particular for middle market loans), this outbreak has resulted in, and until fully resolved is likely to continue to result in, the following among other things: (i) government imposition of various forms of shelter-in-place orders and the closing of “non-essential” businesses, resulting in significant disruption to the businesses of many middle-market loan borrowers including supply chains, demand and practical aspects of their operations, as well as in lay-offs of employees, and, while these effects are hoped to be temporary, some effects could be persistent or even permanent; (ii) increased draws by borrowers on revolving lines of credit; (iii) increased requests by borrowers for amendments and waivers of their credit agreements to avoid default, increased defaults by such borrowers and/or increased difficulty in obtaining refinancing at the maturity dates of their loans; (iv) volatility and disruption of these markets including greater volatility in pricing and spreads and difficulty in valuing loans during periods of increased volatility, and liquidity issues; and (v) rapidly evolving proposals and/or actions by state and federal governments to address problems being experienced by the markets and by businesses and the economy in general which will not necessarily adequately address the problems facing the loan market and middle market businesses. This outbreak is having, and any future outbreaks could have, an adverse impact on the markets and the economy in general, which could have a material adverse impact on, among other things, the ability of lenders to originate loans, the volume and type of loans originated, and the volume and type of amendments and waivers granted to borrowers and remedial actions taken in the event of a borrower default, each of which could negatively impact the amount and quality of loans available for investment by us and returns to us, among other things. As of the date of this 10-Q, it is impossible to determine the scope of this outbreak, or any future outbreaks, how long any such outbreak, market disruption or uncertainties may last, the effect any governmental actions will have or the full potential impact on us and our portfolio companies Any potential impact to our results of operations will depend to a large extent on future developments and new information that could emerge regarding the duration and severity of COVID-19 and the actions taken by authorities and other entities to contain COVID-19 or treat its impact, all of which are beyond our control. These potential impacts, while uncertain, could adversely affect our and our portfolio companies’ operating results.

If the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, loan non-accruals, problem assets, and bankruptcies may increase. In addition, collateral for our loans may decline in value, which could cause loan losses to increase and the net worth and liquidity of loan guarantors could decline, impairing their ability to honor commitments to us. An increase in loan delinquencies and non-accruals or a decrease in loan collateral and guarantor net worth could result in increased costs and reduced income which would have a material adverse effect on our business, financial condition or results of operations.

We will also be negatively affected if our operations and effectiveness or the operations and effectiveness of a portfolio company (or any of the key personnel or service providers of the foregoing) is compromised or if necessary or beneficial systems and processes are disrupted.

 

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Any public health emergency, including the COVID-19 pandemic or any outbreak of other existing or new epidemic diseases, or the threat thereof, and the resulting financial and economic market uncertainty could have a significant adverse impact on us and the fair value of our investments. These potential impacts, while uncertain, could adversely affect our and our portfolio companies’ operating results.

Capital Markets Uncertainty. The U.S. capital markets have experienced extreme volatility and disruption following the global outbreak of COVID-19 that began in December 2019. The global impact of the outbreak is rapidly evolving, and many countries have reacted by instituting quarantines, prohibitions on travel and the closure of offices, businesses, schools, retail stores and other public venues. Businesses are also implementing similar precautionary measures. Such measures, as well as the general uncertainty surrounding the dangers and impact of COVID-19, have created significant disruption in supply chains and economic activity. The impact of COVID- 19 has led to significant volatility and declines in the global public equity markets and it is uncertain how long this volatility will continue. As COVID-19 continues to spread, the potential impacts, including a global, regional or other economic recession, are increasingly uncertain and difficult to assess. Some economists and major investment banks have expressed concern that the continued spread of the virus globally could lead to a world-wide economic downturn.

Disruptions in the capital markets caused by the COVID-19 pandemic have increased the spread between the yields realized on risk-free and higher risk securities, resulting in illiquidity in parts of the capital markets. These and future market disruptions and/or illiquidity would be expected to have an adverse effect on our business, financial condition, results of operations and cash flows. Unfavorable economic conditions also would be expected to increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events have limited and could continue to limit our investment originations, limit our ability to grow and have a material negative impact on our operating results and the fair values of our debt and equity investments.

Additionally, the recent disruption in economic activity caused by the COVID-19 pandemic has had, and may continue to have, a negative effect on the potential for liquidity events involving our investments. The illiquidity of our investments may make it difficult for us to sell such investments to access capital if required, and as a result, we could realize significantly less than the value at which we have recorded our investments if we were required to sell them for liquidity purposes. An inability to raise or access capital, and any required sale of all or a portion of our investments as a result, could have a material adverse effect on our business, financial condition or results of operations.

Inability to Secure Debt Financing. In past economic downturns, such as the financial crisis in the United States that began in mid-2007 and during other times of extreme market volatility, many commercial banks and other financial institutions stopped lending or significantly curtailed their lending activity. In addition, in an effort to stem losses and reduce their exposure to segments of the economy deemed to be high risk, some financial institutions limited routine refinancing and loan modification transactions and even reviewed the terms of existing facilities to identify bases for accelerating the maturity of existing lending facilities. If these conditions recur, for example as a result of the COVID-19 pandemic, it may be difficult for us to obtain desired financing to finance the growth of our investments on acceptable economic terms, or at all.

So far, the COVID-19 pandemic has resulted in, and until fully resolved is likely to continue to result in, among other things, increased draws by borrowers on revolving lines of credit and increased requests by borrowers for amendments, modifications and waivers of their credit agreements to avoid default or change payment terms, increased defaults by such borrowers and/or increased difficulty in obtaining refinancing at the maturity dates of their loans. In addition, the duration and effectiveness of responsive measures implemented by governments and central banks cannot be predicted. The commencement, continuation, or cessation of government and central bank policies and economic stimulus programs, including changes in monetary policy involving interest rate adjustments or governmental policies, may contribute to the development of or result in an increase in market volatility, illiquidity and other adverse effects that could negatively impact the credit markets and the Company.

 

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If we are unable to consummate credit facilities on commercially reasonable terms, our liquidity may be reduced significantly. If we are unable to repay amounts outstanding under any facility we may enter into and are declared in default or are unable to renew or refinance any such facility, it would limit our ability to initiate significant originations or to operate our business in the normal course. These situations may arise due to circumstances that we may be unable to control, such as inaccessibility of the credit markets, a severe decline in the value of the U.S. dollar, a further economic downturn or an operational problem that affects third parties or us, and could materially damage our business. Moreover, we are unable to predict when economic and market conditions may become more favorable. Even if such conditions improve broadly and significantly over the long term, adverse conditions in particular sectors of the financial markets could adversely impact our business.

Risks Relating to Reference Rates. LIBOR, the London Interbank Offered Rate, is the basic rate of interest used in lending transactions between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. We typically use LIBOR as a reference rate in floating-rate loans we extend to portfolio companies such that the interest due to us pursuant to a term loan extended to a portfolio company is calculated using LIBOR. The terms of our debt investments generally include minimum interest rate floors which are calculated based on LIBOR. In the recent past, concerns have been publicized that some of the member banks surveyed by the British Bankers’ Association (“BBA”) in connection with the calculation of LIBOR across a range of maturities and currencies may have been under-reporting or otherwise manipulating the inter-bank lending rate applicable to them in order to profit on their derivative positions or to avoid an appearance of capital insufficiency or adverse reputational or other consequences that may have resulted from reporting inter-bank lending rates higher than those they actually submitted. A number of BBA member banks entered into settlements with their regulators and law enforcement agencies with respect to alleged manipulation of LIBOR, and investigations by regulators and governmental authorities in various jurisdictions are ongoing.

Actions by the ICE Benchmark Administration, regulators or law enforcement agencies as a result of these or future events, may result in changes to the manner in which LIBOR is determined. Potential changes, or uncertainty related to such potential changes may adversely affect the market for LIBOR-based securities, including our portfolio of LIBOR-indexed, floating-rate debt securities. In addition, any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for LIBOR-based securities or the value of our portfolio of LIBOR-indexed, floating-rate debt securities, loans, and other financial obligations or extensions of credit held by or due to us.

On July 27, 2017, the U.K. Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. In addition, on March 25, 2020, the FCA stated that although the central assumption that firms cannot rely on LIBOR being published after the end of 2021 has not changed, the outbreak of COVID-19 has impacted the timing of many firms’ transition planning, and the FCA will continue to assess the impact of the COVID-19 pandemic on transition timelines and update the marketplace as soon as possible. It is unclear if after 2021 LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. We have exposure to LIBOR, including in financial instruments that mature after 2021. Our exposure arises from the value of our portfolio of LIBOR-indexed, floating-rate debt securities.

In the United States, the Federal Reserve Board and the Federal Reserve Bank of New York, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index calculated by short-term repurchase agreements, backed by Treasury securities called the Secured Overnight Financing Rate (“SOFR”). The Federal Reserve Bank of New York began publishing SOFR in April 2018. Whether or not SOFR attains market traction as a LIBOR replacement remains a question and the future of LIBOR at this time is uncertain, including whether the COVID-19 pandemic will have further effect on LIBOR transition plans.

 

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The elimination of LIBOR or any other changes or reforms to the determination or supervision of LIBOR could have an adverse impact on the market for or value of any LIBOR-indexed, floating-rate debt securities, loans, and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations. If LIBOR ceases to exist, we may need to renegotiate the credit agreements extending beyond 2021 with our portfolio companies that utilize LIBOR as a factor in determining the interest rate to replace LIBOR with the new standard that is established. In the event that the LIBOR Rate is no longer available or published on a current basis or no longer made available or used for determining the interest rate of loans, our administrative agent that manages our loans will generally select a comparable successor rate; provided that (i) to the extent a comparable or successor rate is approved by the administrative agent, the approved rate shall be applied in a manner consistent with market practice; and (ii) to the extent such market practice is not administratively feasible for the administrative agent, such approved rate shall be applied as otherwise reasonably determined by the administrative agent.

No Assurance of Cash Distributions. Subject to the Board’s discretion and applicable legal restrictions, the Company expects to declare and pay distributions quarterly. We expect to pay these distributions out of assets legally available for distribution. However, there are no assurances that the Company will achieve investment results that will allow a targeted level of cash distributions or year-to-year increases in cash distributions. All distributions that are made will be at the discretion of the Board and will depend on earnings, financial condition, maintenance of RIC status and other factors as the Board may deem to be relevant. Our ability to pay distributions might be adversely affected by the impact of one or more of the risk factors described in this quarterly report or incorporated herein by reference, including the COVID-19 pandemic described above. For example, if the temporary closure of many corporate offices, retail stores, and manufacturing facilities and factories in the jurisdictions, including the United States, affected by the COVID-19 pandemic were to continue for an extended period of time, it could result in reduced cash flows to us from our existing portfolio companies, which could reduce cash available for distribution to our unitholders. If we violate certain covenants under our existing or future credit facilities or other leverage, we may be limited in our ability to make distributions. To the extent we make distributions to unitholders that include a return of capital, such portion of the distribution essentially constitutes a return of the unitholder’s investment. There can be no assurances that the Company will pay distributions to Unitholders in the future.

In certain cases, the Company may recognize income before or without receiving the accompanying cash. Depending on the amount of noncash income, this could result in difficulty satisfying the annual distribution requirement applicable to RICs. Accordingly, the Company may have to sell some investments at times it would not consider advantageous, raise additional debt or equity capital or reduce new investments to meet these distribution requirements.

Potential Dividend Deferrals. As a BDC, we are not required to make any distributions to Unitholders other than in connection with our election to be taxed as a RIC under subchapter M of the Code. In order to maintain our tax treatment as a RIC, we must distribute to Unitholders for each taxable year at least 90% of our investment company taxable income (i.e., net ordinary income plus realized net short-term capital gains in excess of realized net long-term capital losses). If we qualify for taxation as a RIC, we generally will not be subject to corporate-level U.S. federal income tax on our investment company taxable income and net capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) that we timely distribute to Unitholders. We will be subject to a 4% US federal excise tax on undistributed earnings of a RIC unless we distribute each calendar year at least the sum of (i) 98.0% of our ordinary income for the calendar year, (ii) 98.2% of our capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year, and (iii) any ordinary income and net capital gains for preceding years that were not distributed during such years and on which we paid no federal income tax.

Under the Code, we may satisfy certain of our RIC distributions with dividends paid after the end of the current year. In particular, if we pay a distribution in January of the following year that was declared in October, November, or December of the current year and is payable to Unitholders of record in the current year, the

 

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dividend will be treated for all US federal tax purposes as if it were paid on December 31 of the current year. In addition, under the Code, we may pay dividends, referred to as “spillover dividends,” that are paid during the following taxable year that will allow us to maintain our qualification for taxation as a RIC and eliminate our liability for corporate-level U.S. federal income tax. Under these spillover dividend procedures, we may defer distribution of income earned during the current year until December of the following year. For example, we may defer distributions of income earned during 2020 until as late as December 31, 2021. If we choose to pay a spillover dividend, we will incur the 4% U.S. federal excise tax on some or all of the distribution.

Due to the COVID-19 pandemic or other disruptions in the economy, we anticipate that we may take certain actions with respect to the timing and amounts of our distributions in order to preserve cash and maintain flexibility. For example, we may defer our dividends to the following taxable year. If we defer our dividends, we may choose to utilize the spillover dividend rules discussed above and incur the 4% U.S. federal excise tax on such amounts. To further preserve cash, we may combine these deferrals of dividends with one or more distributions that are payable partially in our Units as discussed below under “Stock Dividend Considerations.”

Stock Dividend Considerations. We may distribute taxable dividends that are payable in part in our Units. In accordance with certain applicable Treasury regulations and published guidance issued by the Internal Revenue Service, a RIC may treat a distribution of its own shares as fulfilling the RIC distribution requirements if each shareholder may elect to receive his or her entire distribution in either cash or shares of the RIC. The IRS has published a revenue procedure indicating that, in the case of publicly offered RICs, this rule will apply where the total amount of cash to be distributed is not less than 20% (which has been temporarily reduced to 10% for distributions declared on or after April 1, 2020, and on or before December 31, 2020) of the total distribution. Under this revenue procedure, if too many unitholders elect to receive cash, the cash available for distribution must be allocated among the unitholders electing to receive cash (with the balance of the distribution paid in shares). In no event will any unitholder, electing to receive cash, receive less than the lesser of (a) the portion of the distribution such unitholder has elected to receive in cash or (b) an amount equal to his or her entire distribution times the percentage limitation on cash available for distribution. Because we are not currently a publicly offered RIC, our ability to rely on the revenue procedure and other guidance is uncertain. If elect to pay a distribution in our own Units consistent with the revenue procedure and other guidance, for U.S. federal income tax purposes, the amount of the dividend paid in Units will be equal to the amount of cash that could have been received instead of Units. Taxable Unitholders receiving such dividends will be required to include the amount of the dividends as ordinary income (or as long-term capital gain to the extent such distribution is properly reported as a capital gain dividend) to the extent of our current and accumulated earnings and profits for United States federal income tax purposes. As a result, a U.S. Unitholder may be required to pay tax with respect to such dividends in excess of any cash received. Furthermore, with respect to non-U.S. Unitholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in Units.

Tax Considerations Regarding Dividends for Private BDCs. We do not currently qualify as a “publicly offered regulated investment company,” as defined in the Code. Accordingly, U.S. individual and other noncorporate Unitholders will be taxed as though they received a distribution of some of our expenses. A “publicly offered regulated investment company” is a RIC whose Units are either (i) continuously offered pursuant to a public offering, (ii) regularly traded on an established securities market, or (iii) held by at least 500 persons at all times during the taxable year. We anticipate that we will not qualify as a publicly offered RIC for the 2020 tax year, and we cannot determine when we will qualify as a publicly offered RIC. Since the Company is not a publicly offered RIC, a non-corporate Unitholder’s allocable portion of our affected expenses, including a portion of our management fees, will be treated as an additional distribution to the Unitholders. A non-corporate Unitholder’s allocable portion of these expenses are treated as miscellaneous itemized deductions that are not currently deductible by such Unitholder (and beginning in 2026, will be deductible to such Unitholder only to the extent they exceed 2% of such Unitholder’s adjusted gross income), and are not deductible for alternative minimum tax purposes.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There were no unregistered sales of equity securities other than those already disclosed in certain Form 8-Ks filed with the SEC.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosure

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:

 

   3.1  Certificate of Formation(1)
   3.2  Second Amended and Restated Limited Liability Company Agreement(2)
   4.1  Form of Subscription Agreement(1)
 31.1  Certification of Co-Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.*
 31.2  Certification of Co-Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.*
 31.3  Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.*
 32.1  Certification of Co-Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
 32.2  Certification of Co-Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
 32.3  Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 

*

Filed herewith.

(1)

Previously filed as an exhibit to Amendment No. 1 to the Registrant’s Registration Statement on Form 10 (File No. 000-55955) filed with the SEC on August 24, 2018.

(2)

Previously filed in connection with the Registrant’s report on Form 10-K filed on February 20, 2020.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 on August 4, 2020.

 

SCP PRIVATE CREDIT INCOME BDC LLC
By: 

/S/ MICHAEL S. GROSS

 

Michael S. Gross

Co-Chief Executive Officer

(Principal Executive Officer)

By: 

/S/ BRUCE J. SPOHLER

 

Bruce J. Spohler

Co-Chief Executive Officer

(Principal Executive Officer)

By: 

/S/ RICHARD L. PETEKA

 

Richard L. Peteka

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

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